Solution Manual for Fundamentals of Financial Accounting (7th Edition) by Phillips

SOLUTION MANUAL FOR J J




Fundamentals of Financial Accounting 7e Phillips J J J J J




Chapter 1-13 with Appendix J J




C&D

Chapter 1 J




Business Decisions and Financial Accounting J J J J




ANSWERS TO QUESTIONS J J




1. Accounting is a system of analyzing, recording, and summarizing the J J J J J J J J J




results of a business‘s activities and then reporting them to decision
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makers.
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2. An advantage of operating as a sole proprietorship, rather than a
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corporation, is that it is easy to establish. Another advantage is that
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income from a sole proprietorship is taxed only once in the hands of the
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individual proprietor (income from a corporation is taxed in the corporation
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and then again in the hands of the individual shareholder). A disadvantage
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of operating as a sole proprietorship, rather than a corporation, is that the
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individual proprietor can be held responsible for the debts of the business.
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3. Financial accounting focuses on preparing and using the financial J J J J J J J J




statements that are made available to owners and external users such as
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customers, creditors, and potential investors who are interested in reading
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them. Managerial accounting focuses on other accounting reports that are
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not released to the general public, but instead are prepared for internal
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decision making and used by employees, supervisors, and managers who
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run the company.
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4. Financial reports are used by both internal and external groups and J J J J J J J J J J




individuals. The internal groups are comprised of the various managers of
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the business. The external groups include investors, creditors, governmental
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agencies, other interested parties, and the public at large.
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5. The business itself, not the individual stockholders who own the business,
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is viewed as owning the assets and owing the liabilities on its balance
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sheet. A business‘s balance sheet includes the assets, liabilities, and
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stockholders‘ equity of only that business and not the personal assets,
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liabilities, and equity of the stockholders.
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company show the results of the business activities of only that company.
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Fundamentals of Financial Accounting, 7/e J J J J 1-1
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of McGraw Hill LLC.
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,6. (a) Operating – These activities are directly related to earning profits.
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JThey include buying supplies, making products, serving customers, cleaning
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Jthe premises, advertising, renting a building, repairing equipment, and
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Jobtaining insurance coverage. J J




(b) Investing – These activities involve buying and selling productive J J J J J J J J




Jresources with long lives (such as buildings, land, equipment, and tools), J J J J J J J J J J




Jpurchasing investments, and lending to others. J J J J J




(c) Financing – Any borrowing from banks, repaying bank loans, receiving J J J J J J J J J




Jcontributions from stockholders, or paying dividends to stockholders are J J J J J J J J




Jconsidered financing activities. J J




7. The heading of each of the four primary financial statements should
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Jinclude the following: J J




(a) Name of the business J J J




(b) Name of the statement J J J




(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
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position (assets, liabilities and stockholders‘ equity) of a business at a
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point in time.
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(b) The purpose of the income statement is to present information about
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the revenues, expenses, and net income of a business for a specified
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period of time.
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(c) The statement of retained earnings reports the way that net income J J J J J J J J J J




and the distribution of dividends affected the financial position of the
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company during the period.
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(d) The purpose of the statement of cash flows is to summarize how a J J J J J J J J J J J J




business‘s operating, investing, and financing activities caused its cash
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balance to change
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9. The income statement, statement of retained earnings, and statement of
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cash flows would be dated ―For the Year Ended December 31, 2021,‖
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because they report the inflows and outflows of resources over a period
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of time. In contrast, the balance sheet would be dated ―At December 31,
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2021,‖ because it represents the assets, liabilities and stockholders‘ equity
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at a specific date.
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10. Net income is the excess of total revenues over total expenses. A net
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loss occurs if total expenses exceed total revenues.
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11. The accounting equation for the balance sheet is: Assets = Liabilities +
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Stockholders‘ Equity. Assets are the economic resources controlled by the
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company. J Liabilities are amounts owed by the business. Stockholders‘ J J J J J J J J




equity is the owners‘ claims to the business. It includes amounts
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contributed to the business (by investors through purchasing the company‘s
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stock) and the amounts earned and accumulated through profitable
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business operations.
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Fundamentals of Financial Accounting, 7/e J J J J 1-2
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J J J J J J All rights reserved. No reproduction or distribution without the prior written consent
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of McGraw Hill LLC.
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,12. The equation for the income statement is Revenues – Expenses = Net
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Income. Revenues are increases in a company‘s resources, arising
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primarily from its operating activities. Expenses are decreases in a
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company‘s resources, arising primarily from its operating activities. Net
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Income is equal to revenues minus expenses. (If expenses are greater
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than revenues, the company has a Net Loss.)
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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
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with beginning-of-the-year retained earnings which is the prior year‘s ending
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retained earnings reported on the prior year‘s balance sheet. The current
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year's net income reported on the income statement is added and the
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current year's dividends are subtracted from this amount. (If a net loss
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occurs, It would be subtracted, along with the dividends, from the prior
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year‘s ending retained earnings balance.)The ending retained earnings
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amount is reported on the end-of-year balance sheet. 14.
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equation for the statement of cash flows is: Cash flows from operating
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activities + Cash flows from investing activities + Cash flows from financing
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activities = Change in cash for the period. Change in cash for the period
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+ Beginning cash balance = Ending cash balance. The net cash flows for
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the period represent the increase or decrease in cash that occurred during
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the period. Cash flows from operating activities are cash flows directly
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related to earning income (normal business activity). Cash flows from
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investing activities include cash flows that are related to the acquisition or
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sale of the company‘s long-term assets. Cash flows from financing
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activities are directly related to the financing of the company.
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15. Currently, the Financial Accounting Standards Board (FASB) is given the J J J J J J J J J




primary responsibility for setting the detailed rules that become Generally
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Accepted Accounting Principles (GAAP) in the United States.
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(Internationally, the International Accounting Standards Board (IASB) has
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the responsibility for setting accounting rules known as International
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Financial Reporting Standards (IFRS).)
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16. The main goal of accounting rules is to ensure that companies produce
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useful financial information for present and potential investors, lenders, and
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other creditors in making decisions in their capacity as capital providers.
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Financial information must show relevance and faithful representation, as
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well as be comparable, verifiable, timely, and understandable.
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Fundamentals of Financial Accounting, 7/e J J J J 1-3
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J J J J J J All rights reserved. No reproduction or distribution without the prior written consent
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of McGraw Hill LLC.
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, 17. An ethical dilemma is a situation where following one moral principle would
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result in violating another. Three steps that should be considered when
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evaluating ethical dilemmas are:
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(a) Identify who will benefit from the situation (often, the manager or J J J J J J J J J J




employee) and how others will be harmed (other employees, the company‘s
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reputation, owners, creditors, and the public in general).
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(b) Identify the alternative courses of action. J J J J J




(c) Choose the alternative that is the most ethical – that which you would J J J J J J J J J J J J




be proud to have reported in the news media. Often, there is no one
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right answer and hard choices will need to be made. Following strong
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ethical practices is a key part of ensuring good financial reporting by
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businesses of all sizes.
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18. Accounting frauds and cases involving academic dishonesty are similar in J J J J J J J J J




many respects. Both involve deceiving others in an attempt to influence
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their actions or decisions, often resulting in temporary personal gain for the
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deceiver. For example, when an accounting fraud is committed, financial
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statement users may be misled into making decisions they wouldn‘t have
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made had the fraud not occurred (e.g., creditors might loan money to the
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company, investors might invest in the company, or stockholders might
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reward top managers with big bonuses). When academic dishonesty is
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committed, instructors might assign a higher grade than is warranted by
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the student‘s individual contribution. Another similarity is that, as a
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consequence of the deception, innocent bystanders may be adversely
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affected by fraud and academic dishonesty. Fraud may require the
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company to charge higher prices to customers to cover costs incurred as
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a result of the fraud. Academic dishonesty may lead to stricter grading
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standards, with significant deductions taken for inadequate documentation of
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sources referenced. A final similarity is that if fraud and academic
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dishonesty are ultimately uncovered, both are likely to lead to adverse
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long-term consequences for the perpetrator. Fraudsters may be fined,
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imprisoned, and encounter an abrupt end to their careers. Students who
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cheat may be penalized through lower course grades or expulsion, and
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might find it impossible to obtain academic references for employment
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applications.
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Fundamentals of Financial Accounting, 7/e
J J J J 1-4
© 2022 by McGraw Hill LLC.
J J J J J J All rights reserved. No reproduction or distribution without the prior written consent
J J J J J J J J J J J



of McGraw Hill LLC.
J J J J