Fundamentals of Financial Accounting
8th Edition by Fred Phillips
Complete Chapter Solutions Manual
are included (Ch 1 to 13)
** Immediate Download
** Swift Response
** All Chapters included
** Exercises and Problems
,Chapter 1
Business Decisions and Financial Accounting
ANSWERS TO QUESTIONS
1. Accounting is an information system of analyzing, recording, and summarizing the
results of a business’s operating, investing, and financing activities and then
reporting them to decision makers.
2. An advantage of operating as a sole proprietorship is that it is easy and inexpensive
to establish; corporations have the disadvantage of requiring additional costs to
form the corporation. A disadvantage of a sole proprietorship is that the individual
proprietor can be held responsible for the debts of the business; in contrast, a
corporation has the advantage of limiting losses for owners to the amount they
invest in the corporation. A final difference is that income from a sole proprietorship
is taxed only once in the hands of the individual proprietor; in contrast, the income
from a corporation is taxed first in the corporation and then again in the hands of
the individual shareholder (when corporate profits are paid out as dividends).
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 for internal decision making 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, directors, creditors, governmental agencies,
other interested parties, and the public at large.
5. The business itself, not the individual stockholders 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 stockholders’ equity of only that
business and not the personal assets, liabilities, and equity of the stockholders.
The financial statements of a company show the results of the business activities of
only that company and should exclude the personal transactions of the owners.
, 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 stockholders, or paying dividends to stockholders 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) Title of the report
(c) Date of the statement, or the period of time that the statement covers
8. (a) The purpose of the balance sheet is to report the financial position (assets,
liabilities and stockholders’ 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
dividends (and net losses, if applicable) 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,” because they report the
inflows and outflows of resources over a period of time. In contrast, the balance
sheet would be dated “At December 31,” because it represents the assets, liabilities
and stockholders’ equity at a specific point in time.
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 +
Stockholders’ Equity. Assets are the economic resources controlled by the
business. Liabilities are amounts owed by the business. Stockholders’ equity is
the excess of assets over liabilities, and represents the owners’ claims to the
business. It includes amounts contributed to the business (by investors through
purchasing the company’s stock) and the amounts earned and accumulated
through profitable business operations.
