SOLUTION MANUAL FOR f f
Fundamentals Of Financial Accounting 6CE Fred Phillips, Robert Libby, Patricia Libby, Brandy
f f f f f f f f f f f
Mackintosh
f
Chapter 1-13 f
Chapter 1 f
Business Decisions and Financial Accounting f f f f
ANSWERS TO QUESTIONS f f
1. Accounting is a system of analyzing, recording, and summarizing the results of a
f f f f f f f f f f f f
business‘s activities and then reporting them to decision makers.
f f f f f f f f f
2. An advantage of operating as a sole proprietorship, rather than a corporation, is that it is
f f f f f f f f f f f f f f f
easy to establish. Another advantage is that income from a sole proprietorship is taxed
f f f f f f f f f f f f f f
only once in the hands of the individual proprietor (income from a corporation is taxed in
f f f f f f f f f f f f f f f f
the corporation and then again in the hands of the individual proprietor). A disadvantageof
f f f f f f f f f f f f f f f
operating as a sole proprietorship, rather than a corporation, is that the individual
f f f f f f f f f f f f f
proprietor can be held responsible for the debts of the business.
f f f f f f f f f f f
3. Financial accounting focuses on preparing and using the financial statements that are
f f f f f f f f f f f
made available to owners and external users such as customers, creditors, and potential
f f f f f f f f f f f f f
investors who are interested in reading them. Managerial accounting focuses on other
f f f f f f f f f f f f
accounting reports that are not released to the general public, but instead are prepared
f f f f f f f f f f f f f f
and used by employees, supervisors, and managers who run the company.
f f f f f f f f f f f
4. Financial reports are used by both internal and external groups and individuals. The
f f f f f f f f f f f f
internal groups are comprised of the various managers of the business. The external
f f f f f f f f f f f f f
groups include investors, creditors, governmental agencies, other interested parties, and
f f f f f f f f f f
the public at large.
f f f f
5. The business itself, not the individual shareholders who own the business, is viewed as
f f f f f f f f f f f f f
owning the assets and owing the liabilities on its balance sheet. A business‘s balance sheet
f f f f f f f f f f f f f f f
includes the assets, liabilities, and shareholders‘ equity of only that business and not the
f f f f f f f f f f f f f f
personal assets, liabilities, and equity of the shareholders. The financial statements of a
f f f f f f f f f f f f f
company show the results of the business activities of only that company.
f f f f f f f f f f f f
6. (a) Operating – These activities are directly related to earning profits. They include buying
f f f f f f f f f f f f f
supplies, making products, serving customers, cleaning the premises, advertising, renting a
f f f f f f f f f f f
building, repairing equipment, and obtaining insurance coverage.
f f f f f f f
,Chapter f02 f- fThe fBalance fSheet
(b) Investing – These activities involve buying and selling productive resources with long
f f f f f f f f f f f
flives (such as buildings, land, equipment, and tools), purchasing investments, and lendingto
f f f f f f f f f f f f
fothers.
(c) Financing – Any borrowing from banks, repaying bank loans, receiving f f f f f f f f f
fcontributions from shareholders, or paying dividends to shareholders are considered
f f f f f f f f f
financing activities.
f f
7. The heading of each of the four primary financial statements should include the following:
f f f f f f f f f f f f f
(a) Name of the business f f f
(b) Name of the statement f f f
(c) Date of the statement, or the period of time
f f f f f f f f
8. (a) The purpose of the balance sheet is to report the financial position (assets, liabilitiesand
f f f f f f f f f f f f f f f
shareholders‘ equity) of a business at a point in time.
f f f f f f f f f f
(b) The purpose of the income statement is to present information about the revenues,
f f f f f f f f f f f f
expenses, and net income of a business for a specified period of time.
f f f f f f f f f f f f f
(c) The statement of retained earnings reports the way that net income and the
f f f f f f f f f f f f
distribution of dividends affected the financial position of the company during the period.
f f f f f f f f f f f f f
(d) The purpose of the statement of cash flows is to summarize how a business‘s
f f f f f f f f f f f f f
operating, investing, and financing activities caused its cash balance to change over a
f f f f f f f f f f f f f
particular period of time.
f f f f
9. The income statement, statement of retained earnings, and statement of cash flows wouldbe
f f f f f f f f f f f f f
dated ―For the Year Ended December 31, 2020,‖ because they report the inflows and
f f f f f f f f f f f f f f
outflows of resources during a period of time. In contrast, the balance sheet would be dated
f f f f f f f f f f f f f f f f
―At December 31, 2020,‖ because it represents the assets, liabilities and shareholders‘
f f f f f f f f f f f f
equity at a specific date.
f f f f f
10. Net income is the excess of total revenues over total expenses. A net loss occurs if total
f f f f f f f f f f f f f f f f
expenses exceed total revenues.
f f f f
11. The accounting equation for the balance sheet is: Assets = Liabilities + Shareholders‘
f f f f f f f f f f f f
Equity. Assets are the economic resources controlled by the company. Liabilities are
f f f f f f f f f f f
amounts owed by the business. Shareholders‘ equity is the owners‘ claims to the
f f f f f f f f f f f f f
business. It includes amounts contributed to the business (by investors through
f f f f f f f f f f f
purchasing the company‘s shares) and the amounts earned and accumulated through
f f f f f f f f f f f
profitable business operations.
f f f
12. The equation for the income statement is Revenues –Expenses = Net Income. Revenues
f f f f f f f f f f f f f
are increases in a company‘s resources, arising primarily from its operating activities.
f f f f f f f f f f f f
Expenses are decreases in a company‘s resources, arising primarily from its operating
f f f f f f f f f f f f
activities. Net Income is equal to revenues minus expenses. (If expenses aregreater than
f f f f f f f f f f f f f f
revenues, the company has a Net Loss.)
f f f f f f f
Phillips fet fal. fFundamentals fof fFinancial fAccounting, f6ce Solutions fManual
fCopyright fMcGraw fHill., f2021 Page f2-2
,Chapter f02 f- fThe fBalance fSheet
13. The equation for the statement of retained earnings is: Beginning Retained Earnings + Net
f f f f f f f f f f f f f
Income - Dividends = Ending Retained Earnings. It begins with beginning-of-the-year
f f f f f f f f f f f
retained earnings which is the prior year‘s ending retained earnings reported on the prior
f f f f f f f f f f f f f f
year‘s balance sheet. The current year's net income reported on the income statement is
f f f f f f f f f f f f f f
added and the current year's dividends are subtracted from this amount. The ending
f f f f f f f f f f f f f
retained earnings amount is reported on the end-of-year balance sheet.
f f f f f f f f f f
14. The equation for the statement of cash flows is: Cash flows from operating activities + Cash
f f f f f f f f f f f f f f f
flows from investing activities + Cash flows from financing activities = Change in cash for
f f f f f f f f f f f f f f f
the period. Change in cash for the period + Beginning cash balance = Ending cash
f f f f f f f f f f f f f f f
balance. The net cash flows for the period represent the increase or decrease in cash that
f f f f f f f f f f f f f f f f
occurred during the period. Cash flows from operating activities are cash flowsdirectly
f f f f f f f f f f f f f
related to earning income (normal business activity). Cash flows from investing activities
f f f f f f f f f f f f
include cash flows that are related to the acquisition or sale of the company‘s long-term
f f f f f f f f f f f f f f f
assets. Cash flows from financing activities are directly related to the financingof the
f f f f f f f f f f f f f f
company.
f
15. Currently, the Chartered Professional Accountants of Canada (CPA) is given the primary
f f f f f f f f f f f
responsibility for setting the detailed rules that become Generally Accepted Accounting
f f f f f f f f f f f
Principles (GAAP) in Canada. (Internationally, the International Accounting Standards
f f f f f f f f f
Board (IASB) has the responsibility for setting accounting rules known as International
f f f f f f f f f f f f
Financial Reporting Standards (IFRS).)
f f f f
16. The main goal of accounting rules is to ensure that companies produce useful financial
f f f f f f f f f f f f f
information for present and potential investors, lenders, and other creditors in making
f f f f f f f f f f f f
decisions in their capacity as capital providers. Financial information must show
f f f f f f f f f f f
relevance and faithful representation, as well as be comparable, verifiable, timely, and
f f f f f f f f f f f f
understandable.
f
17. An ethical dilemma is a situation where following one moral principle would result in
f f f f f f f f f f f f f
violating another. Three steps that should be considered when evaluating ethical
f f f f f f f f f f f
dilemmas are:
f f
(a) Identify who will benefit from the situation (often, the manager or employee) and how f f f f f f f f f f f f f
others will be harmed (other employees, the company‘s reputation, owners, creditors, and
f f f f f f f f f f f f
the public in general).
f f f f
(b) Identify the alternative courses of action. f f f f f
(c) Choose the alternative that is the most ethical – that which you would be proud to have f f f f f f f f f f f f f f f f
reported in the news media. Often, there is no one right answer and hard choiceswill need
f f f f f f f f f f f f f f f f f
to be made. Following strong ethical practices is a key part of ensuring good financial
f f f f f f f f f f f f f f f
reporting by businesses of all sizes.
f f f f f f
Phillips fet fal. fFundamentals fof fFinancial fAccounting, f6ce Solutions fManual
fCopyright fMcGraw fHill., f2021 Page f2-3
, Chapter f02 f- fThe fBalance fSheet
18. Accounting frauds and cases involving academic dishonesty are similar in many respects.
f f f f f f f f f f f
Both involve deceiving others in an attempt to influence their actions or decisions, often
f f f f f f f f f f f f f f
resulting in temporary personal gain for the deceiver. For example, when an accounting
f f f f f f f f f f f f f
fraud is committed, financial statement users may be misled into making decisions they
f f f f f f f f f f f f f
wouldn‘t have made had the fraud not occurred (e.g., creditors might loan money to the
f f f f f f f f f f f f f f f
company, investors might invest in the company, or shareholders might reward top
f f f f f f f f f f f f
managers with big bonuses). When academic dishonesty is committed, instructors might
f f f f f f f f f f f
assign a higher grade than is warranted by the student‘s individual contribution. Another
f f f f f f f f f f f f f
similarity is that, as a consequence of the deception, innocent bystanders may be adversely
f f f f f f f f f f f f f f
affected by fraud and academic dishonesty. Fraud may require the company to charge
f f f f f f f f f f f f f
higher prices to customers to cover costs incurred as a result of the fraud. Academic
f f f f f f f f f f f f f f f
dishonesty may lead to stricter grading standards, with significant deductions taken for
f f f f f f f f f f f f
inadequate documentation of sources referenced. A final similarity is that if fraudand
f f f f f f f f f f f f f
academic dishonesty are ultimately uncovered, both are likely to lead to adverse long-term
f f f f f f f f f f f f f f
consequences for the perpetrator. Fraudsters may be fined, imprisoned, and encounter an
f f f f f f f f f f f f
abrupt end to their careers. Students who cheat may be penalized through lower course
f f f f f f f f f f f f f f
grades or expulsion, and might find it impossible to obtain academic references for
f f f f f f f f f f f f f
employment applications.
f f
Authors' Recommended Solution Time f f f
(Time in minutes) f f f
Skills
Mini-exercises Exercises Problems Development Continuing Case f
Cases* f
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
Phillips fet fal. fFundamentals fof fFinancial fAccounting, f6ce Solutions fManual
fCopyright fMcGraw fHill., f2021 Page f2-4