Fundamentals of Financial Accounting, 7/e 1-1
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
,SOLUTION MANUAL FOR
Fundamentals of Financial Accounting 7e Phillips
Chapter 1-13 with Appendix C&D
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 shareholder). 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
for internal decision making 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 stockholders 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 stockholders‘ equity of only that business and not the
personal assets, liabilities, and equity of the stockholders. The financial statements of a
company show the results of the business activities of only that company.
Fundamentals of Financial Accounting, 7/e 1-2
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
,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.
(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 stockholders, or paying dividends to stockholders 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 that the statement covers
8. (a) The purpose of the balance sheet is to report the financial position (assets,
liabilities and stockholders‘ 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, 2021,‖ because they report the inflows and
outflows of resources over a period of time. In contrast, the balance sheet would be dated
―At December 31, 2021,‖ because it represents the assets, liabilities and stockholders‘
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 + Stockholders‘
Equity. Assets are the economic resources controlled by the company. Liabilities are
amounts owed by the business. Stockholders‘ equity is the owners‘ claims to the
business. It includes amounts contributed to the business (by investors through
purchasing the company‘s stock) and the amounts earned and accumulated through
profitable business operations.
Fundamentals of Financial Accounting, 7/e 1-3
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, 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.)
13. The equation for the statement of retained earnings is: Beginning Retained Earnings + Net
Income - Dividends = Ending Retained Earnings. It begins with beginning-of-the-year
retained earnings which is the prior year‘s ending retained earnings reported on the prior
year‘s balance sheet. The current year's net income reported on the income statement is
added and the current year's dividends are subtracted from this amount. (If a net loss
occurs, It would be subtracted, along with the dividends, from the prior year‘s ending
retained earnings balance.)The ending retained earnings amount is reported on the end-
of-year balance sheet. 14. The
equation for the statement of cash flows is: Cash flows from operating activities + Cash
flows from investing activities + Cash flows from financing activities = Change in cash for
the period. Change in cash for the period + Beginning cash balance = Ending cash balance.
The net cash flows for the period represent the increase or decrease in cash that occurred
during the period. Cash flows from operating activities are cash flows directly related to
earning income (normal business activity). Cash flows from investing activities include cash
flows that are related to the acquisition or sale of the company‘s long-term assets. Cash
flows from financing activities are directly related to the financing of the company.
15. Currently, the Financial Accounting Standards Board (FASB) is given the primary
responsibility for setting the detailed rules that become Generally Accepted Accounting
Principles (GAAP) in the United States. (Internationally, the International Accounting
Standards Board (IASB) has the responsibility for setting accounting rules known as
International Financial Reporting Standards (IFRS).)
16. The main goal of accounting rules is to ensure that companies produce useful financial
information for present and potential investors, lenders, and other creditors in making
decisions in their capacity as capital providers. Financial information must show relevance
and faithful representation, as well as be comparable, verifiable, timely, and
understandable.
Fundamentals of Financial Accounting, 7/e 1-4
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
,SOLUTION MANUAL FOR
Fundamentals of Financial Accounting 7e Phillips
Chapter 1-13 with Appendix C&D
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 shareholder). 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
for internal decision making 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 stockholders 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 stockholders‘ equity of only that business and not the
personal assets, liabilities, and equity of the stockholders. The financial statements of a
company show the results of the business activities of only that company.
Fundamentals of Financial Accounting, 7/e 1-2
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
,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.
(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 stockholders, or paying dividends to stockholders 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 that the statement covers
8. (a) The purpose of the balance sheet is to report the financial position (assets,
liabilities and stockholders‘ 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, 2021,‖ because they report the inflows and
outflows of resources over a period of time. In contrast, the balance sheet would be dated
―At December 31, 2021,‖ because it represents the assets, liabilities and stockholders‘
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 + Stockholders‘
Equity. Assets are the economic resources controlled by the company. Liabilities are
amounts owed by the business. Stockholders‘ equity is the owners‘ claims to the
business. It includes amounts contributed to the business (by investors through
purchasing the company‘s stock) and the amounts earned and accumulated through
profitable business operations.
Fundamentals of Financial Accounting, 7/e 1-3
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, 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.)
13. The equation for the statement of retained earnings is: Beginning Retained Earnings + Net
Income - Dividends = Ending Retained Earnings. It begins with beginning-of-the-year
retained earnings which is the prior year‘s ending retained earnings reported on the prior
year‘s balance sheet. The current year's net income reported on the income statement is
added and the current year's dividends are subtracted from this amount. (If a net loss
occurs, It would be subtracted, along with the dividends, from the prior year‘s ending
retained earnings balance.)The ending retained earnings amount is reported on the end-
of-year balance sheet. 14. The
equation for the statement of cash flows is: Cash flows from operating activities + Cash
flows from investing activities + Cash flows from financing activities = Change in cash for
the period. Change in cash for the period + Beginning cash balance = Ending cash balance.
The net cash flows for the period represent the increase or decrease in cash that occurred
during the period. Cash flows from operating activities are cash flows directly related to
earning income (normal business activity). Cash flows from investing activities include cash
flows that are related to the acquisition or sale of the company‘s long-term assets. Cash
flows from financing activities are directly related to the financing of the company.
15. Currently, the Financial Accounting Standards Board (FASB) is given the primary
responsibility for setting the detailed rules that become Generally Accepted Accounting
Principles (GAAP) in the United States. (Internationally, the International Accounting
Standards Board (IASB) has the responsibility for setting accounting rules known as
International Financial Reporting Standards (IFRS).)
16. The main goal of accounting rules is to ensure that companies produce useful financial
information for present and potential investors, lenders, and other creditors in making
decisions in their capacity as capital providers. Financial information must show relevance
and faithful representation, as well as be comparable, verifiable, timely, and
understandable.
Fundamentals of Financial Accounting, 7/e 1-4
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
