Solution Manual For
Fundamentals of Financial Accounting 7e Phillips
Chapter 1-13 with Appendix C&D
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Chapter 1
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Business Decisions and Financial Accounting
ANSWERS TO QUESTIONS
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1. Accounting is a system of analyzing, recording, and summarizing the results of a
business‘s activities and then reporting them to decision makers.
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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
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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
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the business.
3. Financial accounting focuses on preparing and using the financial statements that
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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,
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supervisors, and managers who run the company.
4. Financial reports are used by both internal and external groups and individuals. The
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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
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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
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only that company.
Fundamentals of Financial Accounting, 7/e 1-1
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, 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.
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(c) Financing – Any borrowing from banks, repaying bank loans, receiving
contributions from stockholders, or paying dividends to stockholders are considered
financing activities.
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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
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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.
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(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
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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
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operating, investing, and financing activities caused its cash balance to change
over a particular period of time.
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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
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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
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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
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(by investors through purchasing the company‘s stock) and the amounts earned
and accumulated through profitable business operations.
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, 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
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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
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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
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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
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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
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financing activities are directly related to the financing of the company.
15. Currently, the Financial Accounting Standards Board (FASB) is given the primary
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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
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accounting rules known as International Financial Reporting Standards (IFRS).)
16. The main goal of accounting rules is to ensure that companies produce useful
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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.
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, 17. An ethical dilemma is a situation where following one moral principle would result in
violating another. Three steps that should be considered when evaluating ethical
dilemmas are:
(a) Identify who will benefit from the situation (often, the manager or employee) and
how others will be harmed (other employees, the company‘s reputation, owners,
creditors, and the public in general).
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(b) Identify the alternative courses of action.
(c) Choose the alternative that is the most ethical – that which you would be proud
to have reported in the news media. Often, there is no one right answer and hard
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choices will need to be made. Following strong ethical practices is a key part of
ensuring good financial reporting by businesses of all sizes.
18. Accounting frauds and cases involving academic dishonesty are similar in many
respects. Both involve deceiving others in an attempt to influence their actions or
decisions, often resulting in temporary personal gain for the deceiver. For example,
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when an accounting fraud is committed, financial statement users may be misled
into making decisions they wouldn‘t have made had the fraud not occurred (e.g.,
creditors might loan money to the company, investors might invest in the company,
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or stockholders might reward top managers with big bonuses). When academic
dishonesty is committed, instructors might assign a higher grade than is warranted
by the student‘s individual contribution. Another similarity is that, as a consequence
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of the deception, innocent bystanders may be adversely affected by fraud and
academic dishonesty. Fraud may require the company to charge higher prices to
customers to cover costs incurred as a result of the fraud. Academic dishonesty
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may lead to stricter grading standards, with significant deductions taken for
inadequate documentation of sources referenced. A final similarity is that if fraud
and academic dishonesty are ultimately uncovered, both are likely to lead to
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adverse long-term consequences for the perpetrator. Fraudsters may be fined,
imprisoned, and encounter an abrupt end to their careers. Students who cheat may
be penalized through lower course grades or expulsion, and might find it impossible
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to obtain academic references for employment applications.
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