SOLUTION MANUAL FOR x x
Fundamentals of Financial Accounting 7e Phillips
x x x x x x
Chapter 1-13 with Appendix C&D
x x x x
Chapter x1 x
Business xDecisions xand xFinancial xAccounting
ANSWERS xTO xQUESTIONS
1. Accounting xis xa xsystem xof xanalyzing, xrecording, xand xsummarizing xthe xresults xof xa x
business‘s xactivities xand xthen xreporting xthem xto xdecision xmakers. x
2. An xadvantage xof xoperating xas xa xsole xproprietorship, xrather xthan xa xcorporation, xis xthat x it xis
xeasy xto xestablish. xAnother xadvantage xis xthat xincome xfrom xa xsole xproprietorship xis x taxed
xonly xonce xin xthe xhands xof xthe xindividual xproprietor x(income xfrom xa x x x x corporation xis xtaxed
xin xthe xcorporation xand xthen xagain xin xthe xhands xof xthe xindividual x shareholder). xA
xdisadvantage xof xoperating xas xa xsole xproprietorship, xrather xthan xa x corporation, xis xthat xthe
xindividual xproprietor xcan xbe xheld xresponsible xfor xthe xdebts xof x the xbusiness. x
3. Financial xaccounting xfocuses xon xpreparing xand xusing xthe xfinancial xstatements xthat x are xmade
xavailable xto xowners xand xexternal xusers xsuch xas xcustomers, xcreditors, xand x potential xinvestors
xwho xare xinterested xin xreading xthem. xManagerial xaccounting x focuses xon xother xaccounting
xreports xthat xare xnot xreleased xto xthe xgeneral xpublic, xbut x instead xare xprepared xfor xinternal
xdecision xmaking xand xused xby xemployees, x supervisors, xand xmanagers xwho xrun xthe xcompany.
x
4. Financial xreports xare xused xby xboth xinternal xand xexternal xgroups xand xindividuals. xThe
x internal xgroups xare xcomprised xof xthe xvarious xmanagers xof xthe xbusiness. xThe x external
xgroups xinclude xinvestors, xcreditors, xgovernmental xagencies, xother x interested xparties, xand
xthe xpublic xat xlarge. x
5. The xbusiness xitself, xnot xthe xindividual xstockholders xwho xown xthe xbusiness, xis xviewed x as xowning
xthe xassets xand xowing xthe xliabilities xon xits xbalance xsheet. xA xbusiness‘s x balance xsheet xincludes
xthe xassets, xliabilities, xand xstockholders‘ xequity xof xonly xthat x business xand xnot xthe xpersonal
xassets, xliabilities, xand xequity xof xthe xstockholders. xThe x financial xstatements xof xa xcompany
xshow xthe xresults xof xthe xbusiness xactivities xof x x x only xthat xcompany. x
Fundamentals xof xFinancial 1-1
xAccounting, x7/e
© x2022 xby xMcGraw xHill xLLC. x All xrights xreserved. xNo xreproduction xor xdistribution xwithout xthe xprior xwritten xconsent xof xMcGraw
xHill xLLC.
,6. (a) x Operating x– xThese xactivities xare xdirectly xrelated xto xearning xprofits. xThey xinclude
x buying xsupplies, xmaking xproducts, xserving xcustomers, xcleaning xthe xpremises, x advertising,
xrenting xa xbuilding, xrepairing xequipment, xand xobtaining xinsurance x coverage. x
(b) Investing x– xThese xactivities xinvolve xbuying xand xselling xproductive xresources xwith x long
xlives x(such xas xbuildings, xland, xequipment, xand xtools), xpurchasing xinvestments, x and x lending
x to x others. x
(c) Financingx– xAny xborrowing xfrom xbanks, xrepaying xbank xloans, xreceiving x contributions
xfromxstockholders,xorxpayingxdividendsxtoxstockholdersxarexconsidered x financing xactivities. x
7. The xheading xof xeach xof xthe xfour xprimary xfinancial xstatements xshould xinclude xthe
x following: x
(a) Name xof xthe xbusiness x
(b) Name xof xthe xstatement x
(c) Date xof xthe xstatement, xor xthe xperiod xof xtime xthat xthe xstatement xcovers x
8. (a) x The xpurpose xof xthe xbalance x sheet xis xto x report x the xfinancial xposition x (assets,
x liabilities xand xstockholders‘ xequity) xof xa xbusiness xat xa xpoint xin xtime. x
(b) The x purpose x of x the x income x statement x is x to x present x information x about x the
x revenues, xexpenses, xand xnet xincome xof xa xbusiness xfor xa xspecified xperiod xof xtime. x
(c) The x statement x of x retained x earnings x reports x the x way x that x net x income x and x the
x distribution x of x dividends x affected x the x financial x position x of x the x company x during x the
x period. x
(d) The x purpose x of x the x statement x of x cash x flows x is x to x summarize x how x a x business‘s
x operating, x investing, x and x financing x activities x caused x its x cash x balance x to x change
x over xa xparticular xperiod xof xtime. x
9. The xincome xstatement, xstatement xof xretained xearnings, xand xstatement xof xcash xflows x would
xbe xdated x―For xthe xYear xEnded xDecember x31, x2021,‖ xbecause xthey xreport xthe x inflows
xand xoutflows xof xresources xover xa xperiod xof xtime. xIn xcontrast, xthe xbalance x sheet xwould xbe
xdated x―At xDecember x31, x2021,‖ xbecause xit xrepresents xthe xassets, x liabilities xand
xstockholders‘ xequity xat xa xspecific xdate. x
10. Net xincome xis xthe xexcess xof xtotal xrevenues xover xtotal xexpenses. xA xnet xloss xoccurs xif x total
xexpenses xexceed xtotal xrevenues. x
11. The xaccounting xequation xfor xthe xbalance xsheet xis: xAssets x= xLiabilities x+ x Stockholders‘
xEquity. x Assets xare xthe xeconomic xresources xcontrolled xby xthe x company. x x Liabilities xare
xamounts xowed xby xthe xbusiness. x Stockholders‘ xequity xis x the xowners‘ xclaims xto xthe xbusiness.
xIt xincludes xamounts xcontributed xto xthe xbusiness x (by xinvestors xthrough xpurchasing xthe
xcompany‘s xstock) xand xthe xamounts xearned x and xaccumulated xthrough xprofitable xbusiness
xoperations. x
Fundamentals xof xFinancial 1-2
xAccounting, x7/e
© x2022 xby xMcGraw xHill xLLC. x All xrights xreserved. xNo xreproduction xor xdistribution xwithout xthe xprior xwritten xconsent xof xMcGraw
xHill xLLC.
,12. The xequation xfor xthe xincome xstatement xis xRevenues x – xExpenses x= xNet xIncome. x Revenues
xare xincreases xin xa xcompany‘s xresources, xarising xprimarily xfrom xits x operating xactivities.
x Expenses xare xdecreases xin xa xcompany‘s xresources, xarising x primarily xfrom xits xoperating
xactivities. xNet xIncome xis xequal xto xrevenues xminus x expenses. x (If xexpenses xare xgreater
xthan xrevenues, xthe xcompany xhas xa xNet xLoss.) x
13. The xequation xfor xthe xstatement xof xretained xearnings xis: xBeginning x Retained xEarnings x + x Net
xIncome x- xDividends x= xEnding xRetained xEarnings. xIt xbegins xwith x beginning-of-the-year
xretained xearnings xwhich xis xthe xprior xyear‘s xending xretained x earnings xreported xon xthe xprior
xyear‘s xbalance xsheet. x The xcurrent xyear's xnet xincome x reported xon xthe xincome xstatement xis
xadded xand xthe xcurrent xyear's xdividends xare x subtracted xfrom xthis xamount. x(If xa xnet xloss
xoccurs, xIt xwould xbe xsubtracted, xalong xwith x the xdividends, xfrom xthe xprior xyear‘s xending
xretained xearnings xbalance.)The xending x retained xearnings xamount xis xreported xon xthe xend-
of-year xbalance xsheet. x14. x x x The x equation xfor xthe xstatement xof xcash xflows xis: xCash xflows
xfrom xoperating xactivities x+ x Cash xflows xfrom xinvesting xactivities x+ xCash xflows xfrom xfinancing
xactivities x= xChange x in xcash xfor xthe xperiod. xChange xin xcash xfor xthe xperiod x+ xBeginning xcash
xbalance x= x Ending xcash xbalance. x The xnet xcash xflows xfor xthe xperiod xrepresent xthe xincrease
xor x decrease xin xcash xthat xoccurred xduring xthe xperiod. x Cash xflows xfrom xoperating x activities
xare xcash xflows xdirectly xrelated xto xearning xincome x(normal xbusiness x x activity). xCash xflows
xfrom xinvesting xactivities xinclude xcash xflows xthat xare xrelated xto x the xacquisition xor xsale xof xthe
xcompany‘s xlong-term xassets. xCash xflows xfrom xfinancing x activities xare xdirectly xrelated xto xthe
xfinancing xof xthe xcompany. x
15. Currently, xthe xFinancial xAccounting xStandards xBoard x(FASB) xis xgiven xthe xprimary
x responsibility xfor xsetting xthe xdetailed xrules xthat xbecome xGenerally xAccepted x Accounting
xPrinciples x(GAAP) xin xthe xUnited xStates. x(Internationally, xthe x International xAccounting
xStandards xBoard x(IASB) xhas xthe xresponsibility xfor xsetting x accounting xrules xknown xas
xInternational xFinancial xReporting xStandards x(IFRS).) x
16. The xmain xgoal xof xaccounting xrules xis xto xensure xthat xcompanies xproduce xuseful x financial
xinformation xfor xpresent xand xpotential xinvestors, xlenders, xand xother xcreditors x in xmaking
xdecisions xin xtheir xcapacity xas xcapital xproviders. x x Financial xinformation x must xshow xrelevance
xand xfaithful xrepresentation, xas xwell xas xbe xcomparable, x verifiable, xtimely, xand
xunderstandable. x
Fun
© x2022 xby xMcGraw xHill xLLC. x All xrights xreserved. xNo xreproduction xor xdistribution xwithout xthe xprior xwritten xconsent xof xMcGraw
xHill xLLC.
, damentals xof xFinancial
xAccounting, x7/e 1-3
© x2022 xby xMcGraw xHill xLLC. x All xrights xreserved. xNo xreproduction xor xdistribution xwithout xthe xprior xwritten xconsent xof xMcGraw
xHill xLLC.
Fundamentals of Financial Accounting 7e Phillips
x x x x x x
Chapter 1-13 with Appendix C&D
x x x x
Chapter x1 x
Business xDecisions xand xFinancial xAccounting
ANSWERS xTO xQUESTIONS
1. Accounting xis xa xsystem xof xanalyzing, xrecording, xand xsummarizing xthe xresults xof xa x
business‘s xactivities xand xthen xreporting xthem xto xdecision xmakers. x
2. An xadvantage xof xoperating xas xa xsole xproprietorship, xrather xthan xa xcorporation, xis xthat x it xis
xeasy xto xestablish. xAnother xadvantage xis xthat xincome xfrom xa xsole xproprietorship xis x taxed
xonly xonce xin xthe xhands xof xthe xindividual xproprietor x(income xfrom xa x x x x corporation xis xtaxed
xin xthe xcorporation xand xthen xagain xin xthe xhands xof xthe xindividual x shareholder). xA
xdisadvantage xof xoperating xas xa xsole xproprietorship, xrather xthan xa x corporation, xis xthat xthe
xindividual xproprietor xcan xbe xheld xresponsible xfor xthe xdebts xof x the xbusiness. x
3. Financial xaccounting xfocuses xon xpreparing xand xusing xthe xfinancial xstatements xthat x are xmade
xavailable xto xowners xand xexternal xusers xsuch xas xcustomers, xcreditors, xand x potential xinvestors
xwho xare xinterested xin xreading xthem. xManagerial xaccounting x focuses xon xother xaccounting
xreports xthat xare xnot xreleased xto xthe xgeneral xpublic, xbut x instead xare xprepared xfor xinternal
xdecision xmaking xand xused xby xemployees, x supervisors, xand xmanagers xwho xrun xthe xcompany.
x
4. Financial xreports xare xused xby xboth xinternal xand xexternal xgroups xand xindividuals. xThe
x internal xgroups xare xcomprised xof xthe xvarious xmanagers xof xthe xbusiness. xThe x external
xgroups xinclude xinvestors, xcreditors, xgovernmental xagencies, xother x interested xparties, xand
xthe xpublic xat xlarge. x
5. The xbusiness xitself, xnot xthe xindividual xstockholders xwho xown xthe xbusiness, xis xviewed x as xowning
xthe xassets xand xowing xthe xliabilities xon xits xbalance xsheet. xA xbusiness‘s x balance xsheet xincludes
xthe xassets, xliabilities, xand xstockholders‘ xequity xof xonly xthat x business xand xnot xthe xpersonal
xassets, xliabilities, xand xequity xof xthe xstockholders. xThe x financial xstatements xof xa xcompany
xshow xthe xresults xof xthe xbusiness xactivities xof x x x only xthat xcompany. x
Fundamentals xof xFinancial 1-1
xAccounting, x7/e
© x2022 xby xMcGraw xHill xLLC. x All xrights xreserved. xNo xreproduction xor xdistribution xwithout xthe xprior xwritten xconsent xof xMcGraw
xHill xLLC.
,6. (a) x Operating x– xThese xactivities xare xdirectly xrelated xto xearning xprofits. xThey xinclude
x buying xsupplies, xmaking xproducts, xserving xcustomers, xcleaning xthe xpremises, x advertising,
xrenting xa xbuilding, xrepairing xequipment, xand xobtaining xinsurance x coverage. x
(b) Investing x– xThese xactivities xinvolve xbuying xand xselling xproductive xresources xwith x long
xlives x(such xas xbuildings, xland, xequipment, xand xtools), xpurchasing xinvestments, x and x lending
x to x others. x
(c) Financingx– xAny xborrowing xfrom xbanks, xrepaying xbank xloans, xreceiving x contributions
xfromxstockholders,xorxpayingxdividendsxtoxstockholdersxarexconsidered x financing xactivities. x
7. The xheading xof xeach xof xthe xfour xprimary xfinancial xstatements xshould xinclude xthe
x following: x
(a) Name xof xthe xbusiness x
(b) Name xof xthe xstatement x
(c) Date xof xthe xstatement, xor xthe xperiod xof xtime xthat xthe xstatement xcovers x
8. (a) x The xpurpose xof xthe xbalance x sheet xis xto x report x the xfinancial xposition x (assets,
x liabilities xand xstockholders‘ xequity) xof xa xbusiness xat xa xpoint xin xtime. x
(b) The x purpose x of x the x income x statement x is x to x present x information x about x the
x revenues, xexpenses, xand xnet xincome xof xa xbusiness xfor xa xspecified xperiod xof xtime. x
(c) The x statement x of x retained x earnings x reports x the x way x that x net x income x and x the
x distribution x of x dividends x affected x the x financial x position x of x the x company x during x the
x period. x
(d) The x purpose x of x the x statement x of x cash x flows x is x to x summarize x how x a x business‘s
x operating, x investing, x and x financing x activities x caused x its x cash x balance x to x change
x over xa xparticular xperiod xof xtime. x
9. The xincome xstatement, xstatement xof xretained xearnings, xand xstatement xof xcash xflows x would
xbe xdated x―For xthe xYear xEnded xDecember x31, x2021,‖ xbecause xthey xreport xthe x inflows
xand xoutflows xof xresources xover xa xperiod xof xtime. xIn xcontrast, xthe xbalance x sheet xwould xbe
xdated x―At xDecember x31, x2021,‖ xbecause xit xrepresents xthe xassets, x liabilities xand
xstockholders‘ xequity xat xa xspecific xdate. x
10. Net xincome xis xthe xexcess xof xtotal xrevenues xover xtotal xexpenses. xA xnet xloss xoccurs xif x total
xexpenses xexceed xtotal xrevenues. x
11. The xaccounting xequation xfor xthe xbalance xsheet xis: xAssets x= xLiabilities x+ x Stockholders‘
xEquity. x Assets xare xthe xeconomic xresources xcontrolled xby xthe x company. x x Liabilities xare
xamounts xowed xby xthe xbusiness. x Stockholders‘ xequity xis x the xowners‘ xclaims xto xthe xbusiness.
xIt xincludes xamounts xcontributed xto xthe xbusiness x (by xinvestors xthrough xpurchasing xthe
xcompany‘s xstock) xand xthe xamounts xearned x and xaccumulated xthrough xprofitable xbusiness
xoperations. x
Fundamentals xof xFinancial 1-2
xAccounting, x7/e
© x2022 xby xMcGraw xHill xLLC. x All xrights xreserved. xNo xreproduction xor xdistribution xwithout xthe xprior xwritten xconsent xof xMcGraw
xHill xLLC.
,12. The xequation xfor xthe xincome xstatement xis xRevenues x – xExpenses x= xNet xIncome. x Revenues
xare xincreases xin xa xcompany‘s xresources, xarising xprimarily xfrom xits x operating xactivities.
x Expenses xare xdecreases xin xa xcompany‘s xresources, xarising x primarily xfrom xits xoperating
xactivities. xNet xIncome xis xequal xto xrevenues xminus x expenses. x (If xexpenses xare xgreater
xthan xrevenues, xthe xcompany xhas xa xNet xLoss.) x
13. The xequation xfor xthe xstatement xof xretained xearnings xis: xBeginning x Retained xEarnings x + x Net
xIncome x- xDividends x= xEnding xRetained xEarnings. xIt xbegins xwith x beginning-of-the-year
xretained xearnings xwhich xis xthe xprior xyear‘s xending xretained x earnings xreported xon xthe xprior
xyear‘s xbalance xsheet. x The xcurrent xyear's xnet xincome x reported xon xthe xincome xstatement xis
xadded xand xthe xcurrent xyear's xdividends xare x subtracted xfrom xthis xamount. x(If xa xnet xloss
xoccurs, xIt xwould xbe xsubtracted, xalong xwith x the xdividends, xfrom xthe xprior xyear‘s xending
xretained xearnings xbalance.)The xending x retained xearnings xamount xis xreported xon xthe xend-
of-year xbalance xsheet. x14. x x x The x equation xfor xthe xstatement xof xcash xflows xis: xCash xflows
xfrom xoperating xactivities x+ x Cash xflows xfrom xinvesting xactivities x+ xCash xflows xfrom xfinancing
xactivities x= xChange x in xcash xfor xthe xperiod. xChange xin xcash xfor xthe xperiod x+ xBeginning xcash
xbalance x= x Ending xcash xbalance. x The xnet xcash xflows xfor xthe xperiod xrepresent xthe xincrease
xor x decrease xin xcash xthat xoccurred xduring xthe xperiod. x Cash xflows xfrom xoperating x activities
xare xcash xflows xdirectly xrelated xto xearning xincome x(normal xbusiness x x activity). xCash xflows
xfrom xinvesting xactivities xinclude xcash xflows xthat xare xrelated xto x the xacquisition xor xsale xof xthe
xcompany‘s xlong-term xassets. xCash xflows xfrom xfinancing x activities xare xdirectly xrelated xto xthe
xfinancing xof xthe xcompany. x
15. Currently, xthe xFinancial xAccounting xStandards xBoard x(FASB) xis xgiven xthe xprimary
x responsibility xfor xsetting xthe xdetailed xrules xthat xbecome xGenerally xAccepted x Accounting
xPrinciples x(GAAP) xin xthe xUnited xStates. x(Internationally, xthe x International xAccounting
xStandards xBoard x(IASB) xhas xthe xresponsibility xfor xsetting x accounting xrules xknown xas
xInternational xFinancial xReporting xStandards x(IFRS).) x
16. The xmain xgoal xof xaccounting xrules xis xto xensure xthat xcompanies xproduce xuseful x financial
xinformation xfor xpresent xand xpotential xinvestors, xlenders, xand xother xcreditors x in xmaking
xdecisions xin xtheir xcapacity xas xcapital xproviders. x x Financial xinformation x must xshow xrelevance
xand xfaithful xrepresentation, xas xwell xas xbe xcomparable, x verifiable, xtimely, xand
xunderstandable. x
Fun
© x2022 xby xMcGraw xHill xLLC. x All xrights xreserved. xNo xreproduction xor xdistribution xwithout xthe xprior xwritten xconsent xof xMcGraw
xHill xLLC.
, damentals xof xFinancial
xAccounting, x7/e 1-3
© x2022 xby xMcGraw xHill xLLC. x All xrights xreserved. xNo xreproduction xor xdistribution xwithout xthe xprior xwritten xconsent xof xMcGraw
xHill xLLC.
