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
P P P P P P
ANSWERSPTOPQUESTIONS
1. AccountingPisPaPsystemPofPanalyzing,Precording,PandPsummarizingPthePresultsPofPaPbusiness‘s
activitiesPandPthenPreportingPthemPtoPdecisionPmakers.
2. AnPadvantagePofPoperatingPasPaPsolePproprietorship,PratherPthanPaPcorporation,PisPthatPitPisPeasyPtoP esta
blish.PAnotherPadvantagePisPthatPincomePfromPaPsolePproprietorshipPisPtaxedPonlyPoncePinPthePhandsP of
PthePindividualPproprietorP(incomePfromPaPcorporationPisPtaxedPinPthePcorporationPandPthenPagainPinP t
hePhandsPofPthePindividualPproprietor).PAPdisadvantagePofPoperatingPasPaPsolePproprietorship,PratherP t
hanPaPcorporation,PisPthatPthePindividualPproprietorPcanPbePheldPresponsiblePforPthePdebtsPofPtheP busin
ess.
3. FinancialPaccountingPfocusesPonPpreparingPandPusingPthePfinancialPstatementsPthatParePmadePavailable
P toPownersPandPexternalPusersPsuchPasPcustomers,Pcreditors,PandPpotentialPinvestorsPwhoParePintereste
dP inPreadingPthem.PManagerialPaccountingPfocusesPonPotherPaccountingPreportsPthatParePnotPreleasedPt
oP thePgeneralPpublic,PbutPinsteadParePpreparedPandPusedPbyPemployees,Psupervisors,PandPmanagersP w
hoP runPthePcompany.
4. FinancialPreportsParePusedPbyPbothPinternalPandPexternalPgroupsPandPindividuals.PThePinternalPgroups
P arePcomprisedPofPthePvariousPmanagersPofPthePbusiness.PThePexternalPgroupsPincludePinvestors,P cre
ditors,PgovernmentalPagencies,PotherPinterestedPparties,PandPthePpublicPatPlarge.
5. ThePbusinessPitself,PnotPthePindividualPshareholdersPwhoPownPthePbusiness,PisPviewedPasPowningPthe
P assetsPandPowingPthePliabilitiesPonPitsPbalancePsheet.PAPbusiness‘sPbalancePsheetPincludesPthePassets,
P liabilities,PandPshareholders‘PequityPofPonlyPthatPbusinessPandPnotPthePpersonalPassets,Pliabilities,Pa
ndP equityPofPthePshareholders.P ThePfinancialPstatementsPofPaPcompanyPshowPthePresultsPofPthePbusi
ness
P
,P
activitiesPofPonlyPthatPcompany.
6. (a)P OperatingP–
PThesePactivitiesParePdirectlyPrelatedPtoPearningPprofits.PTheyPincludePbuyingPsupplies,P makingPproduct
s,PservingPcustomers,PcleaningPthePpremises,Padvertising,PrentingPaPbuilding,PrepairingP equipment,Pan
dPobtainingPinsurancePcoverage.
(b) InvestingP–
PThesePactivitiesPinvolvePbuyingPandPsellingPproductivePresourcesPwithPlongPlivesP(suchPasP buildings,Pland
,Pequipment,PandPtools),PpurchasingPinvestments,PandPlendingPtoPothers.
(c) FinancingP–
PAnyPborrowingPfromPbanks,PrepayingPbankPloans,PreceivingPcontributionsPfromP shareholders,Po
rPpayingPdividendsPtoPshareholdersParePconsideredPfinancingPactivities.
7. ThePheadingPofPeachPofPthePfourPprimaryPfinancialPstatementsPshouldPincludePthePfollowing:
(a) NamePofPthePbusiness
(b) NamePofPthePstatement
(c) DatePofPthePstatement,PorPthePperiodPofPtime
8. (a)P ThePpurposePofPthePbalancePsheetPisPtoPreportPthePfinancialPpositionP(assets,P liabilitiesPand
shareholders‘Pequity)PofPaPbusinessPatPaPpointPinPtime.
(b) ThePpurposePofPthePincomePstatementPisPtoPpresentPinformationPaboutPthePrevenues,Pexpenses
,P andPnetPincomePofPaPbusinessPforPaPspecifiedPperiodPofPtime.
(c) ThePstatementPofPretainedPearningsPreportsPthePwayPthatPnetPincomePandPthePdistributionPof
P dividendsPaffectedPthePfinancialPpositionPofPthePcompanyPduringPthePperiod.
(d) ThePpurposePofPthePstatementPofPcashPflowsPisPtoPsummarizePhowPaPbusiness‘sPoperating,
investing,PandPfinancingPactivitiesPcausedPitsPcashPbalancePtoPchangePoverPaPparticularPperiodPofPtime.
9. ThePincomePstatement,PstatementPofPretainedPearnings,PandPstatementPofPcashPflowsPwouldPbePdated
―ForPthePYearPEndedPDecemberP31,P2020,‖PbecausePtheyPreportPthePinflowsPandPoutflowsPofPresourcesP d
uringPaPperiodPofPtime.PInPcontrast,PthePbalancePsheetPwouldPbePdatedP―AtPDecemberP31,P2020,‖Pbecause
P itPrepresentsPthePassets,PliabilitiesPandPshareholders‘PequityPatPaPspecificPdate.
10. NetPincomePisPthePexcessPofPtotalPrevenuesPoverPtotalPexpenses.PAPnetPlossPoccursPifPtotalPexpenses
P exceedPtotalPrevenues.
11. ThePaccountingPequationPforPthePbalancePsheetPis:PAssetsP¶PLiabilitiesP±PShareholders‘P Equity.P Assets
P arePthePeconomicPresourcesPcontrolledPbyPthePcompany.
LiabilitiesPareP
amountsPowedPbyPthePbusiness.P Shareholders‘PequityPisPthePowners‘PclaimsPtoPthePbusiness.PItP inclu
desPamountsPcontributedPtoPthePbusinessP(byPinvestorsPthroughPpurchasingPthePcompany‘sP shares)Pa
ndPthePamountsPearnedPandPaccumulatedPthroughPprofitablePbusinessPoperations.
12. ThePequationPforPthePincomePstatementPisPRevenuesP–
PExpensesP=PNetPIncome.PRevenuesPareP increasesPinPaPcompany‘sPresources,ParisingPprimarilyPfro
P
,P
mPitsPoperatingPactivities.P ExpensesPareP decreasesPinPaPcompany‘sPresources,ParisingPprimarilyPfr
omPitsPoperatingPactivities.PNetPIncomePis
P
, P
equalPtoPrevenuesPminusPexpenses.P (IfPexpensesParePgreaterPthanPrevenues,PthePcompanyPhasPaPNetP Los
s.)
13. ThePequationPforPthePstatementPofPretainedPearningsPis:PBeginningP RetainedPEarningsP+PNetPIncomeP-
P DividendsP=PEndingPRetainedPEarnings.PItPbeginsPwithPbeginning-of-the-
yearPretainedPearningsPwhichPisP thePpriorPyear‘sPendingPretainedPearningsPreportedPonPthePpriorPyear‘sP
balancePsheet.P ThePcurrentPyear'sP netPincomePreportedPonPthePincomePstatementPisPaddedPandPthePcurre
ntPyear'sPdividendsParePsubtractedP fromPthisPamount.PThePendingPretainedPearningsPamountPisPreportedP
onPthePend-of-yearPbalancePsheet.
14. ThePequationPforPthePstatementPofPcashPflowsPis:PCashPflowsPfromPoperatingPactivitiesP+PCashPflowsPfro
mP investingPactivitiesP+PCashPflowsPfromPfinancingPactivitiesP=PChangePinPcashPforPthePperiod.PChangePi
nP cashPforPthePperiodP+PBeginningPcashPbalanceP=PEndingPcashPbalance.P ThePnetPcashPflowsPforPthePper
iodP representPthePincreasePorPdecreasePinPcashPthatPoccurredPduringPthePperiod.P CashPflowsPfromPopera
tingP activitiesParePcashPflowsPdirectlyPrelatedPtoPearningPincomeP(normalPbusinessPactivity).PCashPflowsP
fromP investingPactivitiesPincludePcashPflowsPthatParePrelatedPtoPthePacquisitionPorPsalePofPthePcompany‘s
Plong-
P termPassets.PCashPflowsPfromPfinancingPactivitiesParePdirectlyPrelatedPtoPthePfinancingPofPthePcompany.
15. Currently,PthePCharteredPProfessionalPAccountantsPofPCanadaP(CPA)PisPgivenPthePprimaryPresponsibility
P forPsettingPthePdetailedPrulesPthatPbecomePGenerallyPAcceptedPAccountingPPrinciplesP(GAAP)PinPCanada
.P (Internationally,PthePInternationalPAccountingPStandardsPBoardP(IASB)PhasPthePresponsibilityPforPsettin
gP accountingPrulesPknownPasPInternationalPFinancialPReportingPStandardsP(IFRS).)
16. ThePmainPgoalPofPaccountingPrulesPisPtoPensurePthatPcompaniesPproducePusefulPfinancialPinformationP f
orPpresentPandPpotentialPinvestors,Plenders,PandPotherPcreditorsPinPmakingPdecisionsPinPtheirPcapacity
P asPcapitalPproviders.P FinancialPinformationPmustPshowPrelevancePandPfaithfulPrepresentation,PasPwell
P asPbePcomparable,Pverifiable,Ptimely,PandPunderstandable.
17. AnPethicalPdilemmaPisPaPsituationPwherePfollowingPonePmoralPprinciplePwouldPresultPinPviolating
P another.PThreePstepsPthatPshouldPbePconsideredPwhenPevaluatingPethicalPdilemmasPare:
(a) IdentifyPwhoPwillPbenefitPfromPthePsituationP(often,PthePmanagerPorPemployee)PandPhowPothersPwill
P bePharmedP(otherPemployees,PthePcompany‘sPreputation,Powners,Pcreditors,PandPthePpublicPinPgeneral).
(b) IdentifyPthePalternativePcoursesPofPaction.
(c) ChoosePthePalternativePthatPisPthePmostPethicalP–
PthatPwhichPyouPwouldPbePproudPtoPhavePreportedP inPthePnewsPmedia.P Often,PtherePisPnoPonePrightPans
werPandPhardPchoicesPwillPneedPtoPbePmade.P FollowingPstrongPethicalPpracticesPisPaPkeyPpartPofPensurin
gPgoodPfinancialPreportingPbyPbusinessesPofP allPsizes.
P
6CE Fred Phillips, Robert Libby, Patricia Libby, Brandy
Mackintosh Chapter 1-13
Chapter 1 Business Decisions and Financial Accounting
P P P P P P
ANSWERSPTOPQUESTIONS
1. AccountingPisPaPsystemPofPanalyzing,Precording,PandPsummarizingPthePresultsPofPaPbusiness‘s
activitiesPandPthenPreportingPthemPtoPdecisionPmakers.
2. AnPadvantagePofPoperatingPasPaPsolePproprietorship,PratherPthanPaPcorporation,PisPthatPitPisPeasyPtoP esta
blish.PAnotherPadvantagePisPthatPincomePfromPaPsolePproprietorshipPisPtaxedPonlyPoncePinPthePhandsP of
PthePindividualPproprietorP(incomePfromPaPcorporationPisPtaxedPinPthePcorporationPandPthenPagainPinP t
hePhandsPofPthePindividualPproprietor).PAPdisadvantagePofPoperatingPasPaPsolePproprietorship,PratherP t
hanPaPcorporation,PisPthatPthePindividualPproprietorPcanPbePheldPresponsiblePforPthePdebtsPofPtheP busin
ess.
3. FinancialPaccountingPfocusesPonPpreparingPandPusingPthePfinancialPstatementsPthatParePmadePavailable
P toPownersPandPexternalPusersPsuchPasPcustomers,Pcreditors,PandPpotentialPinvestorsPwhoParePintereste
dP inPreadingPthem.PManagerialPaccountingPfocusesPonPotherPaccountingPreportsPthatParePnotPreleasedPt
oP thePgeneralPpublic,PbutPinsteadParePpreparedPandPusedPbyPemployees,Psupervisors,PandPmanagersP w
hoP runPthePcompany.
4. FinancialPreportsParePusedPbyPbothPinternalPandPexternalPgroupsPandPindividuals.PThePinternalPgroups
P arePcomprisedPofPthePvariousPmanagersPofPthePbusiness.PThePexternalPgroupsPincludePinvestors,P cre
ditors,PgovernmentalPagencies,PotherPinterestedPparties,PandPthePpublicPatPlarge.
5. ThePbusinessPitself,PnotPthePindividualPshareholdersPwhoPownPthePbusiness,PisPviewedPasPowningPthe
P assetsPandPowingPthePliabilitiesPonPitsPbalancePsheet.PAPbusiness‘sPbalancePsheetPincludesPthePassets,
P liabilities,PandPshareholders‘PequityPofPonlyPthatPbusinessPandPnotPthePpersonalPassets,Pliabilities,Pa
ndP equityPofPthePshareholders.P ThePfinancialPstatementsPofPaPcompanyPshowPthePresultsPofPthePbusi
ness
P
,P
activitiesPofPonlyPthatPcompany.
6. (a)P OperatingP–
PThesePactivitiesParePdirectlyPrelatedPtoPearningPprofits.PTheyPincludePbuyingPsupplies,P makingPproduct
s,PservingPcustomers,PcleaningPthePpremises,Padvertising,PrentingPaPbuilding,PrepairingP equipment,Pan
dPobtainingPinsurancePcoverage.
(b) InvestingP–
PThesePactivitiesPinvolvePbuyingPandPsellingPproductivePresourcesPwithPlongPlivesP(suchPasP buildings,Pland
,Pequipment,PandPtools),PpurchasingPinvestments,PandPlendingPtoPothers.
(c) FinancingP–
PAnyPborrowingPfromPbanks,PrepayingPbankPloans,PreceivingPcontributionsPfromP shareholders,Po
rPpayingPdividendsPtoPshareholdersParePconsideredPfinancingPactivities.
7. ThePheadingPofPeachPofPthePfourPprimaryPfinancialPstatementsPshouldPincludePthePfollowing:
(a) NamePofPthePbusiness
(b) NamePofPthePstatement
(c) DatePofPthePstatement,PorPthePperiodPofPtime
8. (a)P ThePpurposePofPthePbalancePsheetPisPtoPreportPthePfinancialPpositionP(assets,P liabilitiesPand
shareholders‘Pequity)PofPaPbusinessPatPaPpointPinPtime.
(b) ThePpurposePofPthePincomePstatementPisPtoPpresentPinformationPaboutPthePrevenues,Pexpenses
,P andPnetPincomePofPaPbusinessPforPaPspecifiedPperiodPofPtime.
(c) ThePstatementPofPretainedPearningsPreportsPthePwayPthatPnetPincomePandPthePdistributionPof
P dividendsPaffectedPthePfinancialPpositionPofPthePcompanyPduringPthePperiod.
(d) ThePpurposePofPthePstatementPofPcashPflowsPisPtoPsummarizePhowPaPbusiness‘sPoperating,
investing,PandPfinancingPactivitiesPcausedPitsPcashPbalancePtoPchangePoverPaPparticularPperiodPofPtime.
9. ThePincomePstatement,PstatementPofPretainedPearnings,PandPstatementPofPcashPflowsPwouldPbePdated
―ForPthePYearPEndedPDecemberP31,P2020,‖PbecausePtheyPreportPthePinflowsPandPoutflowsPofPresourcesP d
uringPaPperiodPofPtime.PInPcontrast,PthePbalancePsheetPwouldPbePdatedP―AtPDecemberP31,P2020,‖Pbecause
P itPrepresentsPthePassets,PliabilitiesPandPshareholders‘PequityPatPaPspecificPdate.
10. NetPincomePisPthePexcessPofPtotalPrevenuesPoverPtotalPexpenses.PAPnetPlossPoccursPifPtotalPexpenses
P exceedPtotalPrevenues.
11. ThePaccountingPequationPforPthePbalancePsheetPis:PAssetsP¶PLiabilitiesP±PShareholders‘P Equity.P Assets
P arePthePeconomicPresourcesPcontrolledPbyPthePcompany.
LiabilitiesPareP
amountsPowedPbyPthePbusiness.P Shareholders‘PequityPisPthePowners‘PclaimsPtoPthePbusiness.PItP inclu
desPamountsPcontributedPtoPthePbusinessP(byPinvestorsPthroughPpurchasingPthePcompany‘sP shares)Pa
ndPthePamountsPearnedPandPaccumulatedPthroughPprofitablePbusinessPoperations.
12. ThePequationPforPthePincomePstatementPisPRevenuesP–
PExpensesP=PNetPIncome.PRevenuesPareP increasesPinPaPcompany‘sPresources,ParisingPprimarilyPfro
P
,P
mPitsPoperatingPactivities.P ExpensesPareP decreasesPinPaPcompany‘sPresources,ParisingPprimarilyPfr
omPitsPoperatingPactivities.PNetPIncomePis
P
, P
equalPtoPrevenuesPminusPexpenses.P (IfPexpensesParePgreaterPthanPrevenues,PthePcompanyPhasPaPNetP Los
s.)
13. ThePequationPforPthePstatementPofPretainedPearningsPis:PBeginningP RetainedPEarningsP+PNetPIncomeP-
P DividendsP=PEndingPRetainedPEarnings.PItPbeginsPwithPbeginning-of-the-
yearPretainedPearningsPwhichPisP thePpriorPyear‘sPendingPretainedPearningsPreportedPonPthePpriorPyear‘sP
balancePsheet.P ThePcurrentPyear'sP netPincomePreportedPonPthePincomePstatementPisPaddedPandPthePcurre
ntPyear'sPdividendsParePsubtractedP fromPthisPamount.PThePendingPretainedPearningsPamountPisPreportedP
onPthePend-of-yearPbalancePsheet.
14. ThePequationPforPthePstatementPofPcashPflowsPis:PCashPflowsPfromPoperatingPactivitiesP+PCashPflowsPfro
mP investingPactivitiesP+PCashPflowsPfromPfinancingPactivitiesP=PChangePinPcashPforPthePperiod.PChangePi
nP cashPforPthePperiodP+PBeginningPcashPbalanceP=PEndingPcashPbalance.P ThePnetPcashPflowsPforPthePper
iodP representPthePincreasePorPdecreasePinPcashPthatPoccurredPduringPthePperiod.P CashPflowsPfromPopera
tingP activitiesParePcashPflowsPdirectlyPrelatedPtoPearningPincomeP(normalPbusinessPactivity).PCashPflowsP
fromP investingPactivitiesPincludePcashPflowsPthatParePrelatedPtoPthePacquisitionPorPsalePofPthePcompany‘s
Plong-
P termPassets.PCashPflowsPfromPfinancingPactivitiesParePdirectlyPrelatedPtoPthePfinancingPofPthePcompany.
15. Currently,PthePCharteredPProfessionalPAccountantsPofPCanadaP(CPA)PisPgivenPthePprimaryPresponsibility
P forPsettingPthePdetailedPrulesPthatPbecomePGenerallyPAcceptedPAccountingPPrinciplesP(GAAP)PinPCanada
.P (Internationally,PthePInternationalPAccountingPStandardsPBoardP(IASB)PhasPthePresponsibilityPforPsettin
gP accountingPrulesPknownPasPInternationalPFinancialPReportingPStandardsP(IFRS).)
16. ThePmainPgoalPofPaccountingPrulesPisPtoPensurePthatPcompaniesPproducePusefulPfinancialPinformationP f
orPpresentPandPpotentialPinvestors,Plenders,PandPotherPcreditorsPinPmakingPdecisionsPinPtheirPcapacity
P asPcapitalPproviders.P FinancialPinformationPmustPshowPrelevancePandPfaithfulPrepresentation,PasPwell
P asPbePcomparable,Pverifiable,Ptimely,PandPunderstandable.
17. AnPethicalPdilemmaPisPaPsituationPwherePfollowingPonePmoralPprinciplePwouldPresultPinPviolating
P another.PThreePstepsPthatPshouldPbePconsideredPwhenPevaluatingPethicalPdilemmasPare:
(a) IdentifyPwhoPwillPbenefitPfromPthePsituationP(often,PthePmanagerPorPemployee)PandPhowPothersPwill
P bePharmedP(otherPemployees,PthePcompany‘sPreputation,Powners,Pcreditors,PandPthePpublicPinPgeneral).
(b) IdentifyPthePalternativePcoursesPofPaction.
(c) ChoosePthePalternativePthatPisPthePmostPethicalP–
PthatPwhichPyouPwouldPbePproudPtoPhavePreportedP inPthePnewsPmedia.P Often,PtherePisPnoPonePrightPans
werPandPhardPchoicesPwillPneedPtoPbePmade.P FollowingPstrongPethicalPpracticesPisPaPkeyPpartPofPensurin
gPgoodPfinancialPreportingPbyPbusinessesPofP allPsizes.
P
