Fundamentals of Financial Accounting 5Th Canadian Edition By Fred Phillips -Test Bank
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SOLUTION MANUAL FOR Fundamentals of Financial
Accounting 6CE Fred Phillips, Robert Libby, Patricia
Libby, Brandy Mackintosh A+
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.
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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.
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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
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.
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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.
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