Solution Manual for
Fundamentals Of Financial Accounting 6CE Fred Phillips, Robert Libby, Patricia Libby, Brandy
Mackintosh
Chapter 1-13
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.
,Chapter 02 - The Balance Sheet
(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.)
Phillips et al. Fundamentals of Financial Accounting, 6ce Solutions Manual
Copyright McGraw Hill., 2021 Page 2-2
,Chapter 02 - The Balance Sheet
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.
Phillips et al. Fundamentals of Financial Accounting, 6ce Solutions Manual
Copyright McGraw Hill., 2021 Page 2-3
, Chapter 02 - The Balance Sheet
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
Phillips et al. Fundamentals of Financial Accounting, 6ce Solutions Manual
Copyright McGraw Hill., 2021 Page 2-4
