SOLUTION MANUAL
Fundamentals of Financial Accounting
6th Canadian Edition
Fred Phillips, Robert Libby, All Chapters 1 - 13
,TABLE OF CONTENTS
CHAPTER 1: Business Decisions and Financial Accounting
CHAPTER 2: The Balance Sheet
CHAPTER 3: The Income Statement
CHAPTER 4: Adjustments, Financial Statements, and Financial Results
CHAPTER 5: Fraud, Internal Control, and Cash
CHAPTER 6: Merchandising Operations and the Multi-step Income Statement
CHAPTER 7: Inventory and Cost of Goods Sold
CHAPTER 8: Receivables, Bad Debt Expense, and Interest Revenue
CHAPTER 9: Long-Lived Tangible and Intangible Assets
CHAPTER 10: Liabilities
CHAPTER 11: Shareholders' Equity
CHAPTER 12: Statement of Cash Flows
CHAPTER 13: Measuring and Evaluating Financial Performance
,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.
, (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.)
,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. 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 Chartered Professional Accountants of Canada (CPA) is given the primary
responsibility for setting the detailed rules that become Generally Accepted Accounting Principles
(GAAP) in Canada. (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.
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).
(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 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, 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, or
shareholders 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 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 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 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 to obtain academic references
for employment applications.
Authors' Recommended Solution Time (Time in
minutes)
Skills
Mini-exercises Exercises Problems Development Continuing Case
Cases*
No. Time No. Time No. Time No. Time No. Time
1 3 1 10 CP1-1 45 1 20 1 45
2 11 2 10 CP1-2 10 2 20
3 12 3 15 CP1-3 60 3 30
4 6 4 25 CP1-4 5 4 30
5 6 5 25 PA1-1 45 5 20
6 6 6 10 PA1-2 10 6 30
7 6 7 15 PA1-3 50 7 45
8 4 8 10 PA1-4 45
9 4 9 20 PA1-5 50
10 3 10 10 PB1-1 45
11 3 11 3 PB1-2 10
12 6 12 3 PB1-3 45
13 6 PB1-4 10
14 6 PB1-5 50
15 6
16 12
,* Due to the nature of cases, it is very difficult to estimate the amount of time students will need to
complete them. As with any open-ended project, it is possible for students to devote a large amount of
time to these assignments. While students often benefit from the extra effort, we find that some become
frustrated by the perceived difficulty of the task. You can reduce student frustration and anxiety by
making your expectations clear, and by offering suggestions (about how to research topics or what
companies to select). The skills developed by these cases are indicated below.
Financial Ethical Critical
Case Research Technology Writing Teamwork
Analysis Reasoning Thinking
1 x
2 x
3 x x x x x
4 x x x
5 x x x
6 x x x
7 x x
ANSWERS TO MINI-EXERCISES
M1-1
Abbreviation Full Designation
1. CPA Chartered Professional Accountant
2. GAAP Generally Accepted Accounting Principles
3. IASB International Accounting Standards Board
4. CSA Canadian Securities Administrators
5. IFRS International Financial Reporting Standards
6. ASPE Accounting Standards for Private Enterprises
M1-2
, Term or Abbreviation Definition
F (1) Investing activities A. A system that collects and processes financial
D (2) Private company information about an organization and reports that
E (3) Corporation information to decision makers.
A (4) Accounting B. Measurement of information about a business in the
C (5) Partnership monetary unit (dollars or other national currency).
I (6) AcSB C. An unincorporated business owned by two or more
G (7) Financing activities persons.
B (8) Unit of measure D. A company that sells shares privately and is not
K (9) GAAP required to release its financial statements to the public.
J (10) Public company E. An incorporated business that issues shares as
H (11) Operating activities evidence of ownership.
F. Buying and selling productive resources with long lives.
G. Transactions with lenders (borrowing and repaying cash)
and shareholders (selling company shares and paying
dividends).
H. Activities directly related to running the business to earn
profit.
I. Accounting Standards Board.
J. A company that has its shares bought and sold by
investors on established stock exchanges.
K. Generally accepted accounting principles.
,Chapter 02 - The Balance Sheet
M1-3
Term Definition
F (1) Relevance A. The financial reports of a business are assumed to
I (2) Faithful Representation include the results of only that business‘s activities.
C (3) Comparability Separate B. The resources owned by a business.
A (4) Entity C. Financial information that can be compared across businesses
B (5) Assets Liabilities because similar accounting methods have been applied.
H (6) Shareholders‘ Equity D. The total amounts invested and reinvested in the
D (7) Revenues business by its owners.
G (8) Expenses E. The costs of business necessary to earn revenues.
E (9) Unit of Measure F. A feature of financial information that allows it to
J (10) influence a decision.
G. Earned by selling goods or services to customers.
H. The amounts owed by the business.
I. Financial information that depicts the economic
substance of business activities.
J. The assumption that states that results of business activities
should be reported in an appropriate monetary unit.
M1-4
L (B/S) (1) Accounts Payable
A (B/S) (2) Accounts Receivable
A (B/S) (3) Cash
E (I/S) (4) Income Tax Expense
E (I/S) (5) Selling and Administrative Expenses
R (I/S) (6) Sales Revenue
L (B/S) (7) Notes Payable
SE(B/S) (8) Retained Earnings
M1-5
A (B/S) (1) Accounts Receivable
R (I/S) (2) Sales Revenue
A (B/S) (3) Equipment
E (I/S) (4) Supplies Expense
A (B/S) (5) Cash
E (I/S) (6) Advertising Expense
L (B/S) (7) Accounts Payable
SE(B/S) (8) Retained Earnings
, Chapter 02 - The Balance Sheet
M1-6
A (B/S) (1) Accounts Receivable
E (I/S) (2) Selling and Administrative Expenses
A (B/S) (3) Cash
A (B/S) (4) Equipment
E (I/S) (5) Advertising Expenses
R (I/S) (6) Sales Revenue
L (B/S) (7) Notes Payable
SE(B/S) (8) Retained Earnings
L (B/S) (9) Accounts Payable
M1-7
L (B/S) (1) Accounts Payable
SE(B/S) (2) Contributed Capital
A (B/S) (3) Equipment
A (B/S) (4) Accounts Receivable
L (B/S) (5) Notes Payable
A (B/S) (6) Cash
SE(B/S) (7) Retained Earnings
E (I/S) (8) Selling and Administrative Expenses
R (I/S) (9) Sales Revenue
A (B/S) (10) Supplies
M1-8
SRE* (1) Dividends
B/S (2) Total Shareholders‘ Equity
I/S (3) Sales Revenue
B/S (4) Total Assets
SCF (5) Cash Flows from Operating Activities
B/S (6) Total Liabilities
I/S, SRE (7) Net Income
SCF (8) Cash Flows from Financing Activities
* An argument could be made for also including SCF as a plausible answer because the SCF reports
―Dividends paid in cash.‖ The answer SCF has been excluded here because (technically) the caption would
have to read ―Dividends paid in cash‖ if it were to be reported on the SCF.
