Solution Manual for Fundamentals of Financial Accounting 7th Edition – Complete Answers to Chapter 1-13 & Appendix C&D

SOLUTION MANUAL FOR uJ uJ




Fundamentals of Financial Accounting 7e Phillips uJ uJ uJ uJ uJ




Chapter 1-13 with Appendix C&D uJ uJ uJ




Chapter 1 uJ



Business Decisions and Financial Accounting uJ uJ uJ uJ




ANSWERSu TOu QUESTIONS J J




1. Accountingu isu au systemu ofu analyzing,u recording,u andu summarizingu theu resultsu ofu
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au business‘su activitiesu andu thenu reportingu themu tou decisionu makers.
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2. Anu advantageu ofu operatingu asu au soleu proprietorship,u ratheru thanu au corporation,u isu th
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atu itu isu easyu tou establish.u Anotheru advantageu isu thatu incomeu fromu au soleu proprietors
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hipu isu taxedu onlyu onceu inu theu handsu ofu theu individualu proprietoru (incomeu fromu au cor
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porationu isu taxedu inu theu corporationu andu thenu againu inu theu handsu ofu theu individualu s
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hareholder).u Au disadvantageu ofu operatingu asu au soleu proprietorship,u ratheru thanu au co J J J J J J J J J J J J




rporation,u isu thatu theu individualu proprietoru canu beu heldu responsibleu foru theu debtsu ofu t
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heu business. J




3. Financialu accountingu focusesu onu preparingu andu usingu theu financialu statementsu thatu
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areu madeu availableu tou ownersu andu externalu usersu suchu asu customers,u creditors,u an
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du potentialu investorsu whou areu interestedu inu readingu them.u Managerialu accountingu fo
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cusesu onu otheru accountingu reportsu thatu areu notu releasedu tou theu generalu public,u butu
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insteadu areu preparedu foru internalu decisionu makingu andu usedu byu employees,u supervi
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sors,u andu managersu whou runu theu company.
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4. Financialu reportsu areu usedu byu bothu internalu andu externalu groupsu andu individuals.u Th
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eu internalu groupsu areu comprisedu ofu theu variousu managersu ofu theu business.u Theu ext
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ernalu groupsu includeu investors,u creditors,u governmentalu agencies,u otheru interestedu
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parties,u andu theu publicu atu large. J J J J J




5. Theu businessu itself,u notu theu individualu stockholdersu whou ownu theu business,u isu viewe
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du asu owningu theu assetsu andu owingu theu liabilitiesu onu itsu balanceu sheet.u Au business‘su
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balanceu sheetu includesu theu assets,u liabilities,u andu stockholders‘u equityu ofu onlyu thatu
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businessu andu notu theu personalu assets,u liabilities,u andu equityu ofu theu stockholders.u
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Theu financialu statementsu ofu au companyu showu theu resultsu ofu theu businessu activitiesu
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ofu onlyu thatu company.
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Fundamentalsuofu FinancialuAccounting,u 7/e J J J J 1-1
©u2022ubyuMcGrawuHillu LLC.u Allurightsu reserved.u Nou reproductionu orudistributionu withoututheuprioru writtenu consentu ofuMcGrawu Hillu
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,6. (a)u Operatingu – J J




u Theseu activitiesu areu directlyu relatedu tou earningu profits.u Theyu includeu buyingu suppli
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es,u makingu products,u servingu customers,u cleaningu theu premises,u advertising,u renti
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ngu au building,u repairingu equipment,u andu obtainingu insuranceu coverage.
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(b) Investingu – J




u Theseu activitiesu involveu buyingu andu sellingu productiveu resourcesu withu longu livesu (s
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uchu asu buildings,u land,u equipment,u andu tools),u purchasingu investments,u andu lendin
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gu tou others.
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(c) Financingu– J




uAnyuborrowingufromu banks,u repayingubankuloans,ureceivingu contributionsu fromu stoc
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kholders,u oru payingu dividendsu tou stockholdersu areu consideredu financingu activities. J J J J J J J J J




7. Theu headingu ofu eachu ofu theu fouru primaryu financialu statementsu shouldu includeu th
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eu following:
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(a) Nameu ofu theu business J J J




(b) Nameu ofu theu statement J J J




(c) Dateu ofu theu statement,u oru theu periodu ofu timeu thatu theu statementu covers J J J J J J J J J J J J




8. (a)u Theu purposeu ofu theu balanceu sheetu isu tou reportu theu financialu positionu (asset
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s,u liabilitiesu andu stockholders‘u equity)u ofu au businessu atu au pointu inu time.
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(b) Theu purposeu ofu theu incomeu statementu isu tou presentu informationu aboutu theu re J J J J J J J J J J J J




venues,u expenses,u andu netu incomeu ofu au businessu foru au specifiedu periodu ofu time. J J J J J J J J J J J J J




(c) Theu statementu ofu retainedu earningsu reportsu theu wayu thatu netu incomeu andu theu di J J J J J J J J J J J J J




stributionu ofu dividendsu affectedu theu financialu positionu ofu theu companyu duringu theu peri J J J J J J J J J J J J




od.
(d) Theu purposeu ofu theu statementu ofu cashu flowsu isu tou summarizeu howu au business‘su J J J J J J J J J J J J J J




operating,u investing,u andu financingu activitiesu causedu itsu cashu balanceu tou changeu o J J J J J J J J J J J




veru au particularu periodu ofu time.J J J J J




9. Theu incomeu statement,u statementu ofu retainedu earnings,u andu statementu ofu cashu flow
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su wouldu beu datedu ―Foru theu Yearu Endedu Decemberu 31,u 2021,‖u becauseu theyu reportu
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theu inflowsu andu outflowsu ofu resourcesu overu au periodu ofu time.u Inu contrast,u theu balanc
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eu sheetu wouldu beu datedu ―Atu Decemberu 31,u 2021,‖u becauseu itu representsu theu asset
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s,u liabilitiesu andu stockholders‘u equityu atu au specificu date.
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10. Netu incomeu isu theu excessu ofu totalu revenuesu overu totalu expenses.u Au netu lossu occursu
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ifu totalu expensesu exceedu totalu revenues.
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11. Theu accountingu equationu foru theu balanceu sheetu is:u Assetsu =u Liabilitiesu +u Stockhold
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ers‘u Equity.u Assetsu areu theu economicu resourcesu controlledu byu theu company.u Lia
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bilitiesu areu amountsu owedu byu theu business.u Stockholders‘u equityu isu theu owners‘u cl
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aimsu tou theu business.u Itu includesu amountsu contributedu tou theu businessu (byu investor
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su throughu purchasingu theu company‘su stock)u andu theu amountsu earnedu andu accumul
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atedu throughu profitableu businessu operations. J J J J




Fundamentalsuofu FinancialuAccounting,u 7/e J J J J 1-2
©u2022ubyuMcGrawuHillu LLC.u Allurightsu reserved.u Nou reproductionu orudistributionu withoututheuprioru writtenu consentu ofuMcGrawu Hillu
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,12. Theu equationu foru theu incomeu statementu isu Revenuesu –
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uExpensesu =u Netu Income.u Revenuesu areu increasesu inu au company‘su resources,u ari
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singu primarilyu fromu itsu operatingu activities.u Expensesu areu decreasesu inu au compan
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y‘su resources,u arisingu primarilyu fromu itsu operatingu activities.u Netu Incomeu isu equalu t
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ou revenuesu minusu expenses.u (Ifu expensesu areu greateru thanu revenues,u theu compa
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nyu hasu au Netu Loss.) J J J J




13. Theu equationu foru theu statementu ofu retainedu earningsu is:u Beginningu Retainedu Earnin
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gsu +u Netu Incomeu - J J J J




u Dividendsu =u Endingu Retainedu Earnings.u Itu beginsu withu beginning-of-the-
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yearu retainedu earningsu whichu isu theu prioru year‘su endingu retainedu earningsu reportedu
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onu theu prioru year‘su balanceu sheet.u Theu currentu year'su netu incomeu reportedu onu theu i
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ncomeu statementu isu addedu andu theu currentu year'su dividendsu areu subtractedu fromu thi
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su amount.u (Ifu au netu lossu occurs,u Itu wouldu beu subtracted,u alongu withu theu dividends,u fr
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omu theu prioru year‘su endingu retainedu earningsu balance.)Theu endingu retainedu earning
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su amountu isu reportedu onu theu end-of-yearu balanceu sheet.u 14.
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Theu e J




quationu foru theu statementu ofu cashu flowsu is:u Cashu flowsu fromu operatingu activitiesu +u C
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ashu flowsu fromu investingu activitiesu +u Cashu flowsu fromu financingu activitiesu =u Changeu
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inu cashu foru theu period.u Changeu inu cashu foru theu periodu +u Beginningu cashu balanceu =u
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Endingu cashu balance.u Theu netu cashu flowsu foru theu periodu representu theu increaseu oru
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decreaseu inu cashu thatu occurredu duringu theu period.u Cashu flowsu fromu operatingu activi J J J J J J J J J J J J




tiesu areu cashu flowsu directlyu relatedu tou earningu incomeu (normalu businessu activity).u C
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ashu flowsu fromu investingu activitiesu includeu cashu flowsu thatu areu relatedu tou theu acquisi
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tionu oru saleu ofu theu company‘su long- J J J J J J




termu assets.u Cashu flowsu fromu financingu activitiesu areu directlyu relatedu tou theu financi
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ngu ofu theu company. J J J




15. Currently,u theu Financialu Accountingu Standardsu Boardu (FASB)u isu givenu theu primar J J J J J J J J J J




yu responsibilityu foru settingu theu detailedu rulesu thatu becomeu Generallyu Acceptedu Ac
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countingu Principlesu (GAAP)u inu theu Unitedu States.u (Internationally,u theu Internation J J J J J J J J J




alu Accountingu Standardsu Boardu (IASB)u hasu theu responsibilityu foru settingu accounti
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ngu rulesu knownu asu Internationalu Financialu Reportingu Standardsu (IFRS).)
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16. Theu mainu goalu ofu accountingu rulesu isu tou ensureu thatu companiesu produceu usefulu fina
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ncialu informationu foru presentu andu potentialu investors,u lenders,u andu otheru creditorsu inu
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makingu decisionsu inu theiru capacityu asu capitalu providers.u Financialu informationu mus
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tu showu relevanceu andu faithfulu representation,u asu wellu asu beu comparable,u verifiable,u
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timely,u andu understandable. J J




Fundamentalsuofu FinancialuAccounting,u 7/e J J J J 1-3
©u2022ubyuMcGrawuHillu LLC.u Allurightsu reserved.u Nou reproductionu orudistributionu withoututheuprioru writtenu consentu ofuMcGrawu Hillu
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, 17. Anu ethicalu dilemmau isu au situationu whereu followingu oneu moralu principleu wouldu resultu i
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nu violatingu another.u Threeu stepsu thatu shouldu beu consideredu whenu evaluatingu ethica
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lu dilemmasu are:
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(a) Identifyu whou willu benefitu fromu theu situationu (often,u theu manageru oru employee)u an J J J J J J J J J J J J




du howu othersu willu beu harmedu (otheru employees,u theu company‘su reputation,u owners,u
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creditors,u andu theu publicu inu general). J J J J J




(b) Identifyu theu alternativeu coursesu ofu action. J J J J J




(c) Chooseu theu alternativeu thatu isu theu mostu ethicalu – J J J J J J J J




uthatu whichu youu wouldu beu proudu tou haveu reportedu inu theu newsu media.u Often,u there
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u isu nou oneu rightu answeru andu hardu choicesu willu needu tou beu made.u Followingu strongu
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ethicalu practicesu isu au keyu partu ofu ensuringu goodu financialu reportingu byu businessesu
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ofu allu sizes. J J




18. Accountingu fraudsu andu casesu involvingu academicu dishonestyu areu similaru inu manyu re J J J J J J J J J J J




spects.u Bothu involveu deceivingu othersu inu anu attemptu tou influenceu theiru actionsu oru de
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cisions,u oftenu resultingu inu temporaryu personalu gainu foru theu deceiver.u Foru example,u
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whenu anu accountingu fraudu isu committed,u financialu statementu usersu mayu beu misledu i
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ntou makingu decisionsu theyu wouldn‘tu haveu madeu hadu theu fraudu notu occurredu (e.g.,u cr
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editorsu mightu loanu moneyu tou theu company,u investorsu mightu investu inu theu company,u
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oru stockholdersu mightu rewardu topu managersu withu bigu bonuses).u Whenu academicu di
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shonestyu isu committed,u instructorsu mightu assignu au higheru gradeu thanu isu warrantedu J J J J J J J J J J J J




byu theu student‘su individualu contribution.u Anotheru similarityu isu that,u asu au consequenc
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eu ofu theu deception,u innocentu bystandersu mayu beu adverselyu affectedu byu fraudu andu a
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cademicu dishonesty.u Fraudu mayu requireu theu companyu tou chargeu higheru pricesu tou cu
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stomersu tou coveru costsu incurredu asu au resultu ofu theu fraud.u Academicu dishonestyu may
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u leadu tou stricteru gradingu standards,u withu significantu deductionsu takenu foru inadequate
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u documentation u ofu sourcesu referenced.u Au finalu similarityu isu thatu ifu fraudu andu acade
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micu dishonestyu areu ultimatelyu uncovered,u bothu areu likelyu tou leadu tou adverseu long-
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termu consequencesu foru theu perpetrator.u Fraudstersu mayu beu fined,u imprisoned,u and
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u encounteru anu abruptu endu tou theiru careers.u Studentsu whou cheatu mayu beu penalizedu t
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hroughu loweru courseu gradesu oru expulsion,u andu mightu findu itu impossibleu tou obtainu ac
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ademicu referencesu foru employmentu applications. J J J J




Fundamentalsuofu FinancialuAccounting,u 7/e J J J J 1-4
©u2022ubyuMcGrawuHillu LLC.u Allurightsu reserved.u Nou reproductionu orudistributionu withoututheuprioru writtenu consentu ofuMcGrawu Hillu
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