SOLUTION MANUAL FOR d d
FundamentalsofFinancialAccounting7ePhillips d d d d d d
Chapter1-13 withAppendixC&D d d d d
Chapter1 d d
BusinessDecisionsandFinancial Accounting
d d d d
ANSWERSTOQUESTIONS d d
1. Accountingis a systemof analyzing, recording,and summarizingthe resultsof a d d d d d d d d d d d d d
business‘s activities and then reporting them to decision makers. d d d d d d d d d
2. An advantage of operating asa sole proprietorship, ratherthan a corporation, isthat it is easy to
d d d d d d d d d d d d d d d d d
establish.Anotheradvantageis that income froma sole proprietorship is taxedonly oncein the
d d d d d d d d d d d d d d d d
hands of the individual proprietor (income from a corporation is taxed in the corporation and then
d d d d d d d d d d d d d d d d d d d
again inthe handsof the individual shareholder). Adisadvantage of operatingas a sole
d d d d d d d d d d d d d d d
proprietorship, ratherthan a corporation, is that theindividual proprietor can be held responsible
d d d d d d d d d d d d d d
for the debts of thebusiness.
d d d d d d d
3. Financialaccounting focuseson preparing and using the financial statements that aremade
d d d d d d d d d d d d
available toownersand external userssuchas customers, creditors,and potential investors who are
d d d d d d d d d d d d d d d
interested in reading them. Managerial accounting focuses on otheraccounting reports that arenot
d d d d d d d d d d d d d d
released to the general public,but instead are preparedfor internal decision makingand used by
d d d d d d d d d d d d d d d d
employees, supervisors, and managers who run the company.
d d d d d d d d d
4. Financialreportsareused byboth internalandexternalgroupsand individuals. The internalgroups
d d d d d d d d d d d d d d
are comprisedof the variousmanagers of thebusiness. The external groupsincludeinvestors,
d d d d d d d d d d d d d d
creditors,governmental agencies, other interested parties, andthe publicatlarge.
d d d d d d d d d d d d
5. Thebusinessitself,nottheindividualstockholderswhoownthebusiness,isviewed as owning theassets
d d d d d d d d d d d d d d d d
andowing the liabilitieson its balance sheet. Abusiness‘s balance sheet includes the assets,liabilities,
d d d d d d d d d d d d d d d d
and stockholders‘ equity of only that businessand not the personal assets,liabilities, andequity of
d d d d d d d d d d d d d d d d
the stockholders. The financial statements of a companyshowthe resultsof the business activities of
d d d d d d d d d d d d d d d d d d
only that company.
d d d d
FundamentalsofFinancial d d
1-1
Accounting,7/e
d d
©2022byMcGrawHill LLC. Allrights reserved.Noreproduction ordistribution withoutthepriorwritten consent ofMcGrawHill LLC.
d d d d d d d d d d d d d d d d d d d d d
,6. (a) Operating – Theseactivitiesare directly related to earningprofits.They include buying
d d d d d d d d d d d d d
supplies, making products, serving customers, cleaning thepremises, advertising, renting a
d d d d d d d d d d d
building, repairing equipment,and obtaining insurance coverage.
d d d d d d d d
(b) Investing – Theseactivities involvebuyingand selling productive resources with long lives (such d d d d d d d d d d d d d
as buildings, land, equipment, and tools), purchasing investments, and lending to others.
d d d d d d d d d d d d d
(c) Financing–Anyborrowingfrombanks,repayingbankloans,receiving contributionsfrom d d d d d d d d d d d
stockholders,orpayingdividendstostockholdersareconsidered financingactivities.
d d d d d d d d d d d
7. The headingof eachof thefour primaryfinancialstatements shouldincludethe following:
d d d d d d d d d d d d d d
(a) Name of the business d d d d
(b) Name of the statement d d d d
(c) Dateofthe statement,orthe period oftime thatthestatementcovers d d d d d d d d d d d d d
8. (a) The purpose of the balance sheet is to report the financial position (assets, liabilities and
d d d d d d d d d d d d d d d
stockholders‘ equity)of a business at a point in time.
d d d d d d d d d d d
(b) The purpose of the income statement is to present information about the revenues,
d d d d d d d d d d d d
expenses,and netincomeof abusinessfora specifiedperiod of time.
d d d d d d d d d d d d d d
(c) The statement of retained earnings reports the way that net income and the d d d d d d d d d d d d
distribution of dividends affected the financial position of the company during the period.
d d d d d d d d d d d d d d
(d) The purpose of the statement of cash flows is to summarize how a business‘s operating,
d d d d d d d d d d d d d d
investing, and financing activities caused its cash balance to change over a particular
d d d d d d d d d d d d d
period of time.
d d d d
9. The incomestatement,statementof retainedearnings, and statementof cashflows would be dated
d d d d d d d d d d d d d d
―For the Year Ended December 31, 2021,‖ because they report the inflows and outflowsof
d d d d d d d d d d d d d d d
resources over a period of time. In contrast, thebalance sheet would be dated ―At December 31,
d d d d d d d d d d d d d d d d d
2021,‖ because it represents the assets, liabilities and stockholders‘ equity at a specific date.
d d d d d d d d d d d d d d d
10. Net income is the excess of total revenues over totalexpenses. Anet loss occurs if total expenses
d d d d d d d d d d d d d d d d d
exceedtotal revenues.
d d d d
11. The accountingequation forthebalance sheet is: Assets =Liabilities + Stockholders‘ Equity. Assets
d d d d d d d d d d d d d d
are the economic resources controlled by the company. Liabilities are amounts owed by the
d d d d d d d d d d d d d d d
business. Stockholders‘ equity is theowners‘claims tothebusiness.It includesamounts contributed
d d d d d d d d d d d d d d
to the business (by investors throughpurchasing the company‘s stock) andthe amounts earned
d d d d d d d d d d d d d d
and accumulatedthroughprofitable businessoperations.
d d d d d d d
FundamentalsofFinancial d d
1-2
Accounting,7/e
d d
©2022byMcGrawHill LLC. Allrights reserved.Noreproduction ordistribution withoutthepriorwritten consent ofMcGrawHill LLC.
d d d d d d d d d d d d d d d d d d d d d
,12. The equation for the income statement is Revenues –Expenses = Net Income. Revenues are
d d d d d d d d d d d d d d
increases in a company‘s resources, arising primarily from its operating activities. Expenses are
d d d d d d d d d d d d d
decreasesin a company‘s resources, arising primarily from its operating activities. NetIncome is
d d d d d d d d d d d d d d
equal to revenues minus expenses. (If expenses aregreater than revenues,the company has a
d d d d d d d d d d d d d d d
NetLoss.)
d d d
13. The equation for the statement of retained earningsis: Beginning Retained Earnings + NetIncome -
d d d d d d d d d d d d d d d
Dividends = Ending Retained Earnings. It begins with beginning-of-the-year retained earnings
d d d d d d d d d d d
which is the prior year‘s ending retained earnings reportedon theprior year‘s balance sheet. The
d d d d d d d d d d d d d d d d
current year's net income reported on the income statement is added and the current year's dividends
d d d d d d d d d d d d d d d d
are subtractedfrom this amount. (Ifanet loss occurs, It would be subtracted, along with the
d d d d d d d d d d d d d d d d d
dividends,from the prior year‘s ending retainedearningsbalance.)Theending retained earnings
d d d d d d d d d d d d
amount is reported on the end-of-year balance sheet. 14. The equation for the statementof cash
d d d d d d d d d dd d d d d d d d
flows is: Cash flows fromoperating activities+ Cash flowsfrominvestingactivities + Cash flowsfrom
d d d d d d d d d d d d d d d d d
financingactivities = Change in cash for the period. Change in cash for the period +Beginning cash
d d d d d d d d d d d d d d d d d d
balance = Ending cash balance. The net cash flows for theperiod represent the increase or
d d d d d d d d d d d d d d d d
decrease in cash thatoccurred during the period. Cash flows from operating activitiesare cash
d d d d d d d d d d d d d d d
flows directly related to earning income (normal business activity).Cash flows from investing
d d d d d d d d d d d d d d
activities include cashflowsthatare related to the acquisition or saleof the company‘s long-term
d d d d d d d d d d d d d d d d
assets. Cash flows from financing activitiesare directly related to the financing ofthe company.
d d d d d d d d d d d d d d d d
15. Currently,the Financial AccountingStandards Board (FASB) isgiven theprimary responsibility for
d d d d d d d d d d d d
setting thedetailed rules that becomeGenerally Accepted AccountingPrinciples(GAAP)inthe
d d d d d d d d d d d d d
UnitedStates.(Internationally,the InternationalAccountingStandardsBoard(IASB)hasthe
d d d d d d d d d d d
responsibilityforsetting accountingrules knownas International FinancialReporting Standards
d d d d d d d d d d d
(IFRS).)
d d
16. The maingoal of accounting rulesis to ensure that companies produceuseful financialinformation for
d d d d d d d d d d d d d d d
presentandpotentialinvestors,lenders,andothercreditors in makingdecisions in their capacityas
d d d d d d d d d d d d d d d
capital providers. Financial information must show relevance and faithful representation, as wellas
d d d d d d d d d d d d d d
be comparable, verifiable,timely, andunderstandable.
d d d d d d d
FundamentalsofFinancial d d 1-3
Accounting,7/e
d d
©2022byMcGrawHill LLC. Allrights reserved.Noreproduction ordistribution withoutthepriorwritten consent ofMcGrawHill LLC.
d d d d d d d d d d d d d d d d d d d d d
, 17. An ethical dilemma isa situation wherefollowingone moralprinciple would result in violating
d d d d d d d d d d d d d d
another. Three steps that should beconsidered when evaluating ethical dilemmasare:
d d d d d d d d d d d d d
(a) Identifywho will benefitfromthe situation(often,themanager oremployee)and howothers will d d d d d d d d d d d d d d d
beharmed (other employees, the company‘s reputation, owners, creditors, and the public in
d d d d d d d d d d d d d
general).
d d
(b) Identifythealternativecourses ofaction. d d d d d d
(c) Choose the alternative that is the most ethical –that which you would be proud to have d d d d d d d d d d d d d d d d
reported in thenews media. Often, there is no one right answer and hard choices will need to be
d d d d d d d d d d d d d d d d d d d
made. Following strong ethical practices is akey part of ensuringgood financial reporting by
d d d d d d d d d d d d d d d
businesses of all sizes.
d d d d d
18. Accounting frauds andcases involving academic dishonesty are similar in many respects. Both
d d d d d d d d d d d d
involvedeceiving others inan attempt to influence their actions or decisions, often resulting in
d d d d d d d d d d d d d d d
temporarypersonal gain for thedeceiver. Forexample, whenan accounting fraud is committed,
d d d d d d d d d d d d d d
financial statement usersmay be misled into making decisionsthey wouldn‘t have made hadthe
d d d d d d d d d d d d d d d
fraudnot occurred (e.g., creditors might loan money to the company, investors might investin the
d d d d d d d d d d d d d d d d
company, orstockholders might rewardtop managers withbig bonuses). When academic
d d d d d d d d d d d d
dishonesty is committed, instructors might assignahigher grade than is warranted by the student‘s
d d d d d d d d d d d d d d d
individual contribution. Another similarity is that,asa consequence of thedeception, innocent
d d d d d d d d d d d d d
bystanders may be adverselyaffected byfraud and academic dishonesty.Fraud may require the
d d d d d d d d d d d d d d
company to chargehigher prices to customers to cover costs incurredas a result ofthe fraud.
d d d d d d d d d d d d d d d d d
Academic dishonesty may lead to strictergrading standards, with significant deductions taken for
d d d d d d d d d d d d d d
inadequate documentation of sources referenced. Afinal similarityis that if fraud and academic
d d d d d d d d d d d d d d
dishonesty are ultimately uncovered, bothare likely to lead to adverselong-term consequences for
d d d d d d d d d d d d d d
the perpetrator. Fraudsters maybe fined, imprisoned,and encounter anabrupt end to their
d d d d d d d d d d d d d d
careers.Students who cheat may be penalized through lower course grades orexpulsion, and
d d d d d d d d d d d d d d
might find itimpossible to obtainacademic references foremployment applications.
d d d d d d d d d d d d
FundamentalsofFinancial d d
1-4
Accounting,7/e
d d
©2022byMcGrawHill LLC. Allrights reserved.Noreproduction ordistribution withoutthepriorwritten consent ofMcGrawHill LLC.
d d d d d d d d d d d d d d d d d d d d d
FundamentalsofFinancialAccounting7ePhillips d d d d d d
Chapter1-13 withAppendixC&D d d d d
Chapter1 d d
BusinessDecisionsandFinancial Accounting
d d d d
ANSWERSTOQUESTIONS d d
1. Accountingis a systemof analyzing, recording,and summarizingthe resultsof a d d d d d d d d d d d d d
business‘s activities and then reporting them to decision makers. d d d d d d d d d
2. An advantage of operating asa sole proprietorship, ratherthan a corporation, isthat it is easy to
d d d d d d d d d d d d d d d d d
establish.Anotheradvantageis that income froma sole proprietorship is taxedonly oncein the
d d d d d d d d d d d d d d d d
hands of the individual proprietor (income from a corporation is taxed in the corporation and then
d d d d d d d d d d d d d d d d d d d
again inthe handsof the individual shareholder). Adisadvantage of operatingas a sole
d d d d d d d d d d d d d d d
proprietorship, ratherthan a corporation, is that theindividual proprietor can be held responsible
d d d d d d d d d d d d d d
for the debts of thebusiness.
d d d d d d d
3. Financialaccounting focuseson preparing and using the financial statements that aremade
d d d d d d d d d d d d
available toownersand external userssuchas customers, creditors,and potential investors who are
d d d d d d d d d d d d d d d
interested in reading them. Managerial accounting focuses on otheraccounting reports that arenot
d d d d d d d d d d d d d d
released to the general public,but instead are preparedfor internal decision makingand used by
d d d d d d d d d d d d d d d d
employees, supervisors, and managers who run the company.
d d d d d d d d d
4. Financialreportsareused byboth internalandexternalgroupsand individuals. The internalgroups
d d d d d d d d d d d d d d
are comprisedof the variousmanagers of thebusiness. The external groupsincludeinvestors,
d d d d d d d d d d d d d d
creditors,governmental agencies, other interested parties, andthe publicatlarge.
d d d d d d d d d d d d
5. Thebusinessitself,nottheindividualstockholderswhoownthebusiness,isviewed as owning theassets
d d d d d d d d d d d d d d d d
andowing the liabilitieson its balance sheet. Abusiness‘s balance sheet includes the assets,liabilities,
d d d d d d d d d d d d d d d d
and stockholders‘ equity of only that businessand not the personal assets,liabilities, andequity of
d d d d d d d d d d d d d d d d
the stockholders. The financial statements of a companyshowthe resultsof the business activities of
d d d d d d d d d d d d d d d d d d
only that company.
d d d d
FundamentalsofFinancial d d
1-1
Accounting,7/e
d d
©2022byMcGrawHill LLC. Allrights reserved.Noreproduction ordistribution withoutthepriorwritten consent ofMcGrawHill LLC.
d d d d d d d d d d d d d d d d d d d d d
,6. (a) Operating – Theseactivitiesare directly related to earningprofits.They include buying
d d d d d d d d d d d d d
supplies, making products, serving customers, cleaning thepremises, advertising, renting a
d d d d d d d d d d d
building, repairing equipment,and obtaining insurance coverage.
d d d d d d d d
(b) Investing – Theseactivities involvebuyingand selling productive resources with long lives (such d d d d d d d d d d d d d
as buildings, land, equipment, and tools), purchasing investments, and lending to others.
d d d d d d d d d d d d d
(c) Financing–Anyborrowingfrombanks,repayingbankloans,receiving contributionsfrom d d d d d d d d d d d
stockholders,orpayingdividendstostockholdersareconsidered financingactivities.
d d d d d d d d d d d
7. The headingof eachof thefour primaryfinancialstatements shouldincludethe following:
d d d d d d d d d d d d d d
(a) Name of the business d d d d
(b) Name of the statement d d d d
(c) Dateofthe statement,orthe period oftime thatthestatementcovers d d d d d d d d d d d d d
8. (a) The purpose of the balance sheet is to report the financial position (assets, liabilities and
d d d d d d d d d d d d d d d
stockholders‘ equity)of a business at a point in time.
d d d d d d d d d d d
(b) The purpose of the income statement is to present information about the revenues,
d d d d d d d d d d d d
expenses,and netincomeof abusinessfora specifiedperiod of time.
d d d d d d d d d d d d d d
(c) The statement of retained earnings reports the way that net income and the d d d d d d d d d d d d
distribution of dividends affected the financial position of the company during the period.
d d d d d d d d d d d d d d
(d) The purpose of the statement of cash flows is to summarize how a business‘s operating,
d d d d d d d d d d d d d d
investing, and financing activities caused its cash balance to change over a particular
d d d d d d d d d d d d d
period of time.
d d d d
9. The incomestatement,statementof retainedearnings, and statementof cashflows would be dated
d d d d d d d d d d d d d d
―For the Year Ended December 31, 2021,‖ because they report the inflows and outflowsof
d d d d d d d d d d d d d d d
resources over a period of time. In contrast, thebalance sheet would be dated ―At December 31,
d d d d d d d d d d d d d d d d d
2021,‖ because it represents the assets, liabilities and stockholders‘ equity at a specific date.
d d d d d d d d d d d d d d d
10. Net income is the excess of total revenues over totalexpenses. Anet loss occurs if total expenses
d d d d d d d d d d d d d d d d d
exceedtotal revenues.
d d d d
11. The accountingequation forthebalance sheet is: Assets =Liabilities + Stockholders‘ Equity. Assets
d d d d d d d d d d d d d d
are the economic resources controlled by the company. Liabilities are amounts owed by the
d d d d d d d d d d d d d d d
business. Stockholders‘ equity is theowners‘claims tothebusiness.It includesamounts contributed
d d d d d d d d d d d d d d
to the business (by investors throughpurchasing the company‘s stock) andthe amounts earned
d d d d d d d d d d d d d d
and accumulatedthroughprofitable businessoperations.
d d d d d d d
FundamentalsofFinancial d d
1-2
Accounting,7/e
d d
©2022byMcGrawHill LLC. Allrights reserved.Noreproduction ordistribution withoutthepriorwritten consent ofMcGrawHill LLC.
d d d d d d d d d d d d d d d d d d d d d
,12. The equation for the income statement is Revenues –Expenses = Net Income. Revenues are
d d d d d d d d d d d d d d
increases in a company‘s resources, arising primarily from its operating activities. Expenses are
d d d d d d d d d d d d d
decreasesin a company‘s resources, arising primarily from its operating activities. NetIncome is
d d d d d d d d d d d d d d
equal to revenues minus expenses. (If expenses aregreater than revenues,the company has a
d d d d d d d d d d d d d d d
NetLoss.)
d d d
13. The equation for the statement of retained earningsis: Beginning Retained Earnings + NetIncome -
d d d d d d d d d d d d d d d
Dividends = Ending Retained Earnings. It begins with beginning-of-the-year retained earnings
d d d d d d d d d d d
which is the prior year‘s ending retained earnings reportedon theprior year‘s balance sheet. The
d d d d d d d d d d d d d d d d
current year's net income reported on the income statement is added and the current year's dividends
d d d d d d d d d d d d d d d d
are subtractedfrom this amount. (Ifanet loss occurs, It would be subtracted, along with the
d d d d d d d d d d d d d d d d d
dividends,from the prior year‘s ending retainedearningsbalance.)Theending retained earnings
d d d d d d d d d d d d
amount is reported on the end-of-year balance sheet. 14. The equation for the statementof cash
d d d d d d d d d dd d d d d d d d
flows is: Cash flows fromoperating activities+ Cash flowsfrominvestingactivities + Cash flowsfrom
d d d d d d d d d d d d d d d d d
financingactivities = Change in cash for the period. Change in cash for the period +Beginning cash
d d d d d d d d d d d d d d d d d d
balance = Ending cash balance. The net cash flows for theperiod represent the increase or
d d d d d d d d d d d d d d d d
decrease in cash thatoccurred during the period. Cash flows from operating activitiesare cash
d d d d d d d d d d d d d d d
flows directly related to earning income (normal business activity).Cash flows from investing
d d d d d d d d d d d d d d
activities include cashflowsthatare related to the acquisition or saleof the company‘s long-term
d d d d d d d d d d d d d d d d
assets. Cash flows from financing activitiesare directly related to the financing ofthe company.
d d d d d d d d d d d d d d d d
15. Currently,the Financial AccountingStandards Board (FASB) isgiven theprimary responsibility for
d d d d d d d d d d d d
setting thedetailed rules that becomeGenerally Accepted AccountingPrinciples(GAAP)inthe
d d d d d d d d d d d d d
UnitedStates.(Internationally,the InternationalAccountingStandardsBoard(IASB)hasthe
d d d d d d d d d d d
responsibilityforsetting accountingrules knownas International FinancialReporting Standards
d d d d d d d d d d d
(IFRS).)
d d
16. The maingoal of accounting rulesis to ensure that companies produceuseful financialinformation for
d d d d d d d d d d d d d d d
presentandpotentialinvestors,lenders,andothercreditors in makingdecisions in their capacityas
d d d d d d d d d d d d d d d
capital providers. Financial information must show relevance and faithful representation, as wellas
d d d d d d d d d d d d d d
be comparable, verifiable,timely, andunderstandable.
d d d d d d d
FundamentalsofFinancial d d 1-3
Accounting,7/e
d d
©2022byMcGrawHill LLC. Allrights reserved.Noreproduction ordistribution withoutthepriorwritten consent ofMcGrawHill LLC.
d d d d d d d d d d d d d d d d d d d d d
, 17. An ethical dilemma isa situation wherefollowingone moralprinciple would result in violating
d d d d d d d d d d d d d d
another. Three steps that should beconsidered when evaluating ethical dilemmasare:
d d d d d d d d d d d d d
(a) Identifywho will benefitfromthe situation(often,themanager oremployee)and howothers will d d d d d d d d d d d d d d d
beharmed (other employees, the company‘s reputation, owners, creditors, and the public in
d d d d d d d d d d d d d
general).
d d
(b) Identifythealternativecourses ofaction. d d d d d d
(c) Choose the alternative that is the most ethical –that which you would be proud to have d d d d d d d d d d d d d d d d
reported in thenews media. Often, there is no one right answer and hard choices will need to be
d d d d d d d d d d d d d d d d d d d
made. Following strong ethical practices is akey part of ensuringgood financial reporting by
d d d d d d d d d d d d d d d
businesses of all sizes.
d d d d d
18. Accounting frauds andcases involving academic dishonesty are similar in many respects. Both
d d d d d d d d d d d d
involvedeceiving others inan attempt to influence their actions or decisions, often resulting in
d d d d d d d d d d d d d d d
temporarypersonal gain for thedeceiver. Forexample, whenan accounting fraud is committed,
d d d d d d d d d d d d d d
financial statement usersmay be misled into making decisionsthey wouldn‘t have made hadthe
d d d d d d d d d d d d d d d
fraudnot occurred (e.g., creditors might loan money to the company, investors might investin the
d d d d d d d d d d d d d d d d
company, orstockholders might rewardtop managers withbig bonuses). When academic
d d d d d d d d d d d d
dishonesty is committed, instructors might assignahigher grade than is warranted by the student‘s
d d d d d d d d d d d d d d d
individual contribution. Another similarity is that,asa consequence of thedeception, innocent
d d d d d d d d d d d d d
bystanders may be adverselyaffected byfraud and academic dishonesty.Fraud may require the
d d d d d d d d d d d d d d
company to chargehigher prices to customers to cover costs incurredas a result ofthe fraud.
d d d d d d d d d d d d d d d d d
Academic dishonesty may lead to strictergrading standards, with significant deductions taken for
d d d d d d d d d d d d d d
inadequate documentation of sources referenced. Afinal similarityis that if fraud and academic
d d d d d d d d d d d d d d
dishonesty are ultimately uncovered, bothare likely to lead to adverselong-term consequences for
d d d d d d d d d d d d d d
the perpetrator. Fraudsters maybe fined, imprisoned,and encounter anabrupt end to their
d d d d d d d d d d d d d d
careers.Students who cheat may be penalized through lower course grades orexpulsion, and
d d d d d d d d d d d d d d
might find itimpossible to obtainacademic references foremployment applications.
d d d d d d d d d d d d
FundamentalsofFinancial d d
1-4
Accounting,7/e
d d
©2022byMcGrawHill LLC. Allrights reserved.Noreproduction ordistribution withoutthepriorwritten consent ofMcGrawHill LLC.
d d d d d d d d d d d d d d d d d d d d d
