SOLUTION MANUAL FOR jh jh
Fundamentals of Financial Accounting 7e Phillips jh jh jh jh jh jh
Chapter 1-13 with Appendix C&D jh jh jh jh
Chapter 1 jh jh
Business Decisions and Financial Accounting
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ANSWERS TO QUESTIONS jh jh
1. Accounting is a system of analyzing, recording, and summarizing the results of a jh jh jh jh jh jh jh jh jh jh jh jh jh
business‘s activities and then reporting them to decision makers. jh jh jh jh jh jh jh jh jh
2. An advantage of operating as a sole proprietorship, rather than a corporation, is that it is
jh jh jh jh jh jh jh jh jh jh jh jh jh j h jh
easy to establish. Another advantage is that income from a sole proprietorship is taxed only
jh jh jh jh jh jh jh jh jh jh jh jh jh j h jh
once in the hands of the individual proprietor (income from a
jh jh jh corporation is taxed in the jh jh jh jh jh jh jh jh jh j h j h j h jh jh jh jh
corporation and then again in the hands of the individual shareholder). A disadvantage of
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operating as a sole proprietorship, rather than a corporation, is that the individual proprietor
jh jh jh jh jh jh jh jh j h jh jh jh jh jh
can be held responsible for the debts of the business.
jh jh jh jh jh jh jh jh j h jh jh
3. Financial accounting focuses on preparing and using the financial statements that are made
jh jh jh jh jh jh jh jh jh jh j h jh
available to owners and external users such as customers, creditors, and potential investors
jh jh jh jh jh jh jh jh jh jh jh j h jh
who are interested in reading them. Managerial accounting focuses on other accounting
jh jh jh jh jh jh jh jh j h jh jh jh
reports that are not released to the general public, but instead are prepared for internal
jh jh jh jh jh jh jh jh jh jh j h jh jh jh jh
decision making and used by employees, supervisors, and managers who run the company.
jh jh jh jh jh jh j h jh jh jh jh jh jh jh
4. Financial reports are used by both internal and external groups and individuals. The internal
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groups are comprised of the various managers of the business. The external groups include
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investors, creditors, governmental agencies, other interested parties, and the public at large.
jh jh jh jh jh j h jh jh jh jh jh jh jh
5. The business itself, not the individual stockholders who own the business, is viewed as owning
jh jh jh jh jh jh jh jh jh jh jh jh j h jh
the assets and owing the liabilities on its balance sheet. A business‘s balance sheet includes the
jh jh jh jh jh jh jh jh jh jh jh jh j h jh jh jh
assets, liabilities, and stockholders‘ equity of only that business and not the personal assets,
jh jh jh jh jh jh jh jh j h jh jh jh jh jh
liabilities, and equity of the stockholders. The financial statements of a company show the
jh jh jh jh jh jh jh j h jh jh jh jh jh jh
results of the business activities of only that company.
jh jh jh jh jh jh jh j h j h jh jh jh
Fundamentals of Financial jh jh 1-1
Accounting, 7/e
jh jh
© 2022 by McGraw Hill LLC.
jh jh jh jh jh j h All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill
jh jh jh jh jh jh jh jh jh jh jh jh jh jh
LLC.
jh
,6. (a) Operating – These activities are directly related to earning profits. They include buying
j h jh jh jh jh jh jh jh jh jh jh jh j h
supplies, making products, serving customers, cleaning the premises, advertising, renting a
jh jh jh jh jh jh jh jh j h jh jh
building, repairing equipment, and obtaining insurance coverage.
jh jh jh jh jh jh j h jh
(b) Investing – These activities involve buying and selling productive resources with long lives
jh jh jh jh jh jh jh jh jh jh j h jh
(such as buildings, land, equipment, and tools), purchasing investments, and lending to
jh jh jh jh jh jh jh jh jh j h j h j h
others.
j h jh
(c) Financing– Anyborrowingfrom banks, repaying bankloans,receiving contributionsfrom jh jh jh jh jh jh jh jh jh j h jh
stockholders,orpayingdividendstostockholdersareconsidered financingactivities.
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7. The heading of each of the four primary financial statements should include the
jh
jh jh jh jh jh jh jh jh jh jh jh jh j h following:
(a) Name of the business jh jh jh jh
(b) Name of the statement jh jh jh jh
(c) Date of the statement, or the period of time that the statement covers
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8. (a) The purpose of the balance sheet is to report the financial position (assets,
j h jh jh jh jh jh jh jh jh jh jh jh jh
liabilities and stockholders‘ equity) of a business at a point in time.
j h jh jh jh jh jh jh jh jh jh jh jh jh
(b) The purpose of the income statement is to present information about the
j h j h j h j h j h j h j h j h j h j h j h
revenues, expenses, and net income of a business for a specified period of time.
j h jh jh jh jh jh jh jh jh jh jh jh jh jh jh
(c) The statement of retained earnings reports the way that net income and the
j h j h j h j h j h j h j h j h j h j h j h j h
distribution of dividends affected the financial position of the company during the
j h j h j h j h j h j h j h j h j h j h j h j h
period.
j h jh
(d) The purpose of the statement of cash flows is to summarize how a business‘s
jh jh jh jh jh jh jh jh jh jh jh jh jh
operating, investing, and financing activities caused its cash balance to
j h j h j h j h j h j h j h j h j h j h
change over a particular period of time.
j h j h jh jh jh jh jh jh
9. The income statement, statement of retained earnings, and statement of cash flows would be
jh jh jh jh jh jh jh jh jh jh jh j h jh
dated ―For the Year Ended December 31, 2021,‖ because they report the inflows and
jh jh jh jh jh jh jh jh jh jh jh jh j h jh
outflows of resources over a period of time. In contrast, the balance sheet would be dated
jh jh jh jh jh jh jh jh jh jh jh jh j h jh jh jh
―At December 31, 2021,‖ because it represents the assets, liabilities and stockholders‘
jh jh jh jh jh jh jh jh jh j h jh jh
equity at a specific date.
jh jh jh jh jh jh
10. Net income is the excess of total revenues over total expenses. A net loss occurs if total
jh jh jh jh jh jh jh jh jh jh jh jh jh jh jh j h
expenses exceed total revenues.
jh jh jh jh jh
11. The accounting equation for the balance sheet is: Assets = Liabilities + Stockholders‘ Equity.
jh jh jh jh jh jh jh jh jh jh jh j h jh
Assets are the economic resources controlled by the company. Liabilities are amounts owed
j h jh jh jh jh jh jh jh j h jh j h jh jh jh
by the business. Stockholders‘ equity is the owners‘ claims to the business. It includes amounts
jh jh jh j h jh jh j h jh jh jh jh jh jh jh jh
contributed to the business (by investors through purchasing the company‘s stock) and the
jh jh jh jh j h jh jh jh jh jh jh jh jh
amounts earned and accumulated through profitable business operations.
jh jh j h jh jh jh jh jh jh
Fundamentals of Financial jh jh 1-2
Accounting, 7/e
jh jh
© 2022 by McGraw Hill LLC.
jh jh jh jh jh j h All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill
jh jh jh jh jh jh jh jh jh jh jh jh jh jh
LLC.
jh
,12. The equation for the income statement is Revenues – Expenses = Net Income. Revenues are
jh jh jh jh jh jh jh jh jh jh jh jh j h jh
increases in a company‘s resources, arising primarily from its operating activities.
jh jh jh jh jh jh jh jh jh j h jh
Expenses are decreases in a company‘s resources, arising primarily from its operating
j h jh jh jh jh jh jh jh j h jh jh jh
activities. Net Income is equal to revenues minus expenses. (If expenses are greater than
jh jh jh jh jh jh jh jh j h j h jh jh jh jh
revenues, the company has a Net Loss.)
jh jh jh jh jh jh jh jh
13. The equation for the statement of retained earnings is: Beginning Retained Earnings + Net
jh jh jh jh jh jh jh jh jh j h jh j h j h
Income - Dividends = Ending Retained Earnings. It begins with beginning-of-the-year retained
jh jh jh jh jh jh jh jh jh jh j h jh
earnings which is the prior year‘s ending retained earnings reported on the prior year‘s
jh jh jh jh jh jh jh jh j h jh jh jh jh jh
balance sheet. The current year's net income reported on the income statement is added and
jh jh j h jh jh jh jh j h jh jh jh jh jh jh jh
the current year's dividends are subtracted from this amount. (If a net loss occurs, It would be
jh jh jh jh jh j h jh jh jh jh jh jh jh jh jh jh jh
subtracted, along with the dividends, from the prior year‘s ending retained earnings
jh jh jh j h jh jh jh jh jh jh jh jh
balance.)The ending retained earnings amount is reported on the end-of-year balance sheet.
jh jh j h jh jh jh jh jh jh jh jh jh
14. The equation for the statement of cash flows is: Cash flows from operating activities +
jh jh jh j h j h jh jh jh jh jh jh jh jh jh jh jh jh jh
Cash flows from investing activities + Cash flows from financing activities = Change in cash
j h jh jh jh jh jh jh jh jh jh jh jh jh j h jh
for the period. Change in cash for the period + Beginning cash balance = Ending cash
jh jh jh jh jh jh jh jh jh jh jh jh jh jh j h jh
balance. The net cash flows for the period represent the increase or decrease in cash that
jh j h jh jh jh jh jh jh jh jh jh jh j h jh jh jh
occurred during the period. Cash flows from operating activities are cash flows directly
jh jh jh jh j h jh jh jh j h jh jh jh jh
related to earning income (normal business activity). Cash flows from investing activities
jh jh jh jh jh jh jh j h jh jh jh jh jh
include cash flows that are related to the acquisition or sale of the company‘s long-term
jh jh jh jh jh jh jh j h jh jh jh jh jh jh jh
assets. Cash flows from financing activities are directly related to the financing of the
jh jh jh jh jh j h jh jh jh jh jh jh jh jh
company.
jh jh
15. Currently, the Financial Accounting Standards Board (FASB) is given the primary
jh jh jh jh jh jh jh jh jh jh
responsibility for setting the detailed rules that become Generally Accepted Accounting
j h jh jh jh jh jh jh jh jh jh j h
Principles (GAAP) in the United States. (Internationally, the International Accounting
jh jh jh jh jh jh jh jh j h jh
Standards Board (IASB) has the responsibility for setting accounting rules known as
jh jh jh jh jh jh jh jh j h jh jh jh
International Financial Reporting Standards (IFRS).)
jh jh jh jh jh jh
16. The main goal of accounting rules is to ensure that companies produce useful financial
jh jh jh jh jh jh jh jh jh jh jh jh j h
information for present and potential investors, lenders, and other creditors
jh in making
jh jh jh jh jh jh jh jh jh j h jh
decisions in their capacity as capital providers. Financial information must show relevance
jh jh jh jh jh jh jh jh j h jh j h jh jh
and faithful representation, as well as be comparable, verifiable, timely, and
jh jh jh jh jh jh jh jh j h jh jh
understandable.
jh jh
Fun
© 2022 by McGraw Hill LLC.
jh jh jh jh jh j h All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill
jh jh jh jh jh jh jh jh jh jh jh jh jh jh
LLC.
jh
, damentals of Financial Accounting,
jh jh jh
7/e
jh 1-3
© 2022 by McGraw Hill LLC.
jh jh jh jh jh j h All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill
jh jh jh jh jh jh jh jh jh jh jh jh jh jh
LLC.
jh
Fundamentals of Financial Accounting 7e Phillips jh jh jh jh jh jh
Chapter 1-13 with Appendix C&D jh jh jh jh
Chapter 1 jh jh
Business Decisions and Financial Accounting
jh jh jh jh
ANSWERS TO QUESTIONS jh jh
1. Accounting is a system of analyzing, recording, and summarizing the results of a jh jh jh jh jh jh jh jh jh jh jh jh jh
business‘s activities and then reporting them to decision makers. jh jh jh jh jh jh jh jh jh
2. An advantage of operating as a sole proprietorship, rather than a corporation, is that it is
jh jh jh jh jh jh jh jh jh jh jh jh jh j h jh
easy to establish. Another advantage is that income from a sole proprietorship is taxed only
jh jh jh jh jh jh jh jh jh jh jh jh jh j h jh
once in the hands of the individual proprietor (income from a
jh jh jh corporation is taxed in the jh jh jh jh jh jh jh jh jh j h j h j h jh jh jh jh
corporation and then again in the hands of the individual shareholder). A disadvantage of
jh jh jh jh jh jh jh jh jh jh j h jh jh jh
operating as a sole proprietorship, rather than a corporation, is that the individual proprietor
jh jh jh jh jh jh jh jh j h jh jh jh jh jh
can be held responsible for the debts of the business.
jh jh jh jh jh jh jh jh j h jh jh
3. Financial accounting focuses on preparing and using the financial statements that are made
jh jh jh jh jh jh jh jh jh jh j h jh
available to owners and external users such as customers, creditors, and potential investors
jh jh jh jh jh jh jh jh jh jh jh j h jh
who are interested in reading them. Managerial accounting focuses on other accounting
jh jh jh jh jh jh jh jh j h jh jh jh
reports that are not released to the general public, but instead are prepared for internal
jh jh jh jh jh jh jh jh jh jh j h jh jh jh jh
decision making and used by employees, supervisors, and managers who run the company.
jh jh jh jh jh jh j h jh jh jh jh jh jh jh
4. Financial reports are used by both internal and external groups and individuals. The internal
jh jh jh jh jh jh jh jh jh jh jh jh j h
groups are comprised of the various managers of the business. The external groups include
jh jh jh jh jh jh jh jh jh jh jh j h jh jh
investors, creditors, governmental agencies, other interested parties, and the public at large.
jh jh jh jh jh j h jh jh jh jh jh jh jh
5. The business itself, not the individual stockholders who own the business, is viewed as owning
jh jh jh jh jh jh jh jh jh jh jh jh j h jh
the assets and owing the liabilities on its balance sheet. A business‘s balance sheet includes the
jh jh jh jh jh jh jh jh jh jh jh jh j h jh jh jh
assets, liabilities, and stockholders‘ equity of only that business and not the personal assets,
jh jh jh jh jh jh jh jh j h jh jh jh jh jh
liabilities, and equity of the stockholders. The financial statements of a company show the
jh jh jh jh jh jh jh j h jh jh jh jh jh jh
results of the business activities of only that company.
jh jh jh jh jh jh jh j h j h jh jh jh
Fundamentals of Financial jh jh 1-1
Accounting, 7/e
jh jh
© 2022 by McGraw Hill LLC.
jh jh jh jh jh j h All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill
jh jh jh jh jh jh jh jh jh jh jh jh jh jh
LLC.
jh
,6. (a) Operating – These activities are directly related to earning profits. They include buying
j h jh jh jh jh jh jh jh jh jh jh jh j h
supplies, making products, serving customers, cleaning the premises, advertising, renting a
jh jh jh jh jh jh jh jh j h jh jh
building, repairing equipment, and obtaining insurance coverage.
jh jh jh jh jh jh j h jh
(b) Investing – These activities involve buying and selling productive resources with long lives
jh jh jh jh jh jh jh jh jh jh j h jh
(such as buildings, land, equipment, and tools), purchasing investments, and lending to
jh jh jh jh jh jh jh jh jh j h j h j h
others.
j h jh
(c) Financing– Anyborrowingfrom banks, repaying bankloans,receiving contributionsfrom jh jh jh jh jh jh jh jh jh j h jh
stockholders,orpayingdividendstostockholdersareconsidered financingactivities.
jh jh jh jh jh jh jh jh j h jh jh
7. The heading of each of the four primary financial statements should include the
jh
jh jh jh jh jh jh jh jh jh jh jh jh j h following:
(a) Name of the business jh jh jh jh
(b) Name of the statement jh jh jh jh
(c) Date of the statement, or the period of time that the statement covers
jh jh jh jh jh jh jh jh jh jh jh jh jh
8. (a) The purpose of the balance sheet is to report the financial position (assets,
j h jh jh jh jh jh jh jh jh jh jh jh jh
liabilities and stockholders‘ equity) of a business at a point in time.
j h jh jh jh jh jh jh jh jh jh jh jh jh
(b) The purpose of the income statement is to present information about the
j h j h j h j h j h j h j h j h j h j h j h
revenues, expenses, and net income of a business for a specified period of time.
j h jh jh jh jh jh jh jh jh jh jh jh jh jh jh
(c) The statement of retained earnings reports the way that net income and the
j h j h j h j h j h j h j h j h j h j h j h j h
distribution of dividends affected the financial position of the company during the
j h j h j h j h j h j h j h j h j h j h j h j h
period.
j h jh
(d) The purpose of the statement of cash flows is to summarize how a business‘s
jh jh jh jh jh jh jh jh jh jh jh jh jh
operating, investing, and financing activities caused its cash balance to
j h j h j h j h j h j h j h j h j h j h
change over a particular period of time.
j h j h jh jh jh jh jh jh
9. The income statement, statement of retained earnings, and statement of cash flows would be
jh jh jh jh jh jh jh jh jh jh jh j h jh
dated ―For the Year Ended December 31, 2021,‖ because they report the inflows and
jh jh jh jh jh jh jh jh jh jh jh jh j h jh
outflows of resources over a period of time. In contrast, the balance sheet would be dated
jh jh jh jh jh jh jh jh jh jh jh jh j h jh jh jh
―At December 31, 2021,‖ because it represents the assets, liabilities and stockholders‘
jh jh jh jh jh jh jh jh jh j h jh jh
equity at a specific date.
jh jh jh jh jh jh
10. Net income is the excess of total revenues over total expenses. A net loss occurs if total
jh jh jh jh jh jh jh jh jh jh jh jh jh jh jh j h
expenses exceed total revenues.
jh jh jh jh jh
11. The accounting equation for the balance sheet is: Assets = Liabilities + Stockholders‘ Equity.
jh jh jh jh jh jh jh jh jh jh jh j h jh
Assets are the economic resources controlled by the company. Liabilities are amounts owed
j h jh jh jh jh jh jh jh j h jh j h jh jh jh
by the business. Stockholders‘ equity is the owners‘ claims to the business. It includes amounts
jh jh jh j h jh jh j h jh jh jh jh jh jh jh jh
contributed to the business (by investors through purchasing the company‘s stock) and the
jh jh jh jh j h jh jh jh jh jh jh jh jh
amounts earned and accumulated through profitable business operations.
jh jh j h jh jh jh jh jh jh
Fundamentals of Financial jh jh 1-2
Accounting, 7/e
jh jh
© 2022 by McGraw Hill LLC.
jh jh jh jh jh j h All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill
jh jh jh jh jh jh jh jh jh jh jh jh jh jh
LLC.
jh
,12. The equation for the income statement is Revenues – Expenses = Net Income. Revenues are
jh jh jh jh jh jh jh jh jh jh jh jh j h jh
increases in a company‘s resources, arising primarily from its operating activities.
jh jh jh jh jh jh jh jh jh j h jh
Expenses are decreases in a company‘s resources, arising primarily from its operating
j h jh jh jh jh jh jh jh j h jh jh jh
activities. Net Income is equal to revenues minus expenses. (If expenses are greater than
jh jh jh jh jh jh jh jh j h j h jh jh jh jh
revenues, the company has a Net Loss.)
jh jh jh jh jh jh jh jh
13. The equation for the statement of retained earnings is: Beginning Retained Earnings + Net
jh jh jh jh jh jh jh jh jh j h jh j h j h
Income - Dividends = Ending Retained Earnings. It begins with beginning-of-the-year retained
jh jh jh jh jh jh jh jh jh jh j h jh
earnings which is the prior year‘s ending retained earnings reported on the prior year‘s
jh jh jh jh jh jh jh jh j h jh jh jh jh jh
balance sheet. The current year's net income reported on the income statement is added and
jh jh j h jh jh jh jh j h jh jh jh jh jh jh jh
the current year's dividends are subtracted from this amount. (If a net loss occurs, It would be
jh jh jh jh jh j h jh jh jh jh jh jh jh jh jh jh jh
subtracted, along with the dividends, from the prior year‘s ending retained earnings
jh jh jh j h jh jh jh jh jh jh jh jh
balance.)The ending retained earnings amount is reported on the end-of-year balance sheet.
jh jh j h jh jh jh jh jh jh jh jh jh
14. The equation for the statement of cash flows is: Cash flows from operating activities +
jh jh jh j h j h jh jh jh jh jh jh jh jh jh jh jh jh jh
Cash flows from investing activities + Cash flows from financing activities = Change in cash
j h jh jh jh jh jh jh jh jh jh jh jh jh j h jh
for the period. Change in cash for the period + Beginning cash balance = Ending cash
jh jh jh jh jh jh jh jh jh jh jh jh jh jh j h jh
balance. The net cash flows for the period represent the increase or decrease in cash that
jh j h jh jh jh jh jh jh jh jh jh jh j h jh jh jh
occurred during the period. Cash flows from operating activities are cash flows directly
jh jh jh jh j h jh jh jh j h jh jh jh jh
related to earning income (normal business activity). Cash flows from investing activities
jh jh jh jh jh jh jh j h jh jh jh jh jh
include cash flows that are related to the acquisition or sale of the company‘s long-term
jh jh jh jh jh jh jh j h jh jh jh jh jh jh jh
assets. Cash flows from financing activities are directly related to the financing of the
jh jh jh jh jh j h jh jh jh jh jh jh jh jh
company.
jh jh
15. Currently, the Financial Accounting Standards Board (FASB) is given the primary
jh jh jh jh jh jh jh jh jh jh
responsibility for setting the detailed rules that become Generally Accepted Accounting
j h jh jh jh jh jh jh jh jh jh j h
Principles (GAAP) in the United States. (Internationally, the International Accounting
jh jh jh jh jh jh jh jh j h jh
Standards Board (IASB) has the responsibility for setting accounting rules known as
jh jh jh jh jh jh jh jh j h jh jh jh
International Financial Reporting Standards (IFRS).)
jh jh jh jh jh jh
16. The main goal of accounting rules is to ensure that companies produce useful financial
jh jh jh jh jh jh jh jh jh jh jh jh j h
information for present and potential investors, lenders, and other creditors
jh in making
jh jh jh jh jh jh jh jh jh j h jh
decisions in their capacity as capital providers. Financial information must show relevance
jh jh jh jh jh jh jh jh j h jh j h jh jh
and faithful representation, as well as be comparable, verifiable, timely, and
jh jh jh jh jh jh jh jh j h jh jh
understandable.
jh jh
Fun
© 2022 by McGraw Hill LLC.
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