Solution Manual for Fundamentals of Financial Accounting
6CE Fred Phillips, Robert Libby, Patricia Libby, Brandy
Mackintosh Chapter 1-13
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 proprietor). 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 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 shareholders 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 shareholders‘ equity of only that business and not the personal assets, liabilities, and
equity of the shareholders. The financial statements of a company show the results of the business
, activities of only that company.
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
shareholders, or paying dividends to shareholders 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
8. (a) The purpose of the balance sheet is to report the financial position (assets, liabilities and
shareholders‘ 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, 2020,‖ because they report the inflows and outflows of resources
during a period of time. In contrast, the balance sheet would be dated ―At December 31, 2020,‖ because it
represents the assets, liabilities and shareholders‘ 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 ± Shareholders‘ Equity. Assets
are the economic resources controlled by the company. Liabilities are
amounts owed by the business. Shareholders‘ equity is the owners‘ claims to the business. It includes
amounts contributed to the business (by investors through purchasing the company‘s shares) and the
amounts earned and accumulated through profitable business operations.
12. The equation for the income statement is Revenues – Expenses = Net Income. Revenues are
increases in a company‘s resources, arising primarily from its operating activities. Expenses are
decreases in a company‘s resources, arising primarily from its operating activities. Net Income is
, equal to revenues minus expenses. (If expenses are greater than revenues, the company has a Net Loss.)
13. The equation for the statement of retained earnings is: Beginning Retained Earnings + Net Income -
Dividends = Ending Retained Earnings. It begins with beginning-of-the-year retained earnings which is the
prior year‘s ending retained earnings reported on the prior year‘s balance sheet. The current year's net
income reported on the income statement is added and the current year's dividends are subtracted from this
amount. The ending retained earnings amount is reported on the end-of-year balance sheet.
14. The equation for the statement of cash flows is: Cash flows from operating activities + Cash flows from
investing activities + Cash flows from financing activities = Change in cash for the period. Change in cash
for the period + Beginning cash balance = Ending cash balance. The net cash flows for the period
represent the increase or decrease in cash that occurred during the period. Cash flows from operating
activities are cash flows directly related to earning income (normal business activity). Cash flows from
investing activities include cash flows that are related to the acquisition or sale of the company‘s long- term
assets. Cash flows from financing activities are directly related to the financing of the company.
15. Currently, the Chartered Professional Accountants of Canada (CPA) is given the primary responsibility for
setting the detailed rules that become Generally Accepted Accounting Principles (GAAP) in Canada.
(Internationally, the International Accounting Standards Board (IASB) has the responsibility for setting
accounting rules known as International Financial Reporting Standards (IFRS).)
16. The main goal of accounting rules is to ensure that companies produce useful financial information for
present and potential investors, lenders, and other creditors in making decisions in their capacity as
capital providers. Financial information must show relevance and faithful representation, as well as be
comparable, verifiable, timely, and understandable.
17. An ethical dilemma is a situation where following one moral principle would result in violating
another. Three steps that should be considered when evaluating ethical dilemmas are:
(a) Identify who will benefit from the situation (often, the manager or employee) and how others will be
harmed (other employees, the company‘s reputation, owners, creditors, and the public in general).
(b) Identify the alternative courses of action.
(c) Choose the alternative that is the most ethical – that which you would be proud to have reported in
the news media. Often, there is no one right answer and hard choices will need to be made. Following
strong ethical practices is a key part of ensuring good financial reporting by businesses of all sizes.
, 18. Accounting frauds and cases involving academic dishonesty are similar in many respects. Both involve
deceiving others in an attempt to influence their actions or decisions, often resulting in temporary personal
gain for the deceiver. For example, when an accounting fraud is committed, financial statement users may be
misled into making decisions they wouldn‘t have made had the fraud not occurred (e.g., creditors might loan
money to the company, investors might invest in the company, or shareholders might reward top managers
with big bonuses). When academic dishonesty is committed, instructors might assign a higher grade than is
warranted by the student‘s individual contribution. Another similarity is that, as a consequence of the
deception, innocent bystanders may be adversely affected by fraud and academic dishonesty. Fraud may
require the company to charge higher prices to customers to cover costs incurred as a result of the fraud.
Academic dishonesty may lead to stricter grading standards, with significant deductions taken for inadequate
documentation of sources referenced. A final similarity is that if fraud and academic dishonesty are ultimately
uncovered, both are likely to lead to adverse long- term consequences for the perpetrator. Fraudsters may be
fined, imprisoned, and encounter an abrupt end to their careers. Students who cheat may be penalized
through lower course grades or expulsion, and might find it impossible to obtain academic references for
employment applications.
Authors' Recommended Solution Time (Time in minutes)
Skills
Mini-exercises Exercises Problems Development Cases* Continuing Case
No. Time No. Time No. Time No. Time No. Time
1 3 1 10 CP1-1 45 1 20 1 45
2 11 2 10 CP1-2 10 2 20
3 12 3 15 CP1-3 60 3 30
4 6 4 25 CP1-4 5 4 30
5 6 5 25 PA1-1 45 5 20
6 6 6 10 PA1-2 10 6 30
7 6 7 15 PA1-3 50 7 45
8 4 8 10 PA1-4 45
9 4 9 20 PA1-5 50
10 3 10 10 PB1-1 45
11 3 11 3 PB1-2 10
12 6 12 3 PB1-3 45
13 6 PB1-4 10
14 6 PB1-5 50
15 6
16 12
6CE Fred Phillips, Robert Libby, Patricia Libby, Brandy
Mackintosh Chapter 1-13
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 proprietor). 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 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 shareholders 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 shareholders‘ equity of only that business and not the personal assets, liabilities, and
equity of the shareholders. The financial statements of a company show the results of the business
, activities of only that company.
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
shareholders, or paying dividends to shareholders 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
8. (a) The purpose of the balance sheet is to report the financial position (assets, liabilities and
shareholders‘ 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, 2020,‖ because they report the inflows and outflows of resources
during a period of time. In contrast, the balance sheet would be dated ―At December 31, 2020,‖ because it
represents the assets, liabilities and shareholders‘ 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 ± Shareholders‘ Equity. Assets
are the economic resources controlled by the company. Liabilities are
amounts owed by the business. Shareholders‘ equity is the owners‘ claims to the business. It includes
amounts contributed to the business (by investors through purchasing the company‘s shares) and the
amounts earned and accumulated through profitable business operations.
12. The equation for the income statement is Revenues – Expenses = Net Income. Revenues are
increases in a company‘s resources, arising primarily from its operating activities. Expenses are
decreases in a company‘s resources, arising primarily from its operating activities. Net Income is
, equal to revenues minus expenses. (If expenses are greater than revenues, the company has a Net Loss.)
13. The equation for the statement of retained earnings is: Beginning Retained Earnings + Net Income -
Dividends = Ending Retained Earnings. It begins with beginning-of-the-year retained earnings which is the
prior year‘s ending retained earnings reported on the prior year‘s balance sheet. The current year's net
income reported on the income statement is added and the current year's dividends are subtracted from this
amount. The ending retained earnings amount is reported on the end-of-year balance sheet.
14. The equation for the statement of cash flows is: Cash flows from operating activities + Cash flows from
investing activities + Cash flows from financing activities = Change in cash for the period. Change in cash
for the period + Beginning cash balance = Ending cash balance. The net cash flows for the period
represent the increase or decrease in cash that occurred during the period. Cash flows from operating
activities are cash flows directly related to earning income (normal business activity). Cash flows from
investing activities include cash flows that are related to the acquisition or sale of the company‘s long- term
assets. Cash flows from financing activities are directly related to the financing of the company.
15. Currently, the Chartered Professional Accountants of Canada (CPA) is given the primary responsibility for
setting the detailed rules that become Generally Accepted Accounting Principles (GAAP) in Canada.
(Internationally, the International Accounting Standards Board (IASB) has the responsibility for setting
accounting rules known as International Financial Reporting Standards (IFRS).)
16. The main goal of accounting rules is to ensure that companies produce useful financial information for
present and potential investors, lenders, and other creditors in making decisions in their capacity as
capital providers. Financial information must show relevance and faithful representation, as well as be
comparable, verifiable, timely, and understandable.
17. An ethical dilemma is a situation where following one moral principle would result in violating
another. Three steps that should be considered when evaluating ethical dilemmas are:
(a) Identify who will benefit from the situation (often, the manager or employee) and how others will be
harmed (other employees, the company‘s reputation, owners, creditors, and the public in general).
(b) Identify the alternative courses of action.
(c) Choose the alternative that is the most ethical – that which you would be proud to have reported in
the news media. Often, there is no one right answer and hard choices will need to be made. Following
strong ethical practices is a key part of ensuring good financial reporting by businesses of all sizes.
, 18. Accounting frauds and cases involving academic dishonesty are similar in many respects. Both involve
deceiving others in an attempt to influence their actions or decisions, often resulting in temporary personal
gain for the deceiver. For example, when an accounting fraud is committed, financial statement users may be
misled into making decisions they wouldn‘t have made had the fraud not occurred (e.g., creditors might loan
money to the company, investors might invest in the company, or shareholders might reward top managers
with big bonuses). When academic dishonesty is committed, instructors might assign a higher grade than is
warranted by the student‘s individual contribution. Another similarity is that, as a consequence of the
deception, innocent bystanders may be adversely affected by fraud and academic dishonesty. Fraud may
require the company to charge higher prices to customers to cover costs incurred as a result of the fraud.
Academic dishonesty may lead to stricter grading standards, with significant deductions taken for inadequate
documentation of sources referenced. A final similarity is that if fraud and academic dishonesty are ultimately
uncovered, both are likely to lead to adverse long- term consequences for the perpetrator. Fraudsters may be
fined, imprisoned, and encounter an abrupt end to their careers. Students who cheat may be penalized
through lower course grades or expulsion, and might find it impossible to obtain academic references for
employment applications.
Authors' Recommended Solution Time (Time in minutes)
Skills
Mini-exercises Exercises Problems Development Cases* Continuing Case
No. Time No. Time No. Time No. Time No. Time
1 3 1 10 CP1-1 45 1 20 1 45
2 11 2 10 CP1-2 10 2 20
3 12 3 15 CP1-3 60 3 30
4 6 4 25 CP1-4 5 4 30
5 6 5 25 PA1-1 45 5 20
6 6 6 10 PA1-2 10 6 30
7 6 7 15 PA1-3 50 7 45
8 4 8 10 PA1-4 45
9 4 9 20 PA1-5 50
10 3 10 10 PB1-1 45
11 3 11 3 PB1-2 10
12 6 12 3 PB1-3 45
13 6 PB1-4 10
14 6 PB1-5 50
15 6
16 12
