SOLUTION MANUAL FOR
Fundamentals of Financial Accounting 7e
Phillips
Chapter 1-13 with Appendix C&D
Chapter 1
Business Decisions and Financial Accounting
ANSWERS TO QUESTIONS
1. Accounting is a system of analyzing, recording, and summarizing the
results of a
business‘s activities and then reporting them to decision makers.
2. An advantage of operating as a sole proprietorship, rather than a
corporation, is that it is easy to establish. Another advantage is that
income from a sole proprietorship is taxed only once in the hands of the
individual proprietor (income from a corporation is taxed in the
corporation and then again in the hands of the individual shareholder). A
disadvantage of operating as a sole proprietorship, rather than a
corporation, is that the individual proprietor can be held responsible for
the debts of the business.
3. Financial accounting focuses on preparing and using the financial
statements that are made available to owners and external users such
as customers, creditors, and potential investors who are interested in
reading them. Managerial accounting focuses on other accounting
reports that are not released to the general public, but instead are
prepared for internal decision making and used by employees,
supervisors, and managers who run the company.
4. Financial reports are used by both internal and external groups and
individuals. The internal groups are comprised of the various managers
of the business. The external groups include investors, creditors,
governmental agencies, other interested parties, and the public at large.
5. The business itself, not the individual stockholders who own the business,
is viewed as owning the assets and owing the liabilities on its balance
sheet. A business‘s balance sheet includes the assets, liabilities, and
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, stockholders‘ equity of only that business and not the personal assets,
liabilities, and equity of the stockholders. The financial statements of a
company show the results of the business activities of only that
company.
Fundamentals of 1-1
Financial Accounting, 7/e
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
,6. (a) Operating – These activities are directly related to earning profits.
They include buying supplies, making products, serving customers,
cleaning the premises, advertising, renting a building, repairing
equipment, and obtaining insurance coverage.
(b) Investing – These activities involve buying and selling productive
resources with long lives (such as buildings, land, equipment, and tools),
purchasing investments, and lending to others.
(c) Financing – Any borrowing from banks, repaying bank loans,
receiving contributions from stockholders, or paying dividends to
stockholders are considered financing activities.
7. The heading of each of the four primary financial statements should
include the following:
(a) Name of the business
(b) Name of the statement
(c) Date of the statement, or the period of time that the statement covers
8. (a) The purpose of the balance sheet is to report the financial
position (assets, liabilities and stockholders‘ equity) of a business at
a point in time.
(b) The purpose of the income statement is to present information
about the revenues, expenses, and net income of a business for a
specified period of time.
(c) The statement of retained earnings reports the way that net
income and the distribution of dividends affected the financial position
of the company during the period.
(d) The purpose of the statement of cash flows is to summarize how a
business‘s operating, investing, and financing activities caused its
cash balance to change over a particular period of time.
9. The income statement, statement of retained earnings, and statement
of cash flows would be dated ―For the Year Ended December 31,
2021,‖ because they report the inflows and outflows of resources over a
period of time. In contrast, the balance sheet would be dated ―At
December 31, 2021,‖ because it represents the assets, liabilities and
stockholders‘ equity at a specific date.
10. Net income is the excess of total revenues over total expenses. A net
loss occurs if total expenses exceed total revenues.
11. The accounting equation for the balance sheet is: Assets = Liabilities +
Stockholders‘ Equity. Assets are the economic resources controlled by
the company. Liabilities are amounts owed by the business.
Stockholders‘ equity is the owners‘ claims to the business. It includes
amounts contributed to the business (by investors through purchasing
the company‘s stock) and the amounts earned and accumulated
through profitable business operations.
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, Fundamentals of 1-2
Financial Accounting, 7/e
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
Fundamentals of Financial Accounting 7e
Phillips
Chapter 1-13 with Appendix C&D
Chapter 1
Business Decisions and Financial Accounting
ANSWERS TO QUESTIONS
1. Accounting is a system of analyzing, recording, and summarizing the
results of a
business‘s activities and then reporting them to decision makers.
2. An advantage of operating as a sole proprietorship, rather than a
corporation, is that it is easy to establish. Another advantage is that
income from a sole proprietorship is taxed only once in the hands of the
individual proprietor (income from a corporation is taxed in the
corporation and then again in the hands of the individual shareholder). A
disadvantage of operating as a sole proprietorship, rather than a
corporation, is that the individual proprietor can be held responsible for
the debts of the business.
3. Financial accounting focuses on preparing and using the financial
statements that are made available to owners and external users such
as customers, creditors, and potential investors who are interested in
reading them. Managerial accounting focuses on other accounting
reports that are not released to the general public, but instead are
prepared for internal decision making and used by employees,
supervisors, and managers who run the company.
4. Financial reports are used by both internal and external groups and
individuals. The internal groups are comprised of the various managers
of the business. The external groups include investors, creditors,
governmental agencies, other interested parties, and the public at large.
5. The business itself, not the individual stockholders who own the business,
is viewed as owning the assets and owing the liabilities on its balance
sheet. A business‘s balance sheet includes the assets, liabilities, and
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, stockholders‘ equity of only that business and not the personal assets,
liabilities, and equity of the stockholders. The financial statements of a
company show the results of the business activities of only that
company.
Fundamentals of 1-1
Financial Accounting, 7/e
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
,6. (a) Operating – These activities are directly related to earning profits.
They include buying supplies, making products, serving customers,
cleaning the premises, advertising, renting a building, repairing
equipment, and obtaining insurance coverage.
(b) Investing – These activities involve buying and selling productive
resources with long lives (such as buildings, land, equipment, and tools),
purchasing investments, and lending to others.
(c) Financing – Any borrowing from banks, repaying bank loans,
receiving contributions from stockholders, or paying dividends to
stockholders are considered financing activities.
7. The heading of each of the four primary financial statements should
include the following:
(a) Name of the business
(b) Name of the statement
(c) Date of the statement, or the period of time that the statement covers
8. (a) The purpose of the balance sheet is to report the financial
position (assets, liabilities and stockholders‘ equity) of a business at
a point in time.
(b) The purpose of the income statement is to present information
about the revenues, expenses, and net income of a business for a
specified period of time.
(c) The statement of retained earnings reports the way that net
income and the distribution of dividends affected the financial position
of the company during the period.
(d) The purpose of the statement of cash flows is to summarize how a
business‘s operating, investing, and financing activities caused its
cash balance to change over a particular period of time.
9. The income statement, statement of retained earnings, and statement
of cash flows would be dated ―For the Year Ended December 31,
2021,‖ because they report the inflows and outflows of resources over a
period of time. In contrast, the balance sheet would be dated ―At
December 31, 2021,‖ because it represents the assets, liabilities and
stockholders‘ equity at a specific date.
10. Net income is the excess of total revenues over total expenses. A net
loss occurs if total expenses exceed total revenues.
11. The accounting equation for the balance sheet is: Assets = Liabilities +
Stockholders‘ Equity. Assets are the economic resources controlled by
the company. Liabilities are amounts owed by the business.
Stockholders‘ equity is the owners‘ claims to the business. It includes
amounts contributed to the business (by investors through purchasing
the company‘s stock) and the amounts earned and accumulated
through profitable business operations.
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, Fundamentals of 1-2
Financial Accounting, 7/e
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
