SOLUTION MANUAL
Fundamentals of Financial Accounting
8th 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
J (10) Public company public.
H (11) Operating activities E. An incorporated business that issues shares as
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
B (5) Assets Liabilities businesses because similar accounting methods have been
H (6) Shareholders‘ Equity applied.
D (7) Revenues D. The total amounts invested and reinvested in the
G (8) Expenses business by its owners.
E (9) Unit of Measure E. The costs of business necessary to earn revenues.
J (10) F. A feature of financial information that allows it to
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.
