SOLUTION MANUAL FOR Fundamentals of Financial
Accounting 7e Phillips Chapter 1-13 complete guide
graded A+ tips
Chapter 1 i!
Business Decisions and Financial Accounting
i! i! i! i!
ANSWERSi!TOi!QUESTIONS
1. Accountingi!isi!ai!systemi!ofi!analyzing,i!recording,i!andi!summarizingi!thei!resultsi!ofi!ai!b
usiness‘si!activitiesi!andi!theni!reportingi!themi!toi!decisioni!makers.
2. Ani!advantagei!ofi!operatingi!asi!ai!solei!proprietorship,i!ratheri!thani!ai!corporation,i!isi!thati!iti!
isi!easyi!toi!establish.i!Anotheri!advantagei!isi!thati!incomei!fromi!ai!solei!proprietorshipi ! isi!t
axedi!onlyi!oncei!ini!thei!handsi!ofi!thei!individuali!proprietori!(incomei!fromi!ai!corporationi!isi!
taxedi!ini!thei!corporationi!andi!theni!againi!ini!thei!handsi!ofi!thei!individuali!shareholder).i!Ai!
disadvantagei!ofi!operatingi!asi!ai!solei!proprietorship,i!ratheri!thani!ai!corporation,i!isi!thati!t
hei!individuali!proprietori!cani!bei!heldi!responsiblei!fori!thei!debtsi!ofi!thei!business.
3. Financiali!accountingi!focusesi!oni!preparingi!andi!usingi!thei!financiali!statementsi!thati!ar
ei!madei!availablei!toi!ownersi!andi!externali!usersi!suchi!asi!customers,i!creditors,i!andi!pot
entiali!investorsi!whoi!arei!interestedi!ini!readingi!them.i!Manageriali!accountingi!focusesi!
oni!otheri!accountingi!reportsi!thati!arei!noti!releasedi!toi!thei!generali!public,i!buti!insteadi!ar
ei!preparedi!fori!internali!decisioni!makingi!andi!usedi!byi!employees,i!supervisors,i!andi!m
anagersi!whoi!runi!thei!company.
4. Financiali!reportsi!arei!usedi!byi!bothi!internali!andi!externali!groupsi!andi!individuals.i!Thei!i
nternali!groupsi!arei!comprisedi!ofi!thei!variousi!managersi!ofi!thei!business.i!Thei!externali!
groupsi!includei!investors,i!creditors,i!governmentali!agencies,i!otheri!interestedi!parties,i!
andi!thei!publici!ati!large.
5. Thei!businessi!itself,i!noti!thei!individuali!stockholdersi!whoi!owni!thei!business,i!isi!viewedi!a
si!owningi!thei!assetsi!andi!owingi!thei!liabilitiesi!oni!itsi!balancei!sheet.i!Ai!business‘si!balan
cei!sheeti!includesi!thei!assets,i!liabilities,i!andi!stockholders‘i!equityi!ofi!onlyi!thati!business
i!andi!noti!thei!personali!assets,i!liabilities,i!andi!equityi!ofi!thei!stockholders.i ! Thei!financial
i!statementsi!ofi!ai!companyi!showi!thei!resultsi!ofi!thei!businessi!activitiesi!ofi!onlyi!thati!com
pany.
Fundamentalsi!ofi!Financiali!Accounting,i!7/e 1-1
©i!2022i!byi!McGrawi!Hilli!LLC.i ! Alli!rightsi!reserved.i!Noi!reproductioni!ori!distributioni!withouti!thei!priori!writteni!consenti!ofi!McGrawi!Hilli!
LLC.
,6. (a)i ! Operatingi!–
i!Thesei!activitiesi!arei!directlyi!relatedi!toi!earningi!profits.i!Theyi!includei!buyingi!supplies,i!
makingi!products,i!servingi!customers,i!cleaningi!thei!premises,i!advertising,i!rentingi!ai!b
uilding,i!repairingi!equipment,i!andi!obtainingi!insurancei!coverage.
(b) Investingi!–
i!Thesei!activitiesi!involvei!buyingi!andi!sellingi!productivei!resourcesi!withi!longi!livesi!(suchi
!asi!buildings,i!land,i!equipment,i!andi!tools),i!purchasingi!investments,i!andi!lendingi!toi!ot
hers.
(c) Financingi!–
i!Anyi!borrowingi!fromi!banks,i!repayingi!banki!loans,i!receivingi!contributionsi!fromi!stockh
olders,i!ori!payingi!dividendsi!toi!stockholdersi!arei!consideredi!financingi!activities.
7. Thei!headingi!ofi!eachi!ofi!thei!fouri!primaryi!financiali!statementsi!shouldi!includei!thei!f
ollowing:
(a) Namei!ofi!thei!business
(b) Namei!ofi!thei!statement
(c) Datei!ofi!thei!statement,i!ori!thei!periodi!ofi!timei!thati!thei!statementi!covers
8. (a)i ! Thei!purposei!ofi!thei!balancei!sheeti!isi!toi!reporti!thei!financiali!positioni!(assets,i!li
abilitiesi!andi!stockholders‘i!equity)i!ofi!ai!businessi!ati!ai!pointi!ini!time.
(b) Thei!purposei!ofi!thei!incomei!statementi!isi!toi!presenti!informationi!abouti!thei!reve
nues,i!expenses,i!andi!neti!incomei!ofi!ai!businessi!fori!ai!specifiedi!periodi!ofi!time.
(c) Thei!statementi!ofi!retainedi!earningsi!reportsi!thei!wayi!thati!neti!incomei!andi!thei!distri
butioni!ofi!dividendsi!affectedi!thei!financiali!positioni!ofi!thei!companyi!duringi!thei!period.
(d) Thei!purposei!ofi!thei!statementi!ofi!cashi!flowsi!isi!toi!summarizei!howi!ai!business‘si!op
erating,i!investing,i!andi!financingi!activitiesi!causedi!itsi!cashi!balancei!toi!changei ! overi!ai!
particulari!periodi!ofi!time.
9. Thei!incomei!statement,i!statementi!ofi!retainedi!earnings,i!andi!statementi!ofi!cashi!flowsi!
wouldi!bei!datedi!―Fori!thei!Yeari!Endedi!Decemberi!31,i!2021,‖i!becausei!theyi!reporti!thei!i
nflowsi!andi!outflowsi!ofi!resourcesi!overi!ai!periodi!ofi!time.i!Ini!contrast,i!thei!balancei!sheeti
!wouldi!bei!datedi!―Ati!Decemberi!31,i!2021,‖i!becausei!iti!representsi!thei!assets,i!liabilitiesi!
andi!stockholders‘i!equityi!ati!ai!specifici!date.
10. Neti!incomei!isi!thei!excessi!ofi!totali!revenuesi!overi!totali!expenses.i!Ai!neti!lossi!occursi!ifi!to
tali!expensesi!exceedi!totali!revenues.
11. Thei!accountingi!equationi!fori!thei!balancei!sheeti!is:i!Assetsi!=i!Liabilitiesi!+i!Stockholders
‘i!Equity.i ! Assetsi!arei!thei!economici!resourcesi!controlledi!byi!thei!company.i ! Liabilitiesi!
arei!amountsi!owedi!byi!thei!business.i ! Stockholders‘i!equityi!isi!thei!owners‘i!claimsi!toi!th
ei!business.i!Iti!includesi!amountsi!contributedi!toi!thei!businessi!(byi!investorsi!throughi!pu
rchasingi!thei!company‘si!stock)i!andi!thei!amountsi!earnedi!andi!accumulatedi!throughi!pr
ofitablei!businessi!operations.
Fundamentalsi!ofi!Financiali!Accounting,i!7/e 1-2
©i!2022i!byi!McGrawi!Hilli!LLC.i ! Alli!rightsi!reserved.i!Noi!reproductioni!ori!distributioni!withouti!thei!priori!writteni!consenti!ofi!McGrawi!Hilli!
LLC.
,12. Thei!equationi!fori!thei!incomei!statementi!isi!Revenuesi!–
i!Expensesi!=i!Neti!Income.i!Revenuesi!arei!increasesi!ini!ai!company‘si!resources,i!arisin
gi!primarilyi!fromi!itsi!operatingi!activities.i ! Expensesi!arei!decreasesi!ini!ai!company‘si!re
sources,i!arisingi!primarilyi!fromi!itsi!operatingi!activities.i!Neti!Incomei!isi!equali!toi!reven
uesi!minusi!expenses.i ! (Ifi!expensesi!arei!greateri!thani!revenues,i!thei!companyi!hasi!ai!
Neti!Loss.)
13. Thei!equationi!fori!thei!statementi!ofi!retainedi!earningsi!is:i!Beginningi ! Retainedi!Earningsi!
+i ! Neti!Incomei!-i!Dividendsi!=i!Endingi!Retainedi!Earnings.i!Iti!beginsi!withi!beginning-of-
the-
yeari!retainedi!earningsi!whichi!isi!thei!priori!year‘si!endingi!retainedi!earningsi!reportedi!oni!
thei!priori!year‘si!balancei!sheet.i ! Thei!currenti!year'si!neti!incomei!reportedi!oni!thei!income
i!statementi!isi!addedi!andi!thei!currenti!year'si!dividendsi!arei!subtractedi!fromi!thisi!amount.
i!(Ifi!ai!neti!lossi!occurs,i!Iti!wouldi!bei!subtracted,i!alongi!withi!thei!dividends,i!fromi!thei!priori!y
ear‘si!endingi!retainedi!earningsi!balance.)Thei!endingi!retainedi!earningsi!amounti!isi!rep
ortedi!oni!thei!end-of-yeari!balancei!sheet.i!14.
Thei!e
quationi!fori!thei!statementi!ofi!cashi!flowsi!is:i!Cashi!flowsi!fromi!operatingi!activitiesi!+i!Cash
i!flowsi!fromi!investingi!activitiesi!+i!Cashi!flowsi!fromi!financingi!activitiesi!=i!Changei!ini!cas
hi!fori!thei!period.i!Changei!ini!cashi!fori!thei!periodi!+i!Beginningi!cashi!balancei!=i!Endingi!ca
shi!balance.i ! Thei!neti!cashi!flowsi!fori!thei!periodi!representi!thei!increasei!ori!decreasei!ini!c
ashi!thati!occurredi!duringi!thei!period.i ! Cashi!flowsi!fromi!operatingi!activitiesi!arei!cashi!flo
wsi!directlyi!relatedi!toi!earningi!incomei!(normali!businessi!activity).i!Cashi!flowsi!fromi!inve
stingi!activitiesi!includei!cashi!flowsi!thati!arei!relatedi!toi!thei!acquisitioni!ori!salei!ofi!thei!com
pany‘si!long-
termi!assets.i!Cashi!flowsi!fromi ! financingi!activitiesi!arei!directlyi!relatedi!toi!thei!financingi!
ofi!thei!company.
15. Currently,i!thei!Financiali!Accountingi!Standardsi!Boardi!(FASB)i!isi!giveni!thei!primaryi!r
esponsibilityi!fori!settingi!thei!detailedi!rulesi!thati!becomei!Generallyi!Acceptedi!Accoun
tingi!Principlesi!(GAAP)i!ini!thei!Unitedi!States.i!(Internationally,i!thei!Internationali!Acco
untingi!Standardsi!Boardi!(IASB)i!hasi!thei!responsibilityi!fori!settingi!accountingi!rulesi!kn
owni!asi!Internationali!Financiali!Reportingi!Standardsi!(IFRS).)
16. Thei!maini!goali!ofi!accountingi!rulesi!isi!toi!ensurei!thati!companiesi!producei!usefuli!financi
ali!informationi!fori!presenti!andi!potentiali!investors,i!lenders,i!andi!otheri!creditorsi!ini!maki
ngi!decisionsi!ini!theiri!capacityi!asi!capitali!providers.i ! Financiali!informationi!musti!showi!
relevancei!andi!faithfuli!representation,i!asi!welli!asi!bei!comparable,i!verifiable,i!timely,i!an
di!understandable.
Fundamentalsi!ofi!Financiali!Accounting,i!7/e 1-3
©i!2022i!byi!McGrawi!Hilli!LLC.i ! Alli!rightsi!reserved.i!Noi!reproductioni!ori!distributioni!withouti!thei!priori!writteni!consenti!ofi!McGrawi!Hilli!
LLC.
, 17. Ani!ethicali!dilemmai!isi!ai!situationi!wherei!followingi!onei!morali!principlei!wouldi!resulti!ini!vi
olatingi!another.i!Threei!stepsi!thati!shouldi!bei!consideredi!wheni!evaluatingi!ethicali!dile
mmasi!are:
(a) Identifyi!whoi!willi!benefiti!fromi!thei!situationi!(often,i!thei!manageri!ori!employee)i!andi!h
owi!othersi!willi!bei!harmedi!(otheri!employees,i!thei!company‘si!reputation,i!owners,i!credit
ors,i!andi!thei!publici!ini!general).
(b) Identifyi!thei!alternativei!coursesi!ofi!action.
(c) Choosei!thei!alternativei!thati!isi!thei!mosti!ethicali!–
i!thati!whichi!youi!wouldi!bei!proudi!toi!havei!reportedi!ini!thei!newsi!media.i ! Often,i!therei!isi!n
oi!onei!righti!answeri!andi!hardi!choicesi!willi!needi!toi!bei!made.i!Followingi!strongi!ethicali!p
racticesi!isi!ai!keyi!parti!ofi!ensuringi!goodi!financiali!reportingi!byi!businessesi!ofi!alli!sizes.
18. Accountingi!fraudsi!andi!casesi!involvingi!academici!dishonestyi!arei!similari!ini!manyi!resp
ects.i!Bothi!involvei!deceivingi!othersi!ini!ani!attempti!toi!influencei!theiri!actionsi!ori!decision
s,i!ofteni!resultingi!ini!temporaryi!personali!gaini!fori!thei!deceiver.i!Fori!example,i!wheni!ani!
accountingi!fraudi!isi!committed,i!financiali!statementi!usersi!mayi!bei!misledi!intoi!makingi!
decisionsi!theyi!wouldn‘ti!havei!madei!hadi!thei!fraudi!noti!occurredi!(e.g.,i!creditorsi!mighti!l
oani!moneyi!toi!thei!company,i!investorsi!mighti!investi!ini!thei!company,i!ori!stockholdersi!m
ighti!rewardi!topi!managersi!withi!bigi!bonuses).i!Wheni!academici!dishonestyi!isi!committe
d,i!instructorsi!mighti!assigni!ai!higheri!gradei!thani!isi!warrantedi!byi!thei!student‘si!individu
ali!contribution.i!Anotheri!similarityi!isi!that,i!asi!ai!consequencei!ofi!thei!deception,i!innocen
ti!bystandersi!mayi!bei!adverselyi!affectedi!byi!fraudi!andi!academici!dishonesty.i!Fraudi!ma
yi!requirei!thei!companyi!toi!chargei!higheri!pricesi!toi!customersi!toi!coveri!costsi!incurredi!a
si!ai!resulti!ofi!thei!fraud.i!Academici!dishonestyi!mayi!leadi!toi!stricteri!gradingi!standards,i!w
ithi!significanti!deductionsi!takeni!fori!inadequatei!documentationi!ofi!sourcesi!referenced.
i ! Ai!finali!similarityi!isi!thati!ifi!fraudi!andi!academici!dishonestyi!arei!ultimatelyi!uncovered,i!b
othi!arei!likelyi!toi!leadi!toi!adversei!long-
termi!consequencesi!fori!thei!perpetrator.i ! Fraudstersi!mayi!bei!fined,i!imprisoned,i!andi!e
ncounteri!ani!abrupti!endi!toi!theiri!careers.i!Studentsi!whoi!cheati!mayi!bei!penalizedi!throu
ghi!loweri!coursei!gradesi!ori!expulsion,i!andi!mighti!findi!iti!impossiblei!toi!obtaini!academici!r
eferencesi!fori!employmenti!applications.
Fundamentalsi!ofi!Financiali!Accounting,i!7/e 1-4
©i!2022i!byi!McGrawi!Hilli!LLC.i ! Alli!rightsi!reserved.i!Noi!reproductioni!ori!distributioni!withouti!thei!priori!writteni!consenti!ofi!McGrawi!Hilli!
LLC.
Accounting 7e Phillips Chapter 1-13 complete guide
graded A+ tips
Chapter 1 i!
Business Decisions and Financial Accounting
i! i! i! i!
ANSWERSi!TOi!QUESTIONS
1. Accountingi!isi!ai!systemi!ofi!analyzing,i!recording,i!andi!summarizingi!thei!resultsi!ofi!ai!b
usiness‘si!activitiesi!andi!theni!reportingi!themi!toi!decisioni!makers.
2. Ani!advantagei!ofi!operatingi!asi!ai!solei!proprietorship,i!ratheri!thani!ai!corporation,i!isi!thati!iti!
isi!easyi!toi!establish.i!Anotheri!advantagei!isi!thati!incomei!fromi!ai!solei!proprietorshipi ! isi!t
axedi!onlyi!oncei!ini!thei!handsi!ofi!thei!individuali!proprietori!(incomei!fromi!ai!corporationi!isi!
taxedi!ini!thei!corporationi!andi!theni!againi!ini!thei!handsi!ofi!thei!individuali!shareholder).i!Ai!
disadvantagei!ofi!operatingi!asi!ai!solei!proprietorship,i!ratheri!thani!ai!corporation,i!isi!thati!t
hei!individuali!proprietori!cani!bei!heldi!responsiblei!fori!thei!debtsi!ofi!thei!business.
3. Financiali!accountingi!focusesi!oni!preparingi!andi!usingi!thei!financiali!statementsi!thati!ar
ei!madei!availablei!toi!ownersi!andi!externali!usersi!suchi!asi!customers,i!creditors,i!andi!pot
entiali!investorsi!whoi!arei!interestedi!ini!readingi!them.i!Manageriali!accountingi!focusesi!
oni!otheri!accountingi!reportsi!thati!arei!noti!releasedi!toi!thei!generali!public,i!buti!insteadi!ar
ei!preparedi!fori!internali!decisioni!makingi!andi!usedi!byi!employees,i!supervisors,i!andi!m
anagersi!whoi!runi!thei!company.
4. Financiali!reportsi!arei!usedi!byi!bothi!internali!andi!externali!groupsi!andi!individuals.i!Thei!i
nternali!groupsi!arei!comprisedi!ofi!thei!variousi!managersi!ofi!thei!business.i!Thei!externali!
groupsi!includei!investors,i!creditors,i!governmentali!agencies,i!otheri!interestedi!parties,i!
andi!thei!publici!ati!large.
5. Thei!businessi!itself,i!noti!thei!individuali!stockholdersi!whoi!owni!thei!business,i!isi!viewedi!a
si!owningi!thei!assetsi!andi!owingi!thei!liabilitiesi!oni!itsi!balancei!sheet.i!Ai!business‘si!balan
cei!sheeti!includesi!thei!assets,i!liabilities,i!andi!stockholders‘i!equityi!ofi!onlyi!thati!business
i!andi!noti!thei!personali!assets,i!liabilities,i!andi!equityi!ofi!thei!stockholders.i ! Thei!financial
i!statementsi!ofi!ai!companyi!showi!thei!resultsi!ofi!thei!businessi!activitiesi!ofi!onlyi!thati!com
pany.
Fundamentalsi!ofi!Financiali!Accounting,i!7/e 1-1
©i!2022i!byi!McGrawi!Hilli!LLC.i ! Alli!rightsi!reserved.i!Noi!reproductioni!ori!distributioni!withouti!thei!priori!writteni!consenti!ofi!McGrawi!Hilli!
LLC.
,6. (a)i ! Operatingi!–
i!Thesei!activitiesi!arei!directlyi!relatedi!toi!earningi!profits.i!Theyi!includei!buyingi!supplies,i!
makingi!products,i!servingi!customers,i!cleaningi!thei!premises,i!advertising,i!rentingi!ai!b
uilding,i!repairingi!equipment,i!andi!obtainingi!insurancei!coverage.
(b) Investingi!–
i!Thesei!activitiesi!involvei!buyingi!andi!sellingi!productivei!resourcesi!withi!longi!livesi!(suchi
!asi!buildings,i!land,i!equipment,i!andi!tools),i!purchasingi!investments,i!andi!lendingi!toi!ot
hers.
(c) Financingi!–
i!Anyi!borrowingi!fromi!banks,i!repayingi!banki!loans,i!receivingi!contributionsi!fromi!stockh
olders,i!ori!payingi!dividendsi!toi!stockholdersi!arei!consideredi!financingi!activities.
7. Thei!headingi!ofi!eachi!ofi!thei!fouri!primaryi!financiali!statementsi!shouldi!includei!thei!f
ollowing:
(a) Namei!ofi!thei!business
(b) Namei!ofi!thei!statement
(c) Datei!ofi!thei!statement,i!ori!thei!periodi!ofi!timei!thati!thei!statementi!covers
8. (a)i ! Thei!purposei!ofi!thei!balancei!sheeti!isi!toi!reporti!thei!financiali!positioni!(assets,i!li
abilitiesi!andi!stockholders‘i!equity)i!ofi!ai!businessi!ati!ai!pointi!ini!time.
(b) Thei!purposei!ofi!thei!incomei!statementi!isi!toi!presenti!informationi!abouti!thei!reve
nues,i!expenses,i!andi!neti!incomei!ofi!ai!businessi!fori!ai!specifiedi!periodi!ofi!time.
(c) Thei!statementi!ofi!retainedi!earningsi!reportsi!thei!wayi!thati!neti!incomei!andi!thei!distri
butioni!ofi!dividendsi!affectedi!thei!financiali!positioni!ofi!thei!companyi!duringi!thei!period.
(d) Thei!purposei!ofi!thei!statementi!ofi!cashi!flowsi!isi!toi!summarizei!howi!ai!business‘si!op
erating,i!investing,i!andi!financingi!activitiesi!causedi!itsi!cashi!balancei!toi!changei ! overi!ai!
particulari!periodi!ofi!time.
9. Thei!incomei!statement,i!statementi!ofi!retainedi!earnings,i!andi!statementi!ofi!cashi!flowsi!
wouldi!bei!datedi!―Fori!thei!Yeari!Endedi!Decemberi!31,i!2021,‖i!becausei!theyi!reporti!thei!i
nflowsi!andi!outflowsi!ofi!resourcesi!overi!ai!periodi!ofi!time.i!Ini!contrast,i!thei!balancei!sheeti
!wouldi!bei!datedi!―Ati!Decemberi!31,i!2021,‖i!becausei!iti!representsi!thei!assets,i!liabilitiesi!
andi!stockholders‘i!equityi!ati!ai!specifici!date.
10. Neti!incomei!isi!thei!excessi!ofi!totali!revenuesi!overi!totali!expenses.i!Ai!neti!lossi!occursi!ifi!to
tali!expensesi!exceedi!totali!revenues.
11. Thei!accountingi!equationi!fori!thei!balancei!sheeti!is:i!Assetsi!=i!Liabilitiesi!+i!Stockholders
‘i!Equity.i ! Assetsi!arei!thei!economici!resourcesi!controlledi!byi!thei!company.i ! Liabilitiesi!
arei!amountsi!owedi!byi!thei!business.i ! Stockholders‘i!equityi!isi!thei!owners‘i!claimsi!toi!th
ei!business.i!Iti!includesi!amountsi!contributedi!toi!thei!businessi!(byi!investorsi!throughi!pu
rchasingi!thei!company‘si!stock)i!andi!thei!amountsi!earnedi!andi!accumulatedi!throughi!pr
ofitablei!businessi!operations.
Fundamentalsi!ofi!Financiali!Accounting,i!7/e 1-2
©i!2022i!byi!McGrawi!Hilli!LLC.i ! Alli!rightsi!reserved.i!Noi!reproductioni!ori!distributioni!withouti!thei!priori!writteni!consenti!ofi!McGrawi!Hilli!
LLC.
,12. Thei!equationi!fori!thei!incomei!statementi!isi!Revenuesi!–
i!Expensesi!=i!Neti!Income.i!Revenuesi!arei!increasesi!ini!ai!company‘si!resources,i!arisin
gi!primarilyi!fromi!itsi!operatingi!activities.i ! Expensesi!arei!decreasesi!ini!ai!company‘si!re
sources,i!arisingi!primarilyi!fromi!itsi!operatingi!activities.i!Neti!Incomei!isi!equali!toi!reven
uesi!minusi!expenses.i ! (Ifi!expensesi!arei!greateri!thani!revenues,i!thei!companyi!hasi!ai!
Neti!Loss.)
13. Thei!equationi!fori!thei!statementi!ofi!retainedi!earningsi!is:i!Beginningi ! Retainedi!Earningsi!
+i ! Neti!Incomei!-i!Dividendsi!=i!Endingi!Retainedi!Earnings.i!Iti!beginsi!withi!beginning-of-
the-
yeari!retainedi!earningsi!whichi!isi!thei!priori!year‘si!endingi!retainedi!earningsi!reportedi!oni!
thei!priori!year‘si!balancei!sheet.i ! Thei!currenti!year'si!neti!incomei!reportedi!oni!thei!income
i!statementi!isi!addedi!andi!thei!currenti!year'si!dividendsi!arei!subtractedi!fromi!thisi!amount.
i!(Ifi!ai!neti!lossi!occurs,i!Iti!wouldi!bei!subtracted,i!alongi!withi!thei!dividends,i!fromi!thei!priori!y
ear‘si!endingi!retainedi!earningsi!balance.)Thei!endingi!retainedi!earningsi!amounti!isi!rep
ortedi!oni!thei!end-of-yeari!balancei!sheet.i!14.
Thei!e
quationi!fori!thei!statementi!ofi!cashi!flowsi!is:i!Cashi!flowsi!fromi!operatingi!activitiesi!+i!Cash
i!flowsi!fromi!investingi!activitiesi!+i!Cashi!flowsi!fromi!financingi!activitiesi!=i!Changei!ini!cas
hi!fori!thei!period.i!Changei!ini!cashi!fori!thei!periodi!+i!Beginningi!cashi!balancei!=i!Endingi!ca
shi!balance.i ! Thei!neti!cashi!flowsi!fori!thei!periodi!representi!thei!increasei!ori!decreasei!ini!c
ashi!thati!occurredi!duringi!thei!period.i ! Cashi!flowsi!fromi!operatingi!activitiesi!arei!cashi!flo
wsi!directlyi!relatedi!toi!earningi!incomei!(normali!businessi!activity).i!Cashi!flowsi!fromi!inve
stingi!activitiesi!includei!cashi!flowsi!thati!arei!relatedi!toi!thei!acquisitioni!ori!salei!ofi!thei!com
pany‘si!long-
termi!assets.i!Cashi!flowsi!fromi ! financingi!activitiesi!arei!directlyi!relatedi!toi!thei!financingi!
ofi!thei!company.
15. Currently,i!thei!Financiali!Accountingi!Standardsi!Boardi!(FASB)i!isi!giveni!thei!primaryi!r
esponsibilityi!fori!settingi!thei!detailedi!rulesi!thati!becomei!Generallyi!Acceptedi!Accoun
tingi!Principlesi!(GAAP)i!ini!thei!Unitedi!States.i!(Internationally,i!thei!Internationali!Acco
untingi!Standardsi!Boardi!(IASB)i!hasi!thei!responsibilityi!fori!settingi!accountingi!rulesi!kn
owni!asi!Internationali!Financiali!Reportingi!Standardsi!(IFRS).)
16. Thei!maini!goali!ofi!accountingi!rulesi!isi!toi!ensurei!thati!companiesi!producei!usefuli!financi
ali!informationi!fori!presenti!andi!potentiali!investors,i!lenders,i!andi!otheri!creditorsi!ini!maki
ngi!decisionsi!ini!theiri!capacityi!asi!capitali!providers.i ! Financiali!informationi!musti!showi!
relevancei!andi!faithfuli!representation,i!asi!welli!asi!bei!comparable,i!verifiable,i!timely,i!an
di!understandable.
Fundamentalsi!ofi!Financiali!Accounting,i!7/e 1-3
©i!2022i!byi!McGrawi!Hilli!LLC.i ! Alli!rightsi!reserved.i!Noi!reproductioni!ori!distributioni!withouti!thei!priori!writteni!consenti!ofi!McGrawi!Hilli!
LLC.
, 17. Ani!ethicali!dilemmai!isi!ai!situationi!wherei!followingi!onei!morali!principlei!wouldi!resulti!ini!vi
olatingi!another.i!Threei!stepsi!thati!shouldi!bei!consideredi!wheni!evaluatingi!ethicali!dile
mmasi!are:
(a) Identifyi!whoi!willi!benefiti!fromi!thei!situationi!(often,i!thei!manageri!ori!employee)i!andi!h
owi!othersi!willi!bei!harmedi!(otheri!employees,i!thei!company‘si!reputation,i!owners,i!credit
ors,i!andi!thei!publici!ini!general).
(b) Identifyi!thei!alternativei!coursesi!ofi!action.
(c) Choosei!thei!alternativei!thati!isi!thei!mosti!ethicali!–
i!thati!whichi!youi!wouldi!bei!proudi!toi!havei!reportedi!ini!thei!newsi!media.i ! Often,i!therei!isi!n
oi!onei!righti!answeri!andi!hardi!choicesi!willi!needi!toi!bei!made.i!Followingi!strongi!ethicali!p
racticesi!isi!ai!keyi!parti!ofi!ensuringi!goodi!financiali!reportingi!byi!businessesi!ofi!alli!sizes.
18. Accountingi!fraudsi!andi!casesi!involvingi!academici!dishonestyi!arei!similari!ini!manyi!resp
ects.i!Bothi!involvei!deceivingi!othersi!ini!ani!attempti!toi!influencei!theiri!actionsi!ori!decision
s,i!ofteni!resultingi!ini!temporaryi!personali!gaini!fori!thei!deceiver.i!Fori!example,i!wheni!ani!
accountingi!fraudi!isi!committed,i!financiali!statementi!usersi!mayi!bei!misledi!intoi!makingi!
decisionsi!theyi!wouldn‘ti!havei!madei!hadi!thei!fraudi!noti!occurredi!(e.g.,i!creditorsi!mighti!l
oani!moneyi!toi!thei!company,i!investorsi!mighti!investi!ini!thei!company,i!ori!stockholdersi!m
ighti!rewardi!topi!managersi!withi!bigi!bonuses).i!Wheni!academici!dishonestyi!isi!committe
d,i!instructorsi!mighti!assigni!ai!higheri!gradei!thani!isi!warrantedi!byi!thei!student‘si!individu
ali!contribution.i!Anotheri!similarityi!isi!that,i!asi!ai!consequencei!ofi!thei!deception,i!innocen
ti!bystandersi!mayi!bei!adverselyi!affectedi!byi!fraudi!andi!academici!dishonesty.i!Fraudi!ma
yi!requirei!thei!companyi!toi!chargei!higheri!pricesi!toi!customersi!toi!coveri!costsi!incurredi!a
si!ai!resulti!ofi!thei!fraud.i!Academici!dishonestyi!mayi!leadi!toi!stricteri!gradingi!standards,i!w
ithi!significanti!deductionsi!takeni!fori!inadequatei!documentationi!ofi!sourcesi!referenced.
i ! Ai!finali!similarityi!isi!thati!ifi!fraudi!andi!academici!dishonestyi!arei!ultimatelyi!uncovered,i!b
othi!arei!likelyi!toi!leadi!toi!adversei!long-
termi!consequencesi!fori!thei!perpetrator.i ! Fraudstersi!mayi!bei!fined,i!imprisoned,i!andi!e
ncounteri!ani!abrupti!endi!toi!theiri!careers.i!Studentsi!whoi!cheati!mayi!bei!penalizedi!throu
ghi!loweri!coursei!gradesi!ori!expulsion,i!andi!mighti!findi!iti!impossiblei!toi!obtaini!academici!r
eferencesi!fori!employmenti!applications.
Fundamentalsi!ofi!Financiali!Accounting,i!7/e 1-4
©i!2022i!byi!McGrawi!Hilli!LLC.i ! Alli!rightsi!reserved.i!Noi!reproductioni!ori!distributioni!withouti!thei!priori!writteni!consenti!ofi!McGrawi!Hilli!
LLC.
