,
,SOLUTION MANUAL FOR
Fundamentals Of Financial Accounting 8CE Fred Phillips, Robert Libby, Patricia
Libby, Brandy Mackintosh
Chapter 1-13
Chapter 1
Business Decisions and Financial Accounting
ANSWERS TO QUESTIONS
1. Accounting is a system of analyzing, recording, and summarizing the results of a
business‘s activities and then reporting them to decision makers.
2. An advantage of operating as a sole proprietorship, rather than a corporation, is that it is
easy to establish. Another advantage is that income from a sole proprietorship is taxed
only once in the hands of the individual proprietor (income from a corporation is taxed in
the corporation and then again in the hands of the individual proprietor). A disadvantage
of operating as a sole proprietorship, rather than a corporation, is that the individual
proprietor can be held responsible for the debts of the business.
3. Financial accounting focuses on preparing and using the financial statements that are
made available to owners and external users such as customers, creditors, and potential
investors who are interested in reading them. Managerial accounting focuses on other
accounting reports that are not released to the general public, but instead are prepared
and used by employees, supervisors, and managers who run the company.
4. Financial reports are used by both internal and external groups and individuals. The
internal groups are comprised of the various managers of the business. The external
groups include investors, creditors, governmental agencies, other interested parties, and
the public at large.
5. The business itself, not the individual shareholders who own the business, is viewed as
owning the assets and owing the liabilities on its balance sheet. A business‘s balance
sheet includes the assets, liabilities, and shareholders‘ equity of only that business and
not the personal assets, liabilities, and equity of the shareholders. The financial
statements of a company show the results of the business activities of only that company.
6. (a) Operating – These activities are directly related to earning profits. They include buying
supplies, making products, serving customers, cleaning the premises, advertising, renting
a building, repairing equipment, and obtaining insurance coverage.
, Chapter 02 - The Balance Sheet
(b) Investing – These activities involve buying and selling productive resources with long
lives (such as buildings, land, equipment, and tools), purchasing investments, and lending
to others.
(c) Financing – Any borrowing from banks, repaying bank loans, receiving
contributions from shareholders, or paying dividends to shareholders are considered
financing activities.
7. The heading of each of the four primary financial statements should include the following:
(a) Name of the business
(b) Name of the statement
(c) Date of the statement, or the period of time
8. (a) The purpose of the balance sheet is to report the financial position (assets, liabilities
and shareholders‘ equity) of a business at a point in time.
(b) The purpose of the income statement is to present information about the revenues,
expenses, and net income of a business for a specified period of time.
(c) The statement of retained earnings reports the way that net income and the
distribution of dividends affected the financial position of the company during the period.
(d) The purpose of the statement of cash flows is to summarize how a business‘s
operating, investing, and financing activities caused its cash balance to change over a
particular period of time.
9. The income statement, statement of retained earnings, and statement of cash flows would
be dated ―For the Year Ended December 31, 2020,‖ because they report the inflows and
outflows of resources during a period of time. In contrast, the balance sheet would be
dated ―At December 31, 2020,‖ because it represents the assets, liabilities and
shareholders‘ equity at a specific date.
10. Net income is the excess of total revenues over total expenses. A net loss occurs if total
expenses exceed total revenues.
11. The accounting equation for the balance sheet is: Assets = Liabilities + Shareholders‘
Equity. Assets are the economic resources controlled by the company. Liabilities are
amounts owed by the business. Shareholders‘ equity is the owners‘ claims to the
business. It includes amounts contributed to the business (by investors through
purchasing the company‘s shares) and the amounts earned and accumulated through
profitable business operations.
12. The equation for the income statement is Revenues – Expenses = Net Income.
Revenues are increases in a company‘s resources, arising primarily from its operating
activities. Expenses are decreases in a company‘s resources, arising primarily from its
operating activities. Net Income is equal to revenues minus expenses. (If expenses are
greater than revenues, the company has a Net Loss.)
Phillips et al. Fundamentals of Financial Accounting, 6ce Solutions Manual
Copyright McGraw Hill., 2021 Page 2-2
,SOLUTION MANUAL FOR
Fundamentals Of Financial Accounting 8CE Fred Phillips, Robert Libby, Patricia
Libby, Brandy Mackintosh
Chapter 1-13
Chapter 1
Business Decisions and Financial Accounting
ANSWERS TO QUESTIONS
1. Accounting is a system of analyzing, recording, and summarizing the results of a
business‘s activities and then reporting them to decision makers.
2. An advantage of operating as a sole proprietorship, rather than a corporation, is that it is
easy to establish. Another advantage is that income from a sole proprietorship is taxed
only once in the hands of the individual proprietor (income from a corporation is taxed in
the corporation and then again in the hands of the individual proprietor). A disadvantage
of operating as a sole proprietorship, rather than a corporation, is that the individual
proprietor can be held responsible for the debts of the business.
3. Financial accounting focuses on preparing and using the financial statements that are
made available to owners and external users such as customers, creditors, and potential
investors who are interested in reading them. Managerial accounting focuses on other
accounting reports that are not released to the general public, but instead are prepared
and used by employees, supervisors, and managers who run the company.
4. Financial reports are used by both internal and external groups and individuals. The
internal groups are comprised of the various managers of the business. The external
groups include investors, creditors, governmental agencies, other interested parties, and
the public at large.
5. The business itself, not the individual shareholders who own the business, is viewed as
owning the assets and owing the liabilities on its balance sheet. A business‘s balance
sheet includes the assets, liabilities, and shareholders‘ equity of only that business and
not the personal assets, liabilities, and equity of the shareholders. The financial
statements of a company show the results of the business activities of only that company.
6. (a) Operating – These activities are directly related to earning profits. They include buying
supplies, making products, serving customers, cleaning the premises, advertising, renting
a building, repairing equipment, and obtaining insurance coverage.
, Chapter 02 - The Balance Sheet
(b) Investing – These activities involve buying and selling productive resources with long
lives (such as buildings, land, equipment, and tools), purchasing investments, and lending
to others.
(c) Financing – Any borrowing from banks, repaying bank loans, receiving
contributions from shareholders, or paying dividends to shareholders are considered
financing activities.
7. The heading of each of the four primary financial statements should include the following:
(a) Name of the business
(b) Name of the statement
(c) Date of the statement, or the period of time
8. (a) The purpose of the balance sheet is to report the financial position (assets, liabilities
and shareholders‘ equity) of a business at a point in time.
(b) The purpose of the income statement is to present information about the revenues,
expenses, and net income of a business for a specified period of time.
(c) The statement of retained earnings reports the way that net income and the
distribution of dividends affected the financial position of the company during the period.
(d) The purpose of the statement of cash flows is to summarize how a business‘s
operating, investing, and financing activities caused its cash balance to change over a
particular period of time.
9. The income statement, statement of retained earnings, and statement of cash flows would
be dated ―For the Year Ended December 31, 2020,‖ because they report the inflows and
outflows of resources during a period of time. In contrast, the balance sheet would be
dated ―At December 31, 2020,‖ because it represents the assets, liabilities and
shareholders‘ equity at a specific date.
10. Net income is the excess of total revenues over total expenses. A net loss occurs if total
expenses exceed total revenues.
11. The accounting equation for the balance sheet is: Assets = Liabilities + Shareholders‘
Equity. Assets are the economic resources controlled by the company. Liabilities are
amounts owed by the business. Shareholders‘ equity is the owners‘ claims to the
business. It includes amounts contributed to the business (by investors through
purchasing the company‘s shares) and the amounts earned and accumulated through
profitable business operations.
12. The equation for the income statement is Revenues – Expenses = Net Income.
Revenues are increases in a company‘s resources, arising primarily from its operating
activities. Expenses are decreases in a company‘s resources, arising primarily from its
operating activities. Net Income is equal to revenues minus expenses. (If expenses are
greater than revenues, the company has a Net Loss.)
Phillips et al. Fundamentals of Financial Accounting, 6ce Solutions Manual
Copyright McGraw Hill., 2021 Page 2-2
