Solution Manual for Financial Accounting Tools for Business Decision Making, 9th Canadian Edition Pa by digitaldownload87

SOLUTIONS MANUAL FOR Financial Accounting: Tools for Business Decision Solution Manual For 9th Edition Paul Kimmel; Making, Canadian Edition Financial Accounting Tools for Business Decision Making, 9th Canadian Edition Paul Weygandt; D. Kimmel, Jerry J. Weygandt, Jill E. Mitchell, Barbara Trenholm, Wayne Jerry Jill Mitchell; Barbara Trenholm; Irvine, Christopher D. Burnley Chapter 1-14 Wayne Irvine; Christopher CHAPTER 1

THE PURPOSE AND USE OF FINANCIAL STATEMENTS LEARNING OBJECTIVES 1. 2. 3. 4.

Identify the uses and users of accounting information. Describe the primary forms of business organization. Explain the three main types of business activity. Describe the purpose and content of each of the financial statements.

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item LO

BT Item LO

BT Item LO BT Item LO Questions

BT Item LO

13.

19.

25.

14.

20.

26.

15.

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27.

10.

16.

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28.

11.

17.

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29.

12.

18.

24.

30.

Brief Exercises 1.

10.

11.

Exercises 1.

10.

13.

11.

14.

12.

Problems: Set A and B 1.

10.

1,3

Cases 1.

3,4

Legend: The following abbreviations will appear throughout the solutions manual file.

Learning objective

Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation Level of difficulty S Simple M Moderate C Complex

Difficulty:

Time:

Estimated time to prepare in minutes

AACSB

Association to Advance Collegiate Schools of Business Communication Communication Ethics Ethics Analytic Analytic Technology Tech. Diversity Diversity Reflective Thinking Reflec. Thinking CPA Canada Competency Ethics Professional and Ethical Behaviour PS and DM Problem-Solving and Decision-Making Comm. Communication Self-Mgt. Self-Management Team & Lead Teamwork and Leadership Reporting Financial Reporting Stat. & Gov. Strategy and Governance Mgt. Accounting Management Accounting Audit Audit and Assurance Finance Finance Tax Taxation

CPA CM cpa-e001 cpa-e002 cpa-e003 cpa-e004 cpa-e005 cpa-t001 cpa-t002 cpa-t003 cpa-t004 cpa-t005 cpa-t006

ANSWERS TO QUESTIONS 1.

Accounting is the information system that identifies and records the economic events of an organization, and then communicates them to a wide variety of interested users.

LO 1 BT: K Difficulty: S TIME: 3 min. AACSB: None CPA: cpa-t001 CM: Reporting

(a)

Internal users of accounting information work for the company and include finance directors, marketing managers, human resource personnel, production supervisors, and company officers. Internal users have access to company information that is not available to external users.

(b)

Some external users may be individuals who are employees of the company but are not directly involved in managing the company. As a result, they do not have access to much information. External users of accounting information generally do not work for the company. The primary external users are investors and creditors. Other external users include labour unions, customers, the Canada Revenue Agency (CRA), and securities commissions.

LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Internal users may want the following questions answered:  Is there enough cash to purchase a new piece of equipment?  What price should we sell our product for to cover costs and to maximize net income?  How many employees can we afford to hire this year?  Which product line is the most profitable?  How much of a pay raise can the company afford to give me? External users may want the following questions answered:  Is the company earning enough to give me my required return on investment?  Will the company be able to repay its debts as the debts come due?  Will the company stay in business long enough to service the products I buy from it?

LO 1 BT: K Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Primary users of accounting information include investors and creditors. These external users need to make decisions concerning their ongoing business relationship with the company. They need to be able to assess the company‘s performance and financial health because they intend to start, continue, or discontinue having transactions with the company. Other decision makers who have specific needs for certain financial information, such as the amount of taxes paid by the company, are not considered primary users.

LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Decision makers rely on financial statement information and expect the accounting information to have been prepared ethically. Without the expectation of ethical behaviour, the information presented in the financial statements would have no credibility for the users of the accounting information. Without credibility, financial statement information would be useless to financial statement users.

LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None Ethics CPA: cpa-t001 CM: Reporting and Ethics

Descriptive data analytic provides information about what happened. On the other hand, predictive data analytics helps the organization look into the future and gives some visibility into what is likely to happen. Predictive data analytics is of the most use to management

LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None Ethics CPA: cpa-t001 CM: Reporting and Ethics

7. (a) Proprietorship: Proprietorships are easier to form (and dissolve) than other types of business organizations. They are not taxed as separate entities; rather, the proprietor pays personal income tax on the company‘s net income. Depending on the circumstances, this may be an advantage or disadvantage. Disadvantages of a proprietorship include unlimited liability (proprietors are personally liable for all debts of the business) and difficulty in obtaining financing compared to other forms of organization. In addition, the life of the proprietorship is limited as it is dependent on the willingness and capability of the proprietor to continue operations.

7. (continued) (b) Partnership: Partnerships are easier to form (and dissolve) than a corporation, although not as easy as a proprietorship. Similar to proprietorships, partnerships are not taxed as separate entities. Instead, the partners pay personal income tax on their share of income. Depending on the circumstances, this may be an advantage or disadvantage. Disadvantages of partnerships include unlimited liability (partners are jointly and severally liable for all debts of the business) and difficulty in obtaining financing compared to corporations. In addition, the life of a partnership can be limited depending on the terms of the partnership agreement and actions of the other partners. (c) Private corporation: Advantages of a private corporation include limited liability (shareholders not being personally liable for corporate debts), indefinite life, and transferability of ownership. In many cases, depending on the size of the corporation, a creditor such as a bank will ask for a personal guarantee which will void the limited liability advantage. In addition, transferability of ownership may be limited since shares are not publicly traded. Disadvantages of a private corporation include increased government regulations and paperwork. The fact that corporations are taxed as a separate legal entity may be an advantage or a disadvantage. Corporations often receive more favourable income tax treatment than other forms of business organizations. As mentioned above, depending on the size of the corporation, many of the advantages of the corporate form are not available to a small private corporation. (d) Public corporation: The advantages of a public corporation include limited liability, indefinite life, and transferability of ownership. These features make it easier for publicly traded corporations to raise financing compared to other forms of business organizations. Corporations often receive more favourable income tax treatment than other forms of business organizations. Disadvantages include increased government regulations and paperwork. In addition, because the shares of public companies are listed and traded on Canadian or other exchanges such as the Toronto Stock Exchange (TSX), these corporations are required to distribute their financial statements to investors, creditors and other interested parties, and the general public. This requirement involves greater costs to the corporation. LO 2 BT: C Difficulty: M TIME: 20 min. AACSB: None CPA: cpa-t001, cpa-t006 CM: Reporting and Tax

While both public and private corporations enjoy many of the same advantages and disadvantages, one key difference is that public corporations list their shares for sale to the public on Canadian or other stock exchanges. In contrast, while private corporations issue shares, they do not make them available to the general public or trade them on public stock exchanges. Private corporations may also not enjoy the advantages of limited liability and ease of transfer of ownership that public corporations generally experience because of their size and distribution of shares.

LO 2 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Shareholders who invest in public corporations do not have any personal involvement in the management of the company. While the shareholders legally own the corporation, they manage it indirectly through a board of directors they elect. The board, in turn, sets the broad strategic objectives for the company and hires the company's officers, such as the CEO, to execute policy and perform the daily management functions.

LO 2 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

10.

(a)

Public corporations must apply International Financial Reporting Standards (IFRS). Private corporations can apply either IFRS or Accounting Standards for Private Enterprises (ASPE).

(b)

The information needs of users of public corporations and private corporations are different. Users of financial information of public corporations require more extensive disclosure. They may also benefit from the enhanced comparability to global companies provided by international standards. Since private corporations tend to be smaller with easier access to company information, their users do not require as extensive reporting.

LO 2 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

11.

A private company that has plans to grow significantly in the near future, and that wishes to have access to large amounts of capital obtained from external investors will want to go public. In order to go public, the company would be required to have several years of past financial statements prepared using IFRS. In addition, some businesses choose to follow IFRS to be able to compare their performance with businesses in the same industry that are public and whose financial information is readily available.

LO 2 BT: C Difficulty: C TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

12.

The reporting entity concept means that economic activity of any business organization or economic entity is kept separate and distinct from the activities of the owner and all other economic entities. In the case of corporations such as The North West Company Inc., it also means that economic activities of related corporations that are owned or controlled by one corporation are consolidated. The results of these individual companies are also reported separately as separate economic entities.

LO 2 BT: K Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

13.

(a) (b) (c)

(d) (e)

Assets are what the company owns such as cash and equipment. A liability is an amount the company owes such as accounts payable and income tax payable. Shareholders‘ equity represents the residual interest (assets less liabilities) of a company at a point in time and includes share capital and retained earnings, in addition to other possible components. Revenues are increases in a company‘s economic resources from operating activities such as the sale of a product. Expenses are the cost of assets that are consumed or services that are used in the process of generating revenues. Examples include cost of goods sold, rent expense, and salaries expense.

LO 3 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

14.

Operating activities are the activities that the organization undertakes to earn net income. They include the day-to-day activities that generate revenues and cause expenses to be incurred. In order to earn net income, a company must first purchase resources they need to operate. The purchase of these resources (assets) is considered to be an investing activity. Finally, the company must have sufficient funds to purchase assets and to operate. While some of the necessary cash will be generated from operations, often the company needs to raise external funds by either issuing shares or borrowing money. Financing activities involve the activities undertaken by the company to raise cash externally.

LO 3 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

15.

(a)

Two examples of operating activities are revenue generated from providing auto repair services (an inflow of cash) and the expenses related to paying employee salaries (an outflow of cash).

(b)

Two examples of investing activities are the purchase of property, plant, and equipment, such as a building (an outflow of cash), and the sale of a long-term investment (an inflow of cash).

(c)

Two examples of financing activities for a corporation are borrowing money (debt), which is an inflow of cash, and declaring and paying dividends (equity), an outflow of cash

LO 3 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

16.

After lending money to a company, a bank would monitor the dividend paying practices of that company to ensure that the funds that were lent are not being used to pay larger than normal dividends. When the loan was requested, the company would have described the purpose of the loan. Examples include the purchase of some equipment or the refinancing of existing debt. Some banks specify in the loan agreement that the funds cannot be used to pay dividends to ensure that the cash is put to work in the business and not distributed to shareholders.

LO 3 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

17.

I agree. Net income is the result of the revenues less the expenses of a business for a specified period of time. It is the final amount appearing on the statement of income. The statement of changes in equity lists all the transactions that change equity accounts. Retained earnings is increased by net income. Therefore, net income appears as an addition to retained earnings on the statement of changes in equity.

LO 3 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

18.

Retained earnings is an account that reports that sum of all the net income for the business less any dividends that have been declared since its inception. The sources of increases and decreases in retained earnings is reported on the statement of changes in equity. The statement shows the beginning balance in retained earnings plus the net income for the year or less the net loss for the year, followed by a deduction for the dividends that were declared during the year. The final result is the ending balance in retained earnings, which also appears on the statement of financial position.

LO 3 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

19.

A fiscal year is an accounting time period that is one year in length but does not have to end on December 31. Corporations can select their fiscal year end based on when their operations are low or when inventory is low. Selecting a fiscal year end when operations are low provides more time for accounting staff to complete the year-end reporting requirements. If inventories are low, this simplifies the inventory count and minimizes the business disruption caused by counting the inventory.

LO 4 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

20.

The internal accounting records do use exact figures. However, for presentation purposes, it is unlikely that the use of rounded figures would change a decision made by the users of the financial statements. As well, presenting the information in this manner makes the statements easier to read and analyze thereby increasing their utility to the users. Rounding the numbers to the nearest million does not have a material impact on decision-making using the financial statements.

LO 4 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

21.

Assets = Liabilities + Shareholders‘ Equity $1,219,273 = $639,069 + $580,204 (amounts are in thousands of dollars)

LO 4 BT: AP Difficulty: M TIME: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

22.

A statement of changes in equity explains the changes in the components of shareholders‘ equity, such as share capital and retained earnings. Examples of items that increase the components are issue of shares (increases share capital) and net income (increases retained earnings). Examples of items that decrease the components are repurchases of shares (decreases share capital) and declaration of dividends (decreases retained earnings).

LO 4 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

23.

(a)

The primary purpose of the statement of cash flows is to provide financial information about the cash receipts (inflows) and cash payments (outflows) of a company for a specific period of time.

(b)

The three categories of the statement of cash flows are operating activities, investing activities, and financing activities. These categories represent the three principal types of business activities.

LO 4 BT: K Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

24.

The cash obtained from operating activities is not necessarily expected to be positive in the early years of a company‘s life. If a business offers credit to its customers and needs to hold a significant amount of inventory to satisfy customer demands, a large amount of working capital obtained from selling goods will be tied up in accounts receivable and inventory. Creditors on the other hand will have little leniency on a new business when expecting to be paid. Consequently, the amount of cash from operating activities could very likely be negative. For investing activities, a negative cash outflow would also be expected as the business must invest in long-lived assets needed for operations.

LO 4 BT: C Difficulty: C TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

25.

The statement of financial position is prepared as at a specific point in time because it shows what the business owns (its assets) and what it owes (its liabilities). These items are constantly changing. It is necessary to select one point in time at which to present them. The other statements (statement of income, statement of changes in equity, and statement of cash flows) cover a period of time as they report activities and measure performance for a specific period of time.

LO 4 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

26.

(a)

The statement of income reports net income for the period. The net income figure from the statement of income is shown on the statement of changes in equity as an addition to beginning retained earnings. If there is a loss, it is deducted from beginning retained earnings.

(b)

The statement of changes in equity explains the change in the balances of the components of shareholders‘ equity (for example, common shares and retained earnings) from one period to the next. The ending balances are reported in the shareholders‘ equity section of the statement of financial position.

(c)

The statement of cash flows explains the change in the cash balance from one period to the next. The ending balance of cash reported in the statement of cash flows agrees with the ending cash balance reported in the current assets section on the statement of financial position.

LO 4 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

27.

(a)

Companies using IFRS must report a statement of income, statement of changes in equity, statement of financial position, and statement of cash flows. In addition, companies using IFRS may also need to prepare a statement of comprehensive income.

(b)

Companies using ASPE must report a statement of income, statement of retained earnings, balance sheet, and a statement of cash flows.

LO 4 BT: K Difficulty: S TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

28.

The management discussion and analysis (MD&A) section of the annual report provides management‘s perspective on the financial results and can provide important context for interpreting them. In the MD&A, management also provides a forward-looking perspective (how the company‘s operations and results are expected to change in the future).

LO 4 BT: C Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

29.

The auditor's report provides shareholders with an opinion on whether the company's financial statements are fairly presented in accordance with the applicable accounting principles (which is IFRS for public companies). For public companies, the auditor's report will also identify key audit matters, which are the matters that the auditor concluded were of most significance in the audit of the financial statements. These include areas involving significant risks of misstatement, significant risks that have been identified by the auditor, financial statement items involving significant management estimates, and the effect on the audit of significant events or transactions that have taken place.

LO 4 BT: C Difficulty: S TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

30.

Explanatory notes and supporting schedules accompany every set of financial statements and are an integral part of the statements. The notes to the financial statements clarify the financial statements and provide additional detail. Information in the notes does not have to be quantifiable (numeric). Examples of notes are descriptions of the significant accounting policies and methods used in preparing the statements, explanations of uncertainties and contingencies, and various statistics and details too voluminous to be included in the statements. The notes are essential to understanding a company‘s operating performance.

LO 4 BT: C Difficulty: S TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 1.1 (a) Type of Evaluation

(b) Type of User

5 4 1 6 2 3

External Internal External Internal External External

Investor Marketing manager Creditor Chief financial officer Canada Revenue Agency Labour union

LO 1 BT: C Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1.2

1 2 3

(a) Type of Data Analytics

(b) Perspective

Descriptive Diagnostic Predictive

Hindsight Insight Foresight

LO 1 BT: C Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1.3 a. 1 b. 4 c. 3 d. 2 e. 4

Proprietorship Private corporation Public corporation Partnership Private corporation

LO 2 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1.4 a. F b. O c. I d. F e. F f. F g. O h. I i. O

Inflow Inflow Inflow Outflow Inflow Outflow Outflow Outflow Outflow

Note to instructors: As we will learn later in Chapter 13, companies reporting under IFRS have a choice in classifying dividends paid as an operating or financing activity. We have chosen to classify dividends paid as financing activities in this textbook. LO 3 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 1.5

1. 2. 3. 4. 5. 6. 7. 8.

O F O O O O F I

NE + + NE -

LO 3 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1.6 a.

Total assets

= = =

Total liabilities + Shareholders‘ equity $55,000 + $120,000 $175,000

(Liabilities + Shareholders‘ equity = Assets)

Total assets

= = =

Total liabilities + Shareholders‘ equity (share capital + retained earnings) $170,000 + ($100,000 + $90,000) $360,000

(Liabilities + Shareholders‘ equity = Assets)

Total liabilities

= = =

Total assets – Shareholders‘ equity (share capital + retained earnings) $150,000 – ($50,000 + $25,000) $75,000

(Assets – Shareholders‘ equity = Liabilities)

Shareholders‘ equity

= = =

Total assets – Total liabilities $500,000 – ($500,000 ÷ 2) $250,000

(Assets – Liabilities = Shareholders‘ equity) LO 4 BT: AP Difficulty: M TIME: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1.7 Beginning of Year: Assets = Liabilities + Shareholders‘ equity Beginning of Year: $720,000 = $420,000 + Shareholders‘ equity Beginning of Year: Shareholders‘ equity = $300,000 a.

($720,000 + $250,000) = ($420,000 – $80,000) + Shareholders‘ equity Shareholders‘ equity = $630,000

[(Assets ± Change in assets) – (Liabilities ± Change in liabilities) = Shareholders‘ equity]

Assets = ($420,000 – $100,000) + ($300,000 + $90,000 + $125,000) Assets = $835,000

[(Liabilities ± Change in liabilities) + (Shareholders‘ equity ± Change in shareholders‘ equity) = Assets]

($720,000 – $90,000) = Liabilities + ($300,000 + $120,000) Liabilities = $210,000

[(Assets ± Change in assets) – (Shareholders‘ equity ± Change in shareholders‘ equity) = Liabilities] LO 4 BT: AP Difficulty: C TIME: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1.8 a. SI b. SFP c. SCE d. SCF e. SFP f. SCF g. SI h. SCE LO 4 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1.9 a. L b. A c. L d. L e. A f. A g. A h. SE i. L j. SE k. A LO 4 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1.10

a. b. c. d. e. f. g. h.

Net income Repayment of bank loan Declared dividends Issue of common shares Cash purchase of inventory Repurchase of common shares Net loss Issue of long-term debt

Share Capital

Retained Earnings

Total Shareholders' Equity

NE NE NE + NE NE NE

+ NE NE NE NE NE

+ NE + NE NE

LO 4 BT: C Difficulty: C TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 1.11 a.

Beginning balance Issue additional shares Net income Dividends declared Ending balance b.

Beginning balance Issue additional shares Net loss Ending balance

(1)

(2)

Common Shares $100,000 50,000

Retained Earnings $475,000

$150,000

75,000 (15,000) $535,000

(1)

(2)

Common Shares $100,000 50,000

Retained Earnings $475,000

$150,000

(75,000) $400,000

(3) Total Shareholders' Equity $575,000 50,000 75,000 (15,000) $685,000 (3) Total Shareholders' Equity $575,000 50,000 (75,000) $550,000

(Beginning equity ± Changes to equity = Ending equity) LO 4 BT: AN Difficulty: M TIME: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

SOLUTIONS TO EXERCISES EXERCISE 1.1 a.

Chief Financial Officer – Does Meta Platforms generate enough cash to expand its operations and purchase other businesses? Human Resource Manager – What is Meta Platforms‘s annual salary expense?

Creditor – Does Meta Platforms have enough cash available to make its monthly debt payments? Investor – How much did Meta Platforms pay in dividends last year?

Other examples are also possible. LO 1 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 1.2 Proprietorship Partnership 1. 2. 3. 4. 5.

No personal liability Owner(s) pay(s) personal income tax on company income Generally easiest form of organization to raise capital Ownership indicated by shares Required to issue quarterly financial statements

Public Corporation

Private Corporation

Owned by one person

Limited life

8. 9.

Usually, the easiest form of organization to set up Required to use IFRS as its accounting standards

10. Shares are closely held

LO 2 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001, cpa-t006 CM: Reporting and Tax

EXERCISE 1.3 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

O I O F F F O O O F

Note to instructors: As we will learn later in Chapter 13, companies reporting under IFRS have a choice in classifying payments of interest as an operating or financing activity. We have chosen to classify payments of interest as operating activities in this textbook. LO 3 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 1.4 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

(a) O F I F I I O O I F F O

(b) + + + + + -

Note to instructors: As we will learn later in Chapter 13, companies reporting under IFRS have a choice in classifying payments of dividends and interest as an operating or financing activity. We have chosen to classify payments of dividends as financing activities and the payments of interest as operating activities in this textbook. LO 3 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 1.5 1. 2. 3. 4. 5. 6. 7. 8.

SI SFP, SCF SCF SI SCE, SFP SCE SI, SCE SFP

9. 10. 11. 12. 13. 14. 15.

SFP SI SI SCF SFP SCE, SFP SFP

LO 4 BT: K Difficulty: S TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 1.6 a.

Assets – Liabilities = Shareholders‘ equity 2023: $550,000 – $400,000 = $150,000 2024: $630,000 – $420,000 = $210,000

(Assets – Liabilities = Shareholders‘ equity)

Change in shareholders‘ equity $210,000 – $150,000 = $60,000 increase

1. Net income is $60,000 = the increase in shareholders‘ equity 2. Net income is $70,000 = the increase in shareholders‘ equity + dividends declared of $10,000 3. Net income is $30,000 = the increase in shareholders‘ equity – common shares issued of $30,000 4. Net income is $50,000 = the increase in shareholders‘ equity + dividends declared of $10,000 – common shares issued of $20,000

LO 4 BT: AP Difficulty: M TIME: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 1.7 [1]

Total revenues – Net income = Total expenses $1,000,000 – $150,000 = $850,000

[2]

Common shares, end of year $100,000 = Beginning balance of common shares + Issue of shares of $100,000

[3]

$150,000 equal to Net income given above

[4]

Beginning balance of retained earnings plus net income less dividends declared = Ending balance of retained earnings. $0 + $150,000 – Dividends declared = $100,000 Dividends declared = $50,000

[5]

Beginning balance in shareholders' equity + Issue of shares + Net income – Dividends declared = Ending balance in shareholders‘ equity $0 + $100,000 + $150,000 – $50,000 = $200,000

[6]

Total assets – Total liabilities = total Shareholders‘ equity $1,050,000 – $850,000 = $200,000 or [5] above

[7]

Total revenues – Total expenses = Net income Total revenues – $250,000 = $50,000 Total revenues = $300,000

[8]

Beginning balance of common shares + Issue of shares = Common shares, end of year $0 + Issue of shares = $20,000 Issue of shares = $20,000

[9]

$50,000 equal to Net income given above

[10]

Common shares, end of year + Retained Earnings, end of year $20,000 + $40,000 = $60,000 Total shareholders‘ equity, end of year

[11]

Total liabilities + Total shareholders‘ equity = Total assets $150,000 + $60,000 (from [10]) = $210,000

[12]

$60,000 (from [10]) or $210,000 (from [11]) − $150,000 total liabilities = $60,000 total shareholders‘ equity

LO 4 BT: AN Difficulty: C TIME: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 1.8 [1]

Total expenses + Net income = Total revenues $1,700,000 + $1,100,000 = $2,800,000

[2]

Common shares, end of year $200,000 = Beginning balance of common shares (nil) + Issue of shares of $200,000

[3]

$1,100,000 equal to Net income given above

[4]

Beginning balance of retained earnings plus net income less dividends declared + Beginning balance of common shares + Issue of shares = Ending balance in shareholders‘ equity. $0 + $1,100,000 – $300,000 + $0 + $200,000 = $1,000,000 Ending balance in total shareholders‘ equity = $1,000,000

[5]

Total liabilities + Total Shareholders‘ equity = Total assets $1,600,000 + $1,000,000 or [4] above = $2,600,000

[6]

[4] above $1,000,000

[7]

Total revenues – Net income = Total expenses $3,200,000 – $1,500,000 = $1,700,000

[8]

Beginning balance of common shares + Issue of shares = Common shares, end of year $0 + Issue of shares = $500,000 Common shares, end of year $500,000

[9]

$1,500,000 equal to Net income given above

[10]

Beginning balance of retained earnings plus net income less dividends declared = Ending balance of retained earnings. $0 + $1,500,000 – Dividends declared = $1,200,000 Dividends declared = $300,000

[11]

Common shares, end of year + Retained Earnings, end of year $500,000 (from [8]) + $1,200,000 = $1,700,000 Total shareholders‘ equity, end of year

[12]

Total assets – Total Shareholders‘ equity = Total liabilities $3,100,000 – $1,700,000 = $1,400,000

LO 4 BT: AN Difficulty: C TIME: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 1.9 ($ in thousands) a. Assets – Liabilities = Shareholders‘ equity 2021: $4,385,806 – $2,349,880 = $2,035,926 2020: $3,860,205 – $1,927,741 = $1,932,464 b.

Assets = Liabilities + Shareholders‘ equity 2021: $4,385,806 = $2,349,880 + $2,035,926 Assets = Liabilities + Shareholders‘ equity 2020: $3,860,205 = $1,927,741 + $1,932,464

Change in shareholders‘ equity $2,035,926 – $1,932,464= $103,462 increase

Shareholders‘ equity, Dec. 31, 2020 Add: Net income Deduct: Dividends declared Other shareholders‘ equity items Shareholders‘ equity, Dec. 31, 2021

$1,932,464 ? 89,054 89,693 $2,035,926

Solving for Net income: $2,035,926 + $89,054 + $89,693 − $1,932,464 = $282,209. (Beginning equity ± Changes to equity = Ending equity) LO 4 BT: AP Difficulty: M TIME: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 1.10 (a) L A L A A SE A (b)

Accounts payable Accounts receivable Bank loan payable Buildings Cash Common shares Equipment

L A A L SE A

Income tax payable Inventory Land Mortgage payable Retained earnings Supplies

Note to instructors: Students may list the accounts in the following statement in any order within the assets, liabilities, and shareholders‘ equity classifications as they have not yet learned how to classify/order accounts.

EXERCISE 1.10 (CONTINUED) AVENTURA INC. Statement of Financial Position November 30, 2024 Assets Cash Accounts receivable Inventory Supplies Land Buildings Equipment Total assets

$ 20,000 19,500 18,000 700 44,000 100,000 30,000 $232,200

Liabilities and Shareholders‘ Equity Liabilities Accounts payable Income tax payable Bank loan payable Mortgage payable Total liabilities Shareholders‘ equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders‘ equity

$ 26,200 6,000 34,000 97,500 163,700 20,000 48,500 68,500 $232,200

(Assets = Liabilities + Shareholders‘ equity) LO 4 BT: AP Difficulty: M TIME: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 1.11 a. E E NR E R E NR R b.

Selling, general and administrative expenses Cost of goods sold Dividends declared Finance expenses Finance income Income tax expense Inventories Sales LEON‘S FURNITURE LIMITED Statement of Income

Year Ended December 31, 2021 (in thousands) Revenues Sales Finance income Total revenues Expenses Selling, general and administrative expenses Cost of goods sold Finance expenses Total expenses Income before income tax Income tax expense Net income

$2,512,670 5,767 2,518,437 $ 819,091 1,404,446 20,752 2,244,289 274,148 69,221 $ 204,927

[Revenues – Expenses = Net income or (loss)] LO 4 BT: AP Difficulty: M TIME20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 1.12 KON INC. Statement of Income Year Ended December 31, 2024 Revenues Service revenue Expenses Salaries expense Rent expense Utilities expense Office expense Total expenses Income before income tax Income tax expense Net income

$61,000 $30,000 12,400 2,400 1,600 46,400 14,600 3,000 $11,600

[Revenues – Expenses = Net income or (loss)]

KON INC. Statement of Changes in Equity Year Ended December 31, 2024

Common Shares

Retained Earnings

Total Equity

Balance, January 1 Net income Dividends declared Issued common shares Balance, December 31

$20,000

$58,000 11,600 (5,000) ______ $64,600

10,000 $30,000

$78,000 11,600 (5,000) 10,000 $94,600

(Beginning equity ± Changes to equity = Ending equity) LO 4 BT: AP Difficulty: M TIME: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 1.13 a.

Camping revenue Expenses Operating expenses Income tax expense Net income

$283,000 $245,000 10,000

255,000 $ 28,000

[Revenues – Expenses = Net income or (loss)]

Balance, January 1 Net Income Dividends declared Issued common shares Balance, December 31

SEA SURF RESORTS INC. Statement of Changes in Equity Year Ended December 31, 2024 Common Shares $30,000

15,000 $45,000

Retained Earnings $18,000 28,000 (12,000) _______ $34,000

Total Equity $48,000 28,000 (12,000) 15,000 $79,000

(Beginning equity ± Changes to equity = Ending equity) Note to instructors: Students may list the accounts in the following statement in any order within the assets, liabilities, and shareholders‘ equity classifications as they have not yet learned how to classify/order accounts.

EXERCISE 1.13 (CONTINUED) b. (continued) SEA SURF RESORTS INC. Statement of Financial Position December 31, 2024

Assets Cash Supplies Equipment Total assets Liabilities and Shareholders‘ Equity Liabilities Accounts payable Bank loan payable Total liabilities Shareholders‘ equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders‘ equity

19,000 2,500 124,000 $145,500

$ 16,500 50,000 66,500 45,000 34,000 79,000 $145,500

(Assets = Liabilities + Shareholders‘ equity) LO 4 BT: AP Difficulty: M TIME: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 1.14 1.

Yu Corporation is distributing nearly all of this year's net income as dividends. This suggests that Yu is not pursuing rapid growth. Companies that are pursuing opportunities for growth normally retain their net income and pay low, or no dividends.

Surya Corporation is not generating sufficient cash from operating activities to fund its investing activities. The company is borrowing to finance its investing activities. This is common for companies in their early years of existence. It could also be in an expansion stage.

Naguib Ltd. is financing its assets in a slightly higher proportion through equity than through debt. The company has $450,000 ($200,000 + $250,000) of total assets, which are funded 44.4% ($200,000 ÷ $450,000) by liabilities and 55.6% ($250,000 ÷ $450,000) by equity. Since equity does not have to be repaid and does not require interest payments, the company appears to be in a healthy financial position.

Rijo Inc. does not have any liabilities and its assets are completely financed by equity. This places it in a very strong financial position since there are no outside claims on the company‘s assets. This also means that the company is using its own funds to finance assets. While this reduces risk, it may also reduce return if borrowed funds can be employed to generate an internal return higher than the cost of borrowing.

LO 4 BT: AN Difficulty: C TIME: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

SOLUTIONS TO PROBLEMS PROBLEM 1.1A a.

1. The South Face Inc. is an external user of accounting information in assessing the creditworthiness of their customer. 2. An investor purchasing common shares of Orbite Online Inc. is an external user. 3. In deciding whether to extend a loan, Caisse d‘Économie Base Montréal is an external user. 4. As an employee of Tech Toy Limited, the CFO is an internal user.

1. In deciding to extend credit, South Face would focus its attention on the statement of financial position of the new customer. The terms of credit they are extending require repayment in a short period of time. Funds to repay the credit would come from cash on hand and other current assets. The statement of financial position of the new customer will show if the company has enough current assets to meet its current obligations. 2. Since the investor intends to hold the shares for a long period of time (at least five years), s(he) should focus on the company‘s statement of income. The statement of income reports the company‘s past performance in terms of revenues, expenses, and net income. This is generally regarded as a good indicator of the company‘s future performance. 3. The Caisse is interested in two things—the ability of the company to make interest payments on a monthly basis for the next three years and the ability to repay the principal amount at the end of the three years. In order to evaluate both of these factors, the focus should be on the statement of cash flows. This statement provides information on the cash the company generates from its operations on an ongoing basis. It also tells whether the company is currently borrowing or repaying debt. 4. The CFO should focus on the statement of cash flows as this statement clearly sets out the cash generated from operating activities and the amount the company has spent in the past on purchasing equipment and paying dividends.

Note to instructors: Other answers may be valid provided they are properly supported. LO 1 BT: C Difficulty: M TIME: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 1.2A a.

Randi is most likely to select to operate her business as a private corporation. This will assist her with the potential liability of storing RVs for others. She will be able to raise funds to purchase carports as needed and hire employees to install and remove the carports. It is easier to raise funds through a private corporation rather than a proprietorship or partnership.

The graduate students should incorporate their business. A public corporation would give them easier access to capital which would help fund clinical trials. However, public corporation focus on short term results where companies try to meet or exceed analysts‘ expectations. In the past, public companies had more ways to raise capital, however that as changed as the private markets have become flush with cash. The students could start off as a private corporation to minimize the pressure of short-term results and impatient shareholders and then go public once the company has met some long-term goals and objectives.

Stella should operate her ice cream cart as a proprietorship as this is the simplest and least costly form of business organization to establish and eventually dissolve. She is the only person involved in the business and is planning to operate for a limited time.

Palmieri should incorporate his business as a private corporation. Providing a transport service on water involves a potential liability and a corporation is the only business form that provides limited liability. The business is not too capital intensive, and a private corporation has sufficient flexibility to raise funding if required.

A partnership would be the most likely form of business for Alexandro and Alexis to choose. It is simpler to form than a corporation and less costly.

1. 2.

ASPE IFRS (IFRS is recommended if the goal is to become a public corporation although as a private corporation, they may choose ASPE) ASPE* ASPE ASPE*

3. 4. 5.

* proprietorships and partnerships don‘t have to follow any particular set of accounting standards although they generally follow ASPE for external financial reporting purposes. Solutions Manual 1-30 Chapter 1 Copyright © 2023 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

LO 2 BT: C Difficulty: M TIME: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 1.3A a. Operating

Investing

Financing

Indigo Books & Music

Sale of books

Purchase of store equipment

Issue of shares

High Liner Foods

Payment for fish

Purchase of production equipment

Borrowing money from a bank

Mountain Equipment Co-op

Payment for inventory

Purchase of store fixtures

Borrowing money from a bank

Ganong Bros.

Payment of salaries and benefits

Purchase of production equipment

Payment of dividends to shareholders

Royal Bank

Payment of interest on savings accounts

Purchase of office Issue of bonds equipment

b. Financing Issuing shares is common to all corporations. Issuing debt is common to most corporations. Borrowing from a bank is common to most companies. Payment of dividends is common to many, but not all, corporations. Issuing bonds is common to large public corporations. Investing Purchasing property, plant, and equipment is common to most companies—the types of assets would vary according to the nature of the business. Some types of companies require a larger investment in long-lived assets. A new business or expanding business would be more apt to be acquiring assets. Operating The general activities identified above would be common to most corporations with the exception of the payment of interest on savings accounts. The source of the cash receipt (for example, from the sale of books) and cash payment (for example, for the payment for fish) would vary by the nature of the business. LO 3 BT: C Difficulty: C TIME: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 1.4A

Accounts payable Building Cash Common shares Deferred revenue Depreciation expense Dividends payable Intangible assets Interest expense Interest payable Inventory Land Long-term debt Prepaid rent Repairs and maintenance expense Rent expense Retained earnings Salaries expense Supplies expense LO 4 BT: K Difficulty: S TIME: t001 CM: Reporting

L A A SE L E L A E L A A L A E E SE E E

SFP SFP SFP SFP, SCE SFP SI SFP SFP SI SFP SFP SFP SFP SFP SI SI SFP, SCE SI SI

20 min. AACSB: None CPA: cpa-

PROBLEM 1.5A

a. and b. b.

Accounts payable Accounts receivable Bank loan payable Cash Common shares Deferred revenue Equipment Income tax payable Intangible assets Interest payable Inventory Prepaid insurance Retained earnings Salaries payable

$15,600 13,100 32,000 9,350 20,000 1,800 30,500 1,800 5,000 300 9,200 1,000 21,250 700

a. L A L A SE L A L A L A A SE L

Assets

Liabilities $ 15,600

Shareholders‘ Equity

$13,100 32,000 9,350 $ 20,000 1,800 30,500 1,800 5,000 300 9,200 1,000 21,250 700

Supplies Vehicles Totals

2,800 22,500

A A

2,800 22,500 $93,450

______ $52,200

______ $41,250

Assets = Liabilities + SE $93,450 = $52,200 + $41,250 c.

Beginning balance in Retained Earnings + Revenues – Expenses – Dividends declared = Ending balance in Retained Earnings $18,000 + $296,750 – $278,500 – $15,000 = $21,250

LO 4 BT: AP Difficulty: M TIME 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 1.6A a.

(All amounts are in millions of dollars)

Home Depot, Inc. [1]

Total assets = Total liabilities + Total shareholders‘ equity Total assets = $67,282 + $3,299 Total assets = $70,581

[2]

Total liabilities = Total assets – Total shareholders‘ equity Total liabilities = $71,876 – $(1,696) Total liabilities = $73,572

[3]

Shareholders‘ equity, beginning of year + Total revenues – Total expenses – Repurchase of shares – Dividends declared + Other increases in shareholders‘ equity = Shareholders‘ equity, end of year $3,299 + $151,157 – [3] – $15,001 – $6,985 + $558 = $(1,696) [3] Total expenses = $134,724

Canadian Tire [4]

Total liabilities = Total assets – Total shareholders‘ equity Total liabilities = $20,377.1 – $5,834.7 Total liabilities = $14,542.4

[5]

Total assets = Total liabilities + Total shareholders‘ equity Total assets = $15,291.4 + $6,510.8 [6] Total assets = $21,802.2

[6]

Shareholders‘ equity, beginning of year – Repurchase of shares – Dividends declared + Total revenues – Total expenses + Other increases in shareholders‘ equity = Shareholders‘ equity, end of year

$5,834.7 − $131.1 – $291.2 + $16,292.1 – $15,031.4 – $162.3 = $6,510.8

PROBLEM 1.6A (CONTINUED) b.

At the end of the most recent fiscal year, Canadian Tire financed 29.9% ($6,510.8 million ÷ $21,802.2 million) of its assets with equity and 70.1% of its assets with debt ($15,291.4 million ÷ $21,802.2 million). For the equivalent fiscal year end, Home Depot‘s financed -2.4% ($(1,696) million ÷ $71,876 million) of its assets with equity and 102.4% ($73,572 million ÷ $71,876 million) of its assets with debt. Home Depot had more liabilities than assets and negative equity financing. Home Depot is riskier because all of its assets are financed by debt.

Both retailers typically have low inventories at the end of December and at the end of January as a result of the holiday sales, with little or no new inventory purchased during the month of January so no major differences in financial position at the end of December compared to January would be anticipated. As long as there were no significant economic events that affected one company more than the other in the intervening period (January), it is unlikely that the different year-end dates would affect the comparison in b.

LO 4 BT: AN Difficulty: C TIME: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 1.7A a. ONE THINGAMAJIG CORP. Statement of Income Month Ended October 31, 2024 Revenues Service revenue Expenses Salaries expense Repair and maintenance expense Utilities expense Supplies expense Interest expense Total expenses Income before income tax Income tax expense Net income

$35,400 $4,000 5,700 2,000 2,000 3,000 16,700 18,700 1,700 $17,000

[Revenues – Expenses = Net income or (loss)]

ONE THINGAMAJIG CORP. Statement of Changes in Equity Month Ended October 31, 2024

Balance, October 1 Issued common shares Net income Dividends declared Balance, June 30

Common Shares $ 0 40,000

$40,000

Retained Earnings $ 0 17,000 (7,000) $10,000

Total Equity $ 0 40,000 17,000 (7,000) $50,000

(Beginning equity ± Changes to equity = Ending equity)

PROBLEM 1.7A (CONTINUED) a. (continued) Note to instructors: Students may list the accounts in the following statement in any order within the assets, liabilities, and shareholders‘ equity classifications as they have not yet learned how to classify/order accounts. ONE THINGAMAJIG CORP. Statement of Financial Position October 31, 2024 Assets Cash Accounts receivable Supplies Vehicles Total assets

$ 20,000 8,500 4,000 50,000 $82,500 Liabilities and Shareholders‘ Equity

Liabilities Accounts payable Bank loan payable Total liabilities Shareholders‘ equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders‘ equity

$ 8,000 24,500 32,500 40,000 10,000 50,000 $82,500

(Assets – Liabilities = Shareholders‘ equity)

PROBLEM 1.7A (CONTINUED) b.

The financial statements must be prepared in the order of (1) statement of income, (2) statement of changes in equity, and (3) statement of financial position. This is because each subsequent financial statement depends on information contained in the previous statement. The net income from the statement of income flows to the retained earnings account on the statement of changes in equity. The shareholders‘ equity totals in the statement of changes in equity (for example, for common shares and retained earnings) then flow to the shareholders‘ equity section of the statement of financial position.

LO 4 BT: AP Difficulty: M TIME: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 1.8A

Cash dividends paid Cash paid to purchase equipment Cash payments for operating activities Cash receipts from operating activities Cash received from issue of long-term debt Cash received from issue of shares

$ 10,000 35,000 120,000 140,000 20,000 20,000

Activity financing investing operating operating financing financing

b. MAISON CORPORATION Statement of Cash Flows Year Ended December 31, 2024 Operating activities Cash receipts from operating activities Cash payments for operating activities Net cash provided by operating activities

$140,000 (120,000)

Investing activities Purchase of equipment Net cash used by investing activities

$(35,000)

Financing activities Issue of long-term debt Issue of shares Payment of dividends Net cash provided by financing activities

$ 20,000 20,000 (10,000)

Net increase in cash Cash, January 1 Cash, December 31

$20,000

(35,000)

30,000 15,000 12,000 $27,000

(Cash flows from operating, investing, and financing activities = Net change in cash)

PROBLEM 1.8A (CONTINUED) c.

The company is generating less cash from operating activities (+$20,000) than it is using for its investing activities (–$35,000). The company, however, is making up for the deficiency by generating cash from financing activities. Cash from financing activities is not a renewable source of cash and usually entails future cash payments in the form of interest on debt, principal repayment, and dividend payments for shares.

LO 4 BT: AN Difficulty: M TIME: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 1.9A

a. [1]

Operating expenses = Service revenue – Income before income tax Operating expenses = $450,000 – $240,000 Operating expenses = $210,000

[2]

Income tax expense = Income before income tax - Net income [4] Income tax expense = $240,000 – $225,000 Income tax expense = $15,000

[3]

Net income (from [4]) = $225,000

[4]

Net Income = Ending retained earnings [6] + Dividends declared [5] – Beginning retained earnings Net Income = $215,000 + $10,000 - $0 Net Income = $225,000

[5]

Dividends Declared = $10,000

[6]

Ending retained earnings = Total equity – Common Shares Ending retained earnings = $515,000 - $300,000 Ending retained earnings = $215,000

[7]

Net Income [4] = $225,000 Net income can also be calculated from the total equity column from the statement of changes in equity = Ending shareholders‘ equity + Dividends declared – issued common shares – beginning shareholders‘ equity = $515,000 + $10,000 - $275,000 - $25,000 = $225,000

[8]

Buildings = Total assets – Cash – Accounts receivable – Land – Equipment Buildings = $895,000 – $25,000 – $50,000 – $280,000 – $215,000 Buildings = $325,000

[9]

Bank loan payable = Total liabilities + Accounts payable Bank loan payable = $380,000 – 80,000 Bank loan payable = $300,000

[10]

Common shares = $300,000 (from the Statement of Changes in Equity)

[11]

Retained earnings = $215,000 [6] (from the Statement of Changes in Equity)

[12]

Total shareholders' equity = Common shares + Retained earnings Total shareholders' equity = $300,000 (from [10]) + $215,000 (from [11]) Total shareholders‘ equity = $515,000 Total shareholders‘ equity is also provided in the statement of changes in equity

PROBLEM 1.9A (CONTINUED) a. (continued) [13]

(1)

Total liabilities and shareholders' equity = Total liabilities + Total shareholders equity Total liabilities and shareholders' equity = $380,000 + $515,000 (from [12]) Total liabilities and shareholders‘ equity = $895,000 Total liabilities and shareholders‘ equity is also = Total assets of $895,000 In preparing the financial statements, the first statement to be prepared is the statement of income, followed by the statement of changes in equity, and then the statement of financial position. Note to instructors: While the statements must be prepared in this sequence, these statements can be presented in a variety of orders. Often the statement of financial position is presented first, as the most ―permanent‖ statement.

(2)

The reason the statements must be prepared in the order indicated above is that each statement depends on information in the previously prepared statement. For example, the net income figure from the statement of income is used in the statement of changes in equity to calculate the ending balance of retained earnings. The shareholders‘ equity section of the statement of financial position is then completed using the ending balances of common shares and retained earnings, as calculated in the statement of changes in equity.

LO 4 BT: AN Difficulty: C TIME: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 1.10A a.

1. Remove the boat from the listing of assets since it does not belong to the corporation. Remove the boat loan payable from the listing of liabilities since this is a personal loan of Guy Gélinas. 2. Remove the $10,000 outstanding receivable from Guy‘s brother. This is not a company receivable and should not be listed on the company‘s statement of financial position. 3. Correct the Common Shares account to remove the extra amount that had been added to ―balance‖: Remove accounts receivable $10,000 Remove boat asset 24,000 Remove bank loan (40,000) Net adjustment to common shares $ 6,000 Provide separate totals for liabilities and shareholders‘ equity as the two components that are financing the assets of the company.

PROBLEM 1.10A (CONTINUED) b.

GG CORPORATION Statement of Financial Position July 31, 2024

Assets Cash Accounts receivable ($50,000 − $10,000) Inventory Total assets Liabilities and Shareholders‘ Equity Liabilities Accounts payable Total liabilities Shareholders‘ equity Common shares [$50,000 + $6,000 (from (3) above)] Retained earnings Total shareholders‘ equity Total liabilities and shareholders‘ equity

$20,000 40,000 36,000 $96,000

$34,000 34,000

56,000 6,000 62,000 $96,000

(Assets – Liabilities = Shareholders‘ equity)

(c)

As a private company, GG Corporation should also prepare a statement of income, a statement of retained earnings, and a statement of cash flows.

LO 4 BT: AN Difficulty: C TIME: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 1.1B a.

1. An investor purchasing common shares of Fight Fat Ltd. is an external user. 2. As a potential creditor, Comeau Ltée is an external user. 3. The chief financial officer is an internal user. 4. As a potential creditor, Drummond Bank is an external user.

1. In making an investment in common shares, the Ontario investor is becoming a partial owner (shareholder) of the company. In this case, the investment will be held for at least three years. The information that will be most relevant to him/her will be on the statement of income. The statement of income reports the past performance of the company in terms of its revenue, expenses, and net income. This is the best indicator of the company‘s future potential. 2. In deciding to extend credit to a new customer, Comeau would focus its attention on the new customer's statement of financial position. The terms of credit they are extending require repayment in a short period of time. Funds to repay the credit would come from current assets. The statement of financial position of the new customer will show whether the company has enough current assets to meet its current obligations. 3. In order to determine whether the company is generating enough cash to increase the amount of dividends paid to investors, the CFO of Private Label needs information on the amount of cash generated and used in various activities of the business. The statement of cash flows is the most useful statement for this purpose. This statement presents the amount of cash at the beginning and end of the period as well as the details of the amount of cash generated by operating activities and the amount spent on expanding operations (investing activities).

PROBLEM 1.1B (CONTINUED) 4. In deciding whether to extend a loan, Drummond Bank is interested in two things: the ability of the company to make its monthly interest payments for the next five years and the ability to repay the principal amount at the end of five years. In order to evaluate both of these factors the focus should be on the statement of cash flows. This statement provides information on the cash the company generates from its operating activities on an ongoing basis. This will be the most important factor in determining if the company will survive and be able to repay the principal and interest on the loan. Note to instructors: Other answers may be valid provided they are properly supported. LO 1 BT: C Difficulty: M TIME: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 1.2B a.

1. Dawn will likely operate her vegetable stand as a proprietorship because she is planning on operating it for a short time period. A proprietorship is the simplest and least costly business organization to form and dissolve. 2. Joseph and Sabra should form a private corporation when they combine their operations. A private corporation will be easier and less expensive to form than a public corporation. It will also be an easier type of organization in which to raise funds than a proprietorship or partnership. A corporation may also receive more favourable income tax treatment. 3. The professors should incorporate their business as a private corporation because of their concerns about the legal liabilities. A corporation is the only form of business that provides limited liability to its owners. 4. Abdul would likely form a public corporation because he needs to raise funds to invest in inventories and property, plant, and equipment. He has no savings or personal assets and it is normally easier to raise funds through a corporation than through a proprietorship or partnership. A public corporation will allow Abdul to raise larger amounts of funds by selling shares to the public. 5. A partnership would be the most likely form of business for Mary, Richard, and Jigme to choose. It is simpler to form than a corporation and less costly.

1. ASPE* 2. ASPE 3. ASPE 4. IFRS 5. ASPE* * proprietorships and partnerships don‘t have to follow any particular set of accounting standards although they generally follow ASPE for external financial reporting purposes.

LO 2 BT: C Difficulty: M TIME: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 1.3B

Operating

Investing

Financing

CargoJet

Payment for jet fuel

Purchase of airplanes

Issue of shares

University of Calgary Students‘ Union

Payment of salaries and benefits Payment of research expenses Payment for facilities rentals

Purchase of office equipment Purchase of other companies Purchase of equipment

Borrowing money from a bank Issue of bonds

Receipt of revenue from sales of food

Purchase of real estate to build grocery stores

Repaying money to a bank

GlaxoSmithKline

Maple Leaf Sports & Entertainment

Loblaw Companies

Payment of dividends to shareholders

Financing Issuing shares is common to all corporations. Borrowing from and repaying money to a bank is common to most companies. Payment of dividends is common to many, but not all, corporations. Issuing bonds is common to large corporations. Investing Purchasing property, plant, and equipment would be common to most companies—the types of assets would vary according to the type of business. Some types of businesses require a larger investment in longlived assets. A new business or expanding business would be more likely to engage in investing activities (for example, acquiring assets). The purchase of other companies would not be common to all companies. Operating The general activities identified above (sales and expenditures) would be common to most businesses, although the service or product might change.

LO 3 BT: C Difficulty: C TIME: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 1.4B

Accounts payable Accounts receivable Bank loan payable Buildings Cash Common shares Deferred revenue Equipment Income tax expense Income tax payable Intangible assets Interest expense Land Mortgage payable Office expense Prepaid insurance Retained earnings Salaries payable Service revenue

L A L A A SE L A E L A E A L E A SE L R

SFP SFP SFP SFP SFP SFP, SCE SFP SFP SI SFP SFP SI SFP SFP SI SFP SFP, SCE SFP SI

LO 4 BT: K Difficulty: S TIME: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 1.5B a. and b. b.

Accounts payable Accounts receivable Bank loan payable Cash Common shares Deferred revenue Equipment Income tax payable Interest payable Inventory Prepaid insurance Retained earnings Salaries payable Supplies Totals

$23,100 6,950 25,000 17,750 20,000 3,500 66,200 1,900 500 21,300 950 39,850 3,050 3,750

a. L A L A SE L A L L A A SE L A

Assets

Liabilities $23,100

Shareholders‘ Equity

$ 6,950 25,000 17,750 $ 20,000 3,500 66,200 1,900 500 21,300 950 39,850 3,750 $116,900

3,050 ______ $57,050

______ $59,850

Assets = Liabilities + Shareholders‘ equity $116,900 = $57,050 + $59,850 c.

Beginning balance in Retained Earnings + Revenues – Expenses – Dividends Declared = Ending balance in Retained Earnings $8,850 + $365,000 – $333,000 – $1,000 = $39,850

LO 4 BT: AP Difficulty: M TIME: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 1.6B a.

(All amounts are in U.S. millions of dollars) Restaurant Brands [1]

Total liabilities = Total assets – Total shareholders‘ equity Total liabilities = $22,777 – $3,721 Total liabilities = $19,056

[2]

Total shareholders' equity = Total assets – Total liabilities Total shareholders' equity = $23,246 – $19,393 Total shareholders' equity = $3,853

[3]

Shareholders‘ equity, beginning of year + Issuance of shares – Repurchase of shares – Dividends declared + Total revenues – Total expenses + Other increases in shareholders‘ equity = Shareholders‘ equity, end of year $3,721 + $12 − $551 − $[3] + $5,739 – $4,486 + $76 = $3,853 [3] Dividends declared = $658

Starbucks [4]

Total assets = Total liabilities + Total shareholders‘ equity ( - Deficit) Total assets = $37,173.9 - $7,799.4 Total assets = $29,374.5

[5]

Total assets = Total liabilities + Total shareholders‘ equity ( - Deficit) Total assets = $36,707.1 + ($5,314.5) (from [6]) Total assets = $31,392.6

[6]

Shareholders‘ equity, beginning of year + Issuance of shares – Repurchase of shares – Dividends declared + Total revenues – Total expenses + Other increases in shareholders‘ equity = Shareholders‘ equity, end of year − $7,799.4 + $42.4 - $0 − $2,697.2 + $24,607.0 – $20,406.7 + $939.4 = ($5,314.5)

PROBLEM 1.6B (CONTINUED) b.

At the end of the most recent fiscal year, all of Starbuck‘s assets were financed by debt since total liabilities of $36,707.1 exceeded total assets of $31,392.6. Starbucks had effectively no equity financing. Restaurant Brands has lower debt financing. Restaurant Brands financed 16.6% (U.S. $3,853 million ÷ U.S. $23,246 million) of its assets with equity and 83.4% of its assets with debt (U.S. $19,393 million ÷ U.S. $23,246 million). Starbucks is far riskier because more of its assets are financed by debt.

As long as there are no unusual transactions or economic events that affect one company differently than another during the intervening period of time (October through December), or at each company‘s year-end date, the differing year ends should not have a significant impact on the assessment of the financial position and performance for the two companies.

LO 4 BT: AN Difficulty: C TIME: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 1.7B a.

AERO FLYING SCHOOL LTD. Statement of Income Month Ended May 31, 2024

Revenues Service revenue Expenses Fuel expense Rent expense Office expense Salaries expense Repairs and maintenance expense Interest expense Income before income tax Income tax expense Net income

$215,300 $85,400 12,100 12,700 36,600 40,900 12,500

200,200 15,100 2,800 $ 12,300

[Revenues – Expenses = Net income or (loss)]

AERO FLYING SCHOOL LTD. Statement of Changes in Equity Month Ended May 31, 2024

Balance, May 1 Issued common shares Net income Dividends declared Balance, May 31

Common Shares $ 0 180,000

$180,000

Retained Earnings $ 0 12,300 (2,700) $9,600

Total Equity $ 0 180,000 12,300 (2,700) $189,600

(Beginning equity ± Changes to equity = Ending equity)

PROBLEM 1.7B (CONTINUED) a. (continued) Note to instructors: Students may list the accounts in the following statement in any order within the assets, liabilities, and shareholders‘ equity classifications as they have not yet learned how to classify/order accounts. AERO FLYING SCHOOL LTD. Statement of Financial Position May 31, 2024 Assets Cash Accounts receivable Supplies Equipment Total assets

$ 26,900 22,600 15,000 372,500 $ 437,000 Liabilities and Shareholders‘ Equity

Liabilities Accounts payable Bank loan payable Total liabilities Shareholders‘ equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders‘ equity

6,400 241,000 247,400

180,000 9,600 189,600 $437,000

(Assets – Liabilities = Shareholders‘ equity)

PROBLEM 1.7B (CONTINUED) b.

The financial statements must be prepared in the order of (1) statement of income, (2) statement of changes in equity, and (3) statement of financial position. This is because each subsequent financial statement depends on information contained in the previous statement. The net income from the statement of income flows to retained earnings in the statement of changes in equity. The shareholders‘ equity totals (for example, for common shares and retained earnings) in the statement of changes in equity then flow to the shareholders‘ equity section of the statement of financial position.

LO 4 BT: AP Difficulty: M TIME: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 1.8B a. Cash payments for operating activities Cash paid for equipment Repayment of long-term debt Cash dividends paid Cash receipts from operating activities

$109,000 40,000 15,000 13,000 158,000

Activity operating investing financing financing operating

b. FURLOTTE CORPORATION Statement of Cash Flows Year Ended June 30, 2024 Operating activities Cash receipts from operating activities Cash payments for operating activities Net cash provided by operating activities

$158,000 (109,000)

Investing activities Purchase of equipment Net cash used by investing activities

$(40,000)

Financing activities Repayment of long-term debt Payment of dividends Net cash used by financing activities

$(15,000) (13,000)

Net decrease in cash Cash, July 1, 2023 Cash, June 30, 2024

$49,000

(40,000)

(28,000) (19,000) 40,000 $21,000

(Cash flows from operating, investing, and financing activities = Net change in cash)

PROBLEM 1.8B (CONTINUED) c.

The company is generating sufficient cash from its operating activities ($49,000) to pay for the total of its investing activities ($40,000). However, the cash used for financing activities caused the cash balance to decline. If the company expects to continue to use cash for investing activities, it will either have to generate more cash from its operating activities or from its financing activities (for example, borrow money) as its ending cash balance will not sustain this cash outflow on its own.

LO 4 BT: AN Difficulty: M TIME: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 1.9B a.

[1]

Operating expenses = Service revenue – Income before income tax Operating expenses = $325,000 – $116,000 Operating expenses = $209,000

[2]

Net income = Income before income tax – Income tax expense Net income = $116,000 – $23,000 Net income = $93,000

[3]

Net income = $93,000 (same as [2])

[4]

Dividends declared = Beginning retained earnings + Net income – Ending retained earnings Dividends declared = $440,000 + $93,000 – $521,000 Dividends declared = $12,000

[5]

Beginning total equity = Beginning common shares + Beginning retained earnings Beginning total equity = $250,000 + $440,000 Beginning total equity = $690,000

[6]

Total common shares issued = $60,000

[7]

Net income = $93,000 (same as [3])

[8]

Dividends declared = $12,000 (same as [4])

[9]

Ending total equity = Ending common shares + Ending retained earnings Ending total equity = $310,000 + $521,000 Ending total equity = $831,000

[10]

Cash = Total assets – (Accounts receivable + Land + Buildings + Equipment)

Cash = $1,351,000 (from [11]) – ($34,000 + $310,000 + $616,000 + $364,000) Cash = $27,000 [11]

Total assets = Total liabilities and shareholders‘ equity Total assets = $1,351,000

[12]

Common shares = $310,000 (as per statement of changes in equity)

[13]

Retained earnings = $521,000 (as per statement of changes in equity)

PROBLEM 1.9B (CONTINUED) b.

(1)

In preparing the financial statements, the first statement to be prepared is the statement of income, followed by the statement of changes in equity, and then the statement of financial position. While the statements must be prepared in this sequence, these statements can be presented in a variety of orders. Often the statement of financial position is presented first, as the most ―permanent‖ statement.

(2)

The reason the statements must be prepared in the order indicated above is that each statement depends on information in the previously prepared statement. For example, the net income figure in the statement of income is used in the statement of changes in equity to calculate the ending balance of retained earnings. The shareholders‘ equity section of the statement of financial position is then completed using the ending balances of the shareholders‘ equity components (such as common shares and retained earnings) as calculated in the statement of changes in equity.

LO 4 BT: AN Difficulty: C TIME: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 1.10B a.

Remove accounts receivable from the revenue section of the statement of income since it is a current asset and does not belong on the statement of income.

Remove the $3,000 of service revenue that has not yet been earned.

Remove the $12,000 rent expense. This is not an actual transaction and cannot be listed on the company‘s statement of income.

Remove the $4,000 vacation expense. This is not a business expense but rather a personal expense of the business owner.

Deduct expenses from revenues rather than adding them. INDEPENDENT BOOK SHOP LTD. Statement of Income Year Ended March 31, 2024

Revenues Service revenue ($41,000 – $3,000) Expenses Office expense Income before income tax Income tax expense Net income

$38,000 5,000 33,000 5,000 $28,000

[Revenues – Expenses = Net income or (loss)]

As a private company, Independent Book Shop should also prepare a statement of financial position, a statement of retained earnings, and a statement of cash flows.

LO 4 BT: AN Difficulty: C TIME: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT1.1

FINANCIAL STATEMENT IMPACT

Item Common shares Service revenue Retained earnings Deferred revenue Cash payments for operating activities Dividends declared Cash Prepaid insurance Salaries expense Cash payments to purchase equipment Accounts payable Net income

Statement of Income

Statement of Changes in Equity Y

Statement of Financial Position Y

Y Y

Statement of Cash Flow

Y Y Y Y

LO 3,4 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

CT1.2

DATA VISUALIZATION CASE

a. Visual 2 is more useful to users in understanding the extent to which assets are financed with debt or equity. The line for debt shows the decline over the three-year period for the percentage of financing that is provided by debt while the equity line shows the increase in the percentage of financing that is provided by equity. The graph shows a trend of how assets are financed and the changing proportion of debt versus equity financing. b. Visual 1 is an example of a descriptive analytic as it is a restatement of the facts for the amounts of total assets, total liabilities and total equity at the end of each fiscal year in a bar graph. Visual 2 is more useful to users from a predictive perspective as the line graph shows a trend over a three-year period and a user would expect the trend to continue if the operations don‘t change in the coming years.

CT1.3

FINANCIAL REPORTING CASE

North West presents the following five financial statements: Consolidated Statement of Earnings (which we call statement of income in the chapter), Consolidated Statement of Comprehensive Income, Consolidated Balance Sheet (which we call statement of financial position), Consolidated Statement of Changes in Shareholders‘ Equity (which we call statement of changes in equity), and Consolidated Statement of Cash Flows. All the above financial statements, except the Comprehensive Income, were discussed in this chapter.

Statement

As demonstrated in the table below, North West‘s sales decreased, yet net income increased in fiscal 2022.

($ in thousands) Sales Net income (net earnings)

2022 $2,248,796 157,451

2021

Change

$2,359,239 143,560

$(110,440) 13,891

Net income is affected by revenue and expenses incurred by a company during the year. A decrease in sales does not always translate into a decrease in net income. For North West, while revenue decreased, net income increased.

c. ($ in thousands)

(1) January 31, 2022

Total assets Total liabilities Total shareholders‘ equity

$1,219,273 639,069 580,204

(2) January 31, 2021 $1,191,168 685,937 505,231

(Assets = Liabilities + Shareholders‘ equity)

CT1.3 (CONTINUED) d.

($ in thousands)

Share capital Retained earnings

January 31, 2022

$173,081 355,674

January 31, 2021

$174,213 282,088

Yes, the above balances taken from the statement of changes in equity agree with the amounts reported in the shareholders‘ equity section of the balance sheet. Note that these do not comprise all of North West‘s shareholders‘ equity. Other shareholders‘ equity items make up the remainder of the total shareholders‘ equity balances reported on both statements as shown below. ($ in thousands) Share capital Contributed surplus Retained earnings Accumulated other comprehensive income Non-controlling interest Total shareholders‘ equity

($ in thousands) Cash

January 31, 2022

January 31, 2021

$173,081 12,530 355,674

$174,213 13,394 282,088

22,350 16,569 $580,204

21,605 13,931 $505,231

January 31, 2022 $49,426

January 31, 2021 $71,536

This information can be obtained on the balance sheet (statement of financial position) or on the statement of cash flows. LO 3,4 BT: AN Difficulty: M TIME: 40 min. AACSB: Communication and Analytic CPA: cpa-t001, cpat005 CM: Reporting and Finance

CT1.4 a. and b.

FINANCIAL ANALYSIS CASE

[North West ($ in thousands)]

1. Assets Liabilities Shareholders‘ equity

2022 $1,219,273 639,069 580,204

2021 $1,191,168 685,937 505,231

% change 2.4% (6.8)% 14.8%

2. Sales Net income

2022 $2,248,796 157,451

2021 $2,359,239 143,560

% change (4.7)% 9.7%

Sobeys ($ in millions) 1. Assets Liabilities Shareholders‘ equity

2022 $15,366.1 11,245.6 4,120.5

2021 $14,088.2 10,443.0 3,645.2

% change 9.1% 7.7% 13.0%

2. Sales Net income

2022 $30,162.4 754.6

2021 $28,268.3 762.2

% change 6.7% (1.0)%

Both North West and Sobeys experienced growth in assets and shareholders‘ equity. From a profitability standpoint, North West‘s net income increased 9.7% despite a 4.7% decrease in sales which demonstrates a strong management of expenses. In the case of Sobeys, net income decreased 1.0% despite the increase of 6.7% in sales.

In 2022, Sobey‘s fiscal year (May 2, 2021 through May 7, 2022) covers the majority of the same period as North West‘s fiscal year (Feb. 1, 2021 through January 31, 2022). The same is true for their previous fiscal years. Consequently, unless there was a significant economic impact that affected the stores in the non-overlapping period of three months (February through April), I would have no concerns about the comparisons made in c. as they both cover a single fiscal year.

LO 3,4 BT: AN Difficulty: M TIME: 40 min. AACSB: Communication and Analytic CPA: cpa-t001, cpat005 CM: Reporting and Finance

CT1.5

FINANCIAL ANALYSIS CASE

Both North West and Sobeys declared dividends in the current fiscal years as revealed in their respective statement of changes in equity, as follows: North West Sobeys (in thousands) (in millions) Dividends

$70,420

$499.4

Both North West and Sobeys generated positive cash flows from their operations as revealed in their respective statement of cash flows, as follows: North West Sobeys (in thousands) (in millions) Cash from operating activities

(A)

$224,135

$2,005.5

Cash used in investing activities

(B)

75,861

769.4

295%

261%

A divided by B

Both companies are reinvesting cash from operations back into the business. c.

The financing activities section of each company‘s statement of cash flows during the 2022 fiscal year is as follows: North West Sobeys (in thousands) (in millions) Repayment of long-term debt

$85,393

$96.8

Although it appears as if Sobeys paid off debt, this is really not the case since new debt of $94.6 million was obtained. In addition, although it appears North West did repay its long-term debt, its‘ statement of cash flows presentation shows new debt was issued in the amount of $44,071 million. LO 3,4 BT: AN Difficulty: M TIME: 30 min. AACSB: Communication and Analytic CPA: cpa-t001, cpat005 CM: Reporting and Finance

CT1.6 a.

PROFESSIONAL JUDGEMENT CASE

Both public and private companies are separate legal entities owned by shareholders. One of the key differences between the two types of companies is the availability of the shares. Shares of public companies are traded on organized stock exchanges and are available to the general public. In contrast, shares of a private company are not made available to the general public, nor are they traded on a public stock exchange. Another difference is access to capital. Since public companies are traded on organized stock exchanges, they generally have more access to capital than do private companies. Private companies tend to rely upon bank financing for capital. Public and private companies also differ in terms of the amount of information they disclose publicly. Public companies are required to file financial statements with the regulators of the stock exchange. This makes their statements widely available. In contrast, private companies do not have any requirement to make their financial statements publicly available.

The key users of public company financial statements are shareholders, creditors, regulators, analysts, and the general public. In contrast, the key users of private company financial statements are generally creditors as well as private shareholders.

The key difference between the users of public and private financial statements is the different areas of emphasis of the users‘ objectives and needs when reviewing the financial statements. Users of public company financial statements can represent a wide range with varying levels of understanding about the company and its operations. They tend to be a broad group of users who benefit from detailed disclosure that will help them make the appropriate financial decision to invest or to lend, etc. On the other hand, users of private company financial statements tend to be a small group, who usually have a high degree of understanding of the company and its operations. They consist mostly of creditors and a small group of shareholders. These users tend to place a greater emphasis on liquidity, solvency, and short-term cash flow planning.

CT1.6 (CONTINUED) d.

One of the main reasons that Canada adopted IFRS is that these global set of standards will be beneficial to investors, creditors, and other financial statement users by increasing the comparability and quality of financial statements. In other words, users will be able to make an ―apples to apples‖ comparison. If Canadian public companies had a choice of which GAAP to use, then it would entirely defeat the purpose of increasing comparability among public companies.

Since most private companies in Canada are small to medium-sized businesses, the Canadian Accounting Standards Board (AcSB) decided that IFRS, with its extensive disclosure reporting requirements and sophisticated reporting, was not appropriate for most of these companies. However, since private companies can represent a wide range of companies – from large multinationals to small local restaurants, the AcSB decided it was best if private companies have a choice of which standard to adopt. A company‘s choice of which GAAP to adopt is generally driven by users‘ objectives and needs.

LO 1, BT: C Difficulty: M TIME: 30 min. AACSB: Communication CPA: cpa-t001, cpa-e003 CM: Reporting and Comm.

CT1.7

FINANCIAL ANALYSIS CASE

Note to instructors: All of the material supplementing this group activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook as well as in the Prepare and Present section of WileyPLUS. a. Divide revenue by the hourly rate charged to clients: IMS: $1,320,000 ÷ $22 per hour = 60,000 hours PCS: $900,000 ÷ $30 per hour = 30,000 hours b. Knowing the hours worked from the above, we can derive the hourly salary by dividing total salary expense for each company by the hours worked as follows: IMS: $900,000 ÷ 60,000 hours = $15 per hour PCS: $480,000 ÷ 30,000 hours = $16 per hour c. IMS uses larger facilities because its rent expense is higher. This makes sense because they have larger types of cleaning equipment that will need to be stored. Furthermore, the company has a larger staff given the size of its operations and may need more office space. d. PCS has higher other operating expenses because that company owns and operates vehicles. e. Given that both companies pay interest at the same rate, IMS has the larger bank loan because its interest expense is higher. f. The most significant factor that makes PCS more profitable is the fact that this company charges its clients an hourly rate that is almost double the hourly wage rate paid to its employees. IMS is not able to charge its clients at double the wage rate. LO 4 BT: AN Difficulty: M TIME20 min. AACSB: Communication and Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT1.8

ETHICS CASE

The stakeholders in this situation are the new CEO and CFO, and the creditors and investors who rely on the financial statements to make business decisions.

The CEO and CFO should not sign the certification until they have taken steps to assure themselves that the most recent reports accurately and completely reflect the activities of the business. However, as the current management of the company, they cannot refuse to sign the certification just because they are new. They are the management team now and must assume the responsibilities that go with these positions.

The CEO and CFO have no alternative other than to take the steps necessary to assure themselves of the accuracy and completeness of the financial information, and, if accurate, sign the certification. If the information is not accurate or complete, they need to make the required corrections to the financial information. The company may need to delay issuing its financial statements.

LO 1 BT: E Difficulty: M TIME15 min. AACSB: Communication and Ethics CPA: cpa-t001, cpa-e001 CM: Reporting and Ethics

CT1.9 SERIAL CASE a.

Compu-Tech Consulting is a proprietorship. A proprietorship has the advantage of lower administrative costs than a corporation—fewer regulations and procedures to adhere to. Emily may also have more flexibility in working for herself (or less depending on the demands of the business). In addition, as a separate proprietorship, all of the income of the business belongs to Emily. However, the disadvantage of a proprietorship is that Emily has personal and unlimited liability for the debts of the business. She may also have difficulty in raising capital to grow the business. Anthony Business Company Ltd. (ABC) is a private corporation. It has the advantage of limited liability for the shareholders‘ investments in the business compared to a proprietorship. However, this advantage may be negated by a demand from creditors (such as the bank) for a personal guarantee by the shareholders. Another disadvantage is that if net income is distributed by declaring dividends, it must be shared with all shareholders in proportion to their shareholdings. More regulations and paperwork are required for a corporation compared to that of a proprietorship; however, more opportunities exist to share the administrative burdens and to grow the business.

Given its current size, Compu-Tech Consulting likely has no requirements to produce financial statements used by external creditors. It could choose to follow Accounting Standards for Private Enterprises (ASPE) if it was required to produce financial statements. Anthony Business Company Ltd. would most likely use Accounting Standards for Private Enterprises (ASPE) but could also, if it wished, choose to use International Financial Reporting Standards (IFRS). We will assume the former for the purpose of this case.

CT1.9 (CONTINUED) c.

Emily will need information on the revenues and cost of the services performed so she can determine if new contracts are profitable. She will need this information more often initially (for example, on a weekly basis) so she can monitor the results of the contracts and their impact on the operations of the company. She will also need forecasts of future services to plan the work, estimate staffing and other costs, and determine delivery schedules. Emily would also find financial statements useful to better understand ABC‘s business and identify financial issues as early as possible. Monthly financial statements would be best as the more timely the information is, the more useful it is for managing the business.

The users of ABC‘s accounting information include the existing shareholders (Emily‘s parents), potential shareholders such as Emily, creditors such as the bank, and taxing authorities such as the CRA. Emily‘s parents are internal users and they need accounting information to plan, organize, and run the company and determine if they can obtain the financing to meet the increased demand. Emily needs accounting information to determine if her parents‘ business is a sound investment for her and what her responsibilities as administrator would be. Creditors and taxing authorities are external users. The bank and the CRA require financial statements—statement of income, statement of retained earnings (since it is assumed that ABC follows ASPE; however, if it follows IFRS then it would be required to prepare a statement of changes in equity), statement of financial position, statement of cash flows, in addition to accompanying notes to the financial statements—to assess the financial health of the company.

CT1.9 (CONTINUED) e.

The following are examples of activities that ABC is likely to be engaged in: Operating activities include cash collection from revenue generated from providing business services. Cash payments would be made for products, accessories, supplies, salaries, utilities, and interest on bank loans. Investing activities include the purchase of equipment or the sale of used equipment no longer in use. Financing activities include borrowing money from the bank (debt) and paying dividends to shareholders (equity).

LO 1,3 BT: C Difficulty: M TIME: 50 min. AACSB: Comm. CPA: cpa-t001 CM: Reporting

Legal Notice

Copyright © 2023 by John Wiley & Sons Canada, Ltd. or related companies. All rights reserved. The data contained in these files are protected by copyright. This manual is furnished under licence and may be used only in accordance with the terms of such licence. The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified, made available on a network, used to create derivative works, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of John Wiley & Sons Canada, Ltd. MMXXIII iii F1

CHAPTER 2 A FURTHER LOOK AT FINANCIAL STATEMENTS LEARNING OBJECTIVES 1. Identify the sections of a classified statement of financial position. 2. Identify and calculate ratios for analyzing a company‘s liquidity, solvency, and profitability. 3. Describe the framework for the preparation and presentation of financial statements.

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item LO

BT Item LO

BT Item LO BT Item LO Questions

BT Item LO BT

15.

22.

29.

16.

23.

30.

10.

17.

24.

31.

4. 5.

11.

18.

25.

32.

12.

19.

26.

33.

13.

20.

27.

34.

14.

21.

28.

35.

Brief Exercises 1.

10.

11.

12.

Exercises 1.

10.

Problems: Set A and B 1.

10.

Cases 1.

1,2

2,3

Legend: The following abbreviations will appear throughout the solutions manual file. LO

Learning objective

Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation

Difficulty:

Level of difficulty S Simple M Moderate C Complex

Time:

Estimated time to complete in minutes

AACSB

Association to Advance Collegiate Schools of Business Communication Communication Ethics Ethics Analytic Analytic Technology Tech. Diversity Diversity Reflec. Thinking Reflective Thinking

CPA CM

CPA Canada Competency Map Ethics Professional and Ethical Behaviour PS and DM Problem-Solving and Decision-Making Comm. Communication Self-Mgt. Self-Management Team & Lead Teamwork and Leadership Reporting Financial Reporting Stat. & Gov. Strategy and Governance Mgt. Accounting Management Accounting Audit Audit and Assurance Finance Finance Tax Taxation

cpa-e001 cpa-e002 cpa-e003 cpa-e004 cpa-e005 cpa-t001 cpa-t002 cpa-t003 cpa-t004 cpa-t005 cpa-t006

ANSWERS TO QUESTIONS 1.

(a)

Current assets are assets that are expected to be converted into cash, sold, or used up within one year of the company‘s financial statement date or its operating cycle, whichever is longer.

(b)

Examples of current assets include cash, accounts receivable, inventory, and supplies. Current assets are listed in order of liquidity in the current asset section of the statement of financial position.

LO 1 BT: K Difficulty: S Time: 3 min. AACSB: None CPA: cpa.t001 CM: Reporting

The term operating cycle stands for the average time it takes to go from cash to cash in producing revenue. In a merchandising business, this means the time it takes to purchase inventory on account, pay cash to suppliers, sell the inventory on account, and then collect cash from customers. In a service business, it stands for the time it takes to pay employees, provide services on account, and then collect the cash from customers. An operating cycle can be longer than one year. For example, for a shipyard that builds an ocean liner, the time it takes for the completion of the building of the ship may be years. In this case, the operating cycle would be the length of time it takes for the completion of the project. When solving problems taken from the text, we assume that the operating cycle is less than one year.

LO 1 BT: C Difficulty: M Time: 3 min. AACSB: None CPA: cpa.t001 CM: Reporting

(a)

Current assets are assets that are expected to be converted into cash, sold, or used up within one year of the company‘s financial statement date or its operating cycle, whichever is longer. Noncurrent assets are assets that are not expected to be converted into cash, sold, or used up by the business within one year of the financial statement date or its operating cycle. In other words, noncurrent assets are all assets that are not classified as current assets.

(b)

Current assets are assets that are expected to be converted into cash, sold, or used up within one year of the company‘s financial statement date or its operating cycle, whichever is longer. Current liabilities are obligations that are to be paid or settled within one year of the company‘s financial statement date or its operating cycle, whichever is longer. Ideally, current assets will exceed current liabilities for a company.

Showing items as current in nature matters because doing so assists the user of the financial statements to assess the business‘s liquidity. LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

(a)

Current liabilities are obligations that are to be paid or settled within one year of the company‘s financial statement date or its operating cycle, whichever is longer.

(b)

Examples of current liabilities include bank indebtedness, accounts payable, accrued liabilities, and current maturities of long-term debt. Current liabilities are listed in the order in which they are expected to be paid, in the current liability section of the statement of financial position.

LO 1 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

(a)

Current liabilities are obligations that are to be paid or settled within one year of the company‘s financial statement date or its operating cycle, whichever is longer. Non-current liabilities are obligations that are expected to be paid or settled after one year or its operating cycle, whichever is longer. In other words, noncurrent liabilities are all liabilities that are not classified as current liabilities.

(b)

Some liabilities, such as bank loans, appear on the statement of financial position with a current and non-current portion. Included in the balance of the bank loan payable are principal payments that will be due in the next year. That amount must be shown as a current liability as at the company‘s financial statement date. The remaining principal balance is classified as a non-current liability.

LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa.t001 CM: Reporting

(a)

Contra accounts are accounts that offset the account to which they relate. Contra accounts serve to keep track of and disclose the amount of the reduction to the balance of the related account and arrive at its carrying amount. An example is accumulated depreciation, which is offset against the related asset account to arrive at the asset‘s carrying amount.

(b)

In the case of property, plant, and equipment, users find it useful to know the historical cost of assets as well as the cumulative amount of depreciation (contra account called accumulated depreciation) that has been recorded to date on them. The difference between cost and accumulated depreciation is referred to as the carrying amount, also commonly known as net book value or just simply book value.

LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa.t001 CM: Reporting

Current assets and liabilities are listed in the statement of financial position in the order in which they are expected to be converted into cash, sold or used up in the case of assets and paid or settled, in the case of liabilities; that is, in their order of liquidity. Liquidity is enhanced when an asset can be converted to cash more quickly than another asset. In the case of liabilities, some liabilities will be paid more quickly than others and so they would be deemed to be more liquid. Other assets are listed in the order of permanency. Long-term assets, such as property, plant, and equipment, are usually presented in order of permanence, with the most permanent (land) being presented first.

LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa.t001 CM: Reporting

(a)

The two components of shareholders' equity and the purpose of each are: (1) Share capital is used to record investments of assets, i.e. cash, in the business by the owners (shareholders). If there is only one class of shares, it is known as common shares. (2) Retained earnings is used to record accumulated profit, net of any losses and dividends declared, retained in the company.

(b)

Under ASPE, the ending balances of share capital and retained earnings would appear on the statement of financial position and the ending balance of retained earnings would also appear on the statement of retained earnings. Under IFRS, the presentation on the statement of financial position would be the same, and both share capital and retained earnings would appear on the statement of changes in shareholders‘ equity.

LO 1 BT: K Difficulty: M Time: 10 min. AACSB: None CPA: cpa.t001 CM: Reporting

Data analytics is the process of analyzing enormous amounts of data to find patterns and correlations, trends, and other valuable insights to enhance decision-making. Big Data refers to a situation where the volume, velocity, and variety of data require cost-effective, innovative forms of information processing in order to provide useful information.

LO 2 BT: K Difficulty: M Time: 10 min. AACSB: None CPA: cpa.t001 CM: Reporting

10.

Examples of large amount of data available to businesses include customer credit history, customer demographics, and customer on-line activity.

LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

11.

(a)

Variety refers to the many different types of data that Walmart records with more than 1 million customer transactions every hour. Data collected includes the items purchased, customer information, method of payment, online activity records, and store location.

(b)

With this information, Walmart would be better able to decide which items to stock in a particular store, how the economy is doing in different parts of the country, where to expand and so on.

LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

12.

Intracompany ratio comparisons compare elements and ratios within the same financial statements (example, current assets and current liabilities) or between the statement of income and the statement of financial position (example, basic earnings per share) from the same company. Intracompany ratio comparisons can also involve comparing elements or ratios in two or more accounting periods for the same company. Intercompany ratio comparisons compare elements or ratio results between different companies.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

13.

(a)

Liquidity ratios measure a company‘s short-term ability to pay its current liabilities and meet its unexpected needs for cash. Examples of liquidity ratios include working capital and current ratios.

(b)

Solvency ratios measure a company‘s ability to survive over a long period of time. An example of a solvency ratio is the debt to total assets ratio.

(c)

Profitability ratios measure a company‘s operating success for a given period of time. Examples of profitability ratios include basic earnings per share and the price-earnings ratio.

LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

14.

(a)

Working capital is arrived at by deducting current liabilities from current assets.

(b)

Positive working capital means that there are more current assets than current liabilities. Whenever there is positive working capital, the current ratio is greater than 1:1.

(c)

Having positive working capital does not mean that a company has enough cash to operate. It could mean the company has significant accounts receivable or inventory. The working capital may be a very large amount and yet the company may have no cash as it is instead borrowing all of the necessary cash from the bank to make day-to-day payments to suppliers and employees.

LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

15.

The current ratio is a better measure of liquidity than working capital when making comparisons between different businesses. The amount of working capital is an absolute amount. It could vary tremendously depending on the size of the operations of the business. The current ratio on the other hand presents a relationship of current assets to current liabilities and is therefore appropriate as a tool to compare the liquidity of different sized businesses.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

16.

Current assets include accounts receivable and inventory. These may have increasing balances because of uncollectible receivables or slowmoving inventory. This would cause the current ratio to increase. Even though the current ratio may seem high, it is an artificial measure of liquidity if receivables and inventory cannot be easily or quickly converted into cash. Consequently, the current ratio alone does not provide a complete assessment of liquidity.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

17.

Dong Corporation is more solvent as only 45% of its assets are financed by debt whereas 55% of Du's assets are financed by debt. A company carrying a higher proportion of debt has an increased likelihood of encountering financial difficulties and is therefore considered less solvent.

LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

18.

Raising money using debt increases a company‘s level of risk compared to raising money through equity because the terms of repayment of debt require cash outflows for the payment of interest and repayment of principal. These payments tap into cash balances and could hurt the company‘s liquidity. In contrast to debt, equity does not have to be repaid.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

19.

Basic earnings per share comparisons among different companies are difficult due to variations in the financing structure of the companies and in the number of shares issued. Hence, there is no industry average for basic earnings per share. On the other hand, since the price-earnings ratio uses basic earnings per share relative to the market price of the common shares, the ratio can be compared among companies.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

20.

Investors appear to favour TD Bank. Its higher price-earnings ratio indicates that investors are willing to pay proportionately more for TD's shares and have more favourable expectations of future growth.

LO 2 BT: K Difficulty: S Time: 5 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

21.

Increases in the basic earnings per share, price-earnings ratio, and current ratio are considered to be signs of improvement because: 

An increase in the basic earnings per share means that the amount of net income per share is greater than in the previous period.



An increase in the price-earnings ratio means that the share price has increased at a greater rate than the company‘s basic earnings per share, which implies the market believes future net income will continue to increase.



An increase in the current ratio indicates that the company has more current assets available to settle its current liabilities and is more liquid (assuming the components of current assets (e.g., receivables and inventory) are also liquid.

On the other hand, the debt to total assets ratio measures how much of the company is financed by debt. The more debt a company has, the higher the debt to total assets ratio. A company with a higher debt level has increased financial risk due to higher fixed interest and principal repayments, and is less solvent than a company with a lower level of debt. An increase in the debt to total assets ratio might be considered a positive event in the case where the additional debt is long-term and was obtained to increase an investment in the productive capacity of the business (such as an expansion) without being overly risky (such as where the company has a good record of profitability and of ability to service the debt). LO 2 BT: C Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

22.

(a)

The debt to assets ratio indicates the company‘s ability to repay the face value of the debt at maturity and make periodic interest payments.

(b)

The current ratio and working capital indicate a company‘s liquidity and short-term debt-paying ability.

(c)

Earnings per share and price-earnings ratio. Earnings per share indicates the earning power (profitability) of an investment and the price-earnings ratio indicates investors‘ perception of the company‘s earning potential in the future.

LO 2 BT: C Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

23.

(a)

The conceptual framework is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards. The framework prescribes the nature, function, and limits of financial accounting statements. It guides choices about what to present in financial statements, decisions about alternative ways of reporting economic events, and the selection of appropriate ways of communicating such information.

(b)

The conceptual framework under IFRS and ASPE are fundamentally similar so that public companies reporting under IFRS and private companies reporting under ASPE use the same framework.

LO 3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa.t001 CM: Reporting

24.

(a)

The primary objective of financial reporting is to provide information useful to existing and potential investors and creditors in making decisions about providing resources to the company.

(b)

The main users of financial reporting are investors and creditors.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

25.

Stewardship stands for the management of a business‘ assets. Shareholders often delegate the management of a business to employees. It is important to users of financial information that a business have good stewardship to ensure that the highest return on investment is realized for investors and that risk is lowered for the providers of debt.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

26.

The going concern assumption states that the business will remain in operation for the foreseeable future. The timing of when assets will be converted to cash or used in operations and when liabilities are to be paid determines their classification on the statement of financial position. Since the business is expected to remain in operation for the foreseeable future, these elements can continue to be reported in accordance with their respective current or non-current classifications. If the company were about to be shut down, all of its assets and liabilities would be classified as current.

LO 3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa.t001 CM: Reporting

27.

The fundamental qualitative characteristics are (1) relevance and (2) faithful representation. Relevant information will impact a user‘s decision by having predictive value, confirmatory value, or both. Faithful representation means that the financial statements should reflect the economic reality of what really exists or has happened. The information must be complete, neutral, and free from material error.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

28.

Enhancing qualitative characteristics make useful financial information more useful (i.e. they enhance its usefulness). To be useful, financial information must reflect the two fundamental qualitative characteristics of relevance and faithful representation. Enhancing characteristics bring more specific support to the objectives achieved by using the fundamental qualitative characteristics. Enhancing qualitative characteristics include comparability, verifiability, timeliness and understandability. Enhancing qualitative characteristics cannot enhance the usefulness of financial information that is not useful (i.e. information which does not reflect the fundamental qualitative characteristics).

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

29.

Materiality is related to relevance in that they are both defined in terms of what influences or makes a difference to the decision-maker. In order to be relevant to a financial statement user, a transaction, a narrative explanation in the notes to the financial statements, or an amount reported for an element must make a difference to the user in the making of a decision. An item is considered to be material if its omission or misstatement could influence the decision.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

30.

Neutrality is achieved by exercising prudence. Prudence means exercising caution when making judgements. It does not mean being overly conservative when making a judgement. Often estimates need to be arrived at in the measurement of financial statement elements. A fair and neutral approach should be used in arriving at estimates. There should be no bias in interpreting the facts of a situation to arrive at a prudent, yet realistic estimate.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

31.

The four enhancing qualitative characteristics are (1) comparability, (2) verifiability, (3) timeliness, and (4) understandability. There is no prescribed order in applying these characteristics. Company information is more useful when it can be compared over time or to information from other companies. If information is verifiable, it can be relied on more than information that is less verifiable. Information that is presented in a timely fashion is more useful than information that is less current. Information that can be understood by persons with a reasonable knowledge of business is more useful than information that is not as understandable.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

32.

The cost constraint means that information will be presented only when the benefit associated with it exceeds the cost of obtaining and providing it. In attempting to fulfill a completeness objective when obtaining financial information, one could expend considerable resources. The cost of this search may greatly outweigh any benefit in achieving the completeness objective. Consequently, the search for completeness will be restricted by this constraint.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

33.

The elements of financial statements are broad categories or classes of financial statement effects of transactions and other events. They include assets, liabilities, equity, income (which includes revenues and gains), and expenses (which include losses). The grouping is selected in accordance with the economic characteristics of the transactions.

LO 3 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

34.

The two bases are historical cost and fair value. The fair value basis of accounting is applied to those assets that are intended to be sold and whose fair value is readily available. Securities traded on the stock exchanges would be a good example of assets reported at their fair value. The historical cost basis of accounting is used for most of the remaining assets used by the business. Since in most cases the intention is to use the assets to earn revenue, the fair value of the asset is not as relevant as its historical cost.

LO 3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa.t001 CM: Reporting

35.

In order to be relevant for decision making, the measurement of elements of financial statements need to reflect amounts that are reliable. For assets that are intended to be sold, the fair value of the assets becomes the most relevant measurement as it approximates the current amount of cash that could be obtained on the sale of the asset. On the other hand, for assets held for use by the corporation, the value at resale is not as relevant to the financial statement user. In that case, the historical cost of the assets is the better measurement for reporting the financial statement element. An example of a revenue generating asset is land used for a parking lot. It is relevant to compare the actual cost of the land to the amount of the revenue generated from its use. Using the historical cost basis of accounting gives a faithful representation to the financial statement users.

LO 3 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa.t001 CM: Reporting

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 2.1 a. b. c. d. e. f.

5 1 3 3 1 7

Accounts payable Accounts receivable Accumulated depreciation Buildings Cash Common shares

i. j. k. l. m. n.

8 5 1 3 2 6

Current portion of mortgage payable Deferred revenue

Dividends declared Income tax payable Inventory Land Long-term investments Mortgage payable, due in 20 years Patents

p. q.

1 1

Prepaid insurance Supplies

LO 1 BT: K Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 2.2 a. b. c. d.

4 2 4 5

Accounts payable Accumulated depreciation Bank indebtedness Bank loan payable, due

e. f. g. h.

1 6 4 2

Cash Common shares Deferred revenue Equipment

i. 3 Goodwill j. 1 Interest receivable k. 1 Inventory l. 1 Notes receivable, due in six in three years months m. 1 Prepaid rent n. 6 Retained earnings o. 4 Salaries payable p. 1 Supplies q. 1 Trading investments

LO 1 BT: K Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 2.3 SHUM CORPORATION Statement of Financial Position (Partial) Assets Current assets Cash Accounts receivable Inventory Supplies Prepaid insurance Total current assets Property, plant, and equipment Buildings Less: Accumulated depreciation—buildings Equipment Less: Accumulated depreciation—equipment Total property, plant, and equipment Total assets

$16,400 14,500 9,000 4,200 3,900 48,000 Land $110,000 33,000 $70,000 25,000

77,000 45,000 187,000 $235,000

(Assets = Liabilities + Shareholders‘ equity) LO 1 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 2.4 HIRJIKAKA INC. Statement of Financial Position (Partial) Current liabilities Accounts payable Salaries payable Interest payable Income tax payable Deferred revenue Current portion of mortgage payable Total current liabilities

$22,500 3,900 5,200 6,400 900 5,000 $43,900

LO 1 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 2.5 MOOSE JAW TRUCKS LTD. Statement of Financial Position December 31, 2024 Assets Current assets Non-current assets ($50,000 x 3) Total assets

$ 50,000 150,000 $200,000

Liabilities and Shareholders‘ Equity Current liabilities ($50,000 x 60%) Non-current liabilities ($30,000 x 3) Total liabilities Shareholders' equity Common shares Retained earnings (to balance) Total shareholders‘ equity Total liabilities and shareholders' equity

$30,000 90,000 120,000 $ 60,000 20,000 80,000 $200,000

LO 1 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 2.6 a.

($ in thousands) 2021

2020

Working capital:

$302,232 – $129,926 = $172,306

$289,609 – $168,825 = $120,784

Current Assets – Current Liabilities

Current ratio: Current ratio:

$302,232 $129,926

= 2.3:1

$289,609 $168,825

= 1.7:1

Current Assets Current Liabilities

The working capital increased in 2021 and the current ratio also increased. Rogers Sugar's liquidity is stronger in 2021 compared with 2020.

LO 2 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

BRIEF EXERCISE 2.7 a.

(in $ thousands) 2021 Debt to total assets ratio: ($552,347 + $2,083,907) = 68.4% ($398,975 + $3,457,642)

2020 Debt to total assets ratio: ($549,340 + $2,373,123) = 73.6% ($360,597 + $3,610,285)

Total Liabilities Total Assets

The company‘s solvency was stronger in 2021 compared with 2020 because total debt has decreased as a proportion of total assets.

LO 2 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

BRIEF EXERCISE 2.8 a. 2024

2023

Current ratio:

($15,000 + $104,000 + $121,000) $120,000 $240,0001 $120,000

($44,000 + $71,000 + $87,000) = $118,000 $202,0002 $118,000

= 2.0:1

= 1.7:1

Current Assets Current Liabilities

2024

2023

Debt to total assets ratio: ($120,000 + $300,000) ($240,0001 + $500,000)

= 56.8%

Debt to total assets ratio: ($118,000 + $200,000) ($202,0002 + $476,000)

= 46.9%

Total Liabilities Total Assets

The liquidity has improved and the solvency has deteriorated in 2024 for Oshawa Industries Ltd. One possible reason for this trend is that new long-term debt of $100,000 was added during 2024 which helped in financing the additional accounts receivable and inventory, thereby increasing the current ratio. Another explanation for the increase in the liquidity is that accounts payable increased modestly in 2024 while accounts receivable and inventory increased substantially.

LO 2 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

BRIEF EXERCISE 2.9 a.

($ in millions) 2021

2020

Basic earnings per share:

$44,804 43,483

= $1.03 per share

$101,619 42,929

= $2.37 per share

Income available to common shareholders Weighted average number of common shares

Price-earnings ratio: $41.67 $1.03

= 40.5 times

Price-earnings ratio: $26.21 $2.37

= 11.1 times

Market price per share Basic earnings per share

The large decrease in income available to common shareholders and in the basic earnings per share during the year would indicate that profitability has deteriorated in 2021. In spite of the decrease in income available to common shareholders, investors appear to have more confidence in Laurentian Bank of Canada‘s future income as indicated by the substantial increase in the price-earnings ratio in 2021.

LO 2 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

BRIEF EXERCISE 2.10 a. b. c. d. e. f.

Faithful representation Verifiability Understandability Cost Going concern Fair value

LO 3 BT: K Difficulty: M Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 2.11 a. b. c. d. e. f. g. h. i. j. k. l. m.

10 5 13 8 12 9 1 2 4 3 11 6 7

LO 3 BT: C Difficulty: C Time: 15 min. AACSB: None CPA: cpa.t001 CM: Reporting

BRIEF EXERCISE 2.12 a.

Sosa Ltd. has purchased the land for sale and not for use. The fair value of the land becomes the more relevant measurement as it approximates the current amount of cash that could be obtained on the sale of the asset.

Mohawk has purchased land for use and not for sale. The fair value is not as relevant to the financial statement user in this case. The historical cost of the land is the better measurement for reporting the land on the statement of financial position.

LO 3 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa.t001 CM: Reporting

SOLUTIONS TO EXERCISES EXERCISE 2.1 a. 5 b. 1 c. 3 d. 3 e. 7 f. 5 g. 5 h. 4 i. 5 j. 1 k. 1 l. 3 m. 6 n. 1

Accounts payable and accrued liabilities Accounts receivable Accumulated depreciation Buildings and leasehold improvements Common shares Current portion of long-term debt Dividends payable Patents Income and other taxes payable Income and other taxes receivable Inventories Land Long-term debt Prepaid expenses

LO 1 BT: K Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

EXERCISE 2.2 a. BUHLER INDUSTRIES INC. Statement of Financial Position (partial) September 30, 2021 (in thousands) Assets Current assets Accounts receivable $ 33,142 Income tax receivable 263 Inventory 156,406 Prepaid expenses 5,259 Total current assets Long-term investments Long-term other receivables and other assets $ 8,247 Investments 6,254 Property, plant, and equipment Land $ 2,281 Buildings $26,610 Less: Accumulated depreciation 19,737 6,873 Equipment $58,410 Less: Accumulated depreciation 54,139 4,271 Computer equipment $ 7,229 Less: Accumulated depreciation 6,426 803 Total property, plant, and equipment Total assets

$ 195,070

14,501

14,228 $223,799

b. Buhler Inc. does not report any cash as it is operating with a negative bank balance likely covered by a line of credit which would be reported as bank indebtedness in current liabilities on the statement of financial position. LO 1 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

EXERCISE 2.3 TRANSCONTINENTAL INC. Statement of Financial Position (partial) October 31, 2021 (in millions) Liabilities and Shareholders' Equity Current liabilities Accounts payable and accrued liabilities Income taxes payable Deferred revenue Current portion of lease liabilities Current portion of long-term debt Total current liabilities Non-current liabilities Long-term debt Lease liabilities Deferred income tax Other long-term liabilities Total non-current liabilities Total liabilities Shareholders' equity Common shares Retained earnings Accumulated other comprehensive income (loss) Total shareholders‘ equity Total liabilities and shareholders' equity

$ 439.2 28.9 12.3 23.1 187.3 $ 690.8 $ 778.2 137.3 137.3 105.0 1,157.8 1,848.6 $ 640.0 1,159.5 ( 41.3) 1,758.2 $3,606.8

LO 1 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

EXERCISE 2.4 a.

Net income

= Revenues – Expenses = $183,040 – $158,680– $4,550 – $5,200 = $14,610

Retained earnings = Beginning retained earnings + Net income – Dividends declared = $116,520 + $14,610 – $0 = $131,130 b.

SUMMIT LTD. Statement of Financial Position December 31, 2024 Assets

Current assets Cash Accounts receivable Supplies Prepaid insurance Total current assets Long-term investments Property, plant, and equipment Land Buildings $133,800 Less: Accumulated depreciation 50,600 Equipment $ 66,100 Less: Accumulated depreciation 21,470 Total property, plant, and equipment Total assets

$ 24,040 20,780 1,240 1,420 $47,480 28,970 $194,000 83,200 44,630 321,830 $398,280

Liabilities and Shareholders' Equity Current liabilities Accounts payable Interest payable Current portion of mortgage payable Total current liabilities Mortgage payable ($104,000 – $30,500) Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders' equity

$21,050 2,100 30,500 $ 53,650 73,500 127,150 $140,000 131,130 271,130 $398,280

LO 1 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting Solutions Manual 3-103 Chapter 3 Copyright © 2023 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

EXERCISE 2.5 BATRA CORPORATION Statement of Income Year Ended July 31, 2024 Revenues Service revenue Rent income Total revenues Expenses Salaries expense Operating expenses Rent expense Depreciation expense Utilities expense Interest expense Supplies expense Total expenses Income before income tax Income tax expense Net Income

$113,600 18,500 132,100 $44,700 32,500 10,800 3,000 2,600 2,000 900 96,500 35,600 5,000 $30,600

[Revenues – Expenses = Net income or (loss)]

BATRA CORPORATION Statement of Changes in Equity Year Ended July 31, 2024

Balance, August 1, 2023 Issued common shares Net income Dividends declared Balance, July 31, 2024

Common Shares

Retained Earnings

$ 15,000 10,000

$17,940

000 000 $25,000

30,600 (12,000) $36,540

Total Equity $32,940 10,000 30,600 (12,000) $61,540

[Ending retained earnings = Beginning retained earnings ± Net income or (loss) – dividends declared]

EXERCISE 2.5 (CONTINUED) BATRA CORPORATION Statement of Financial Position July 31, 2024 Assets Current assets Cash Trading investments Accounts receivable Supplies Total current assets Property, plant, and equipment Equipment Less: Accumulated depreciation Total property, plant, and equipment Total assets

$ 5,060 20,000 17,100 1,500 $ 43,660 $62,900 6,000 56,900 $100,560

Liabilities and Shareholders' Equity Current liabilities Accounts payable Interest payable Deferred revenue Bank loan payable Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders' equity

$ 4,220 1,000 12,000 21,800 $ 39,020 $25,000 36,540 61,540 $100,560

(Assets = Liabilities + Shareholders‘ equity) LO 1 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

EXERCISE 2.6 a.

Current ratio: $60,000 $40,000

= 1.5:1

Current Assets Current Liabilities

Current ratio: ($60,000 – $20,000) = 2.0:1 ($40,000 – $20,000)

The request of the CFO to pay off an accounts payable ahead of the due date is clearly done to manipulate the current ratio. Her instructions to make the payment came after she was presented with the calculation of the current ratio. In this case the current ratio that is meant to show Padilla‘s liquidity position has been altered by a simple payment on account. That said, it is not unethical to pay an account payable in advance of its due date.

LO 2 BT: E Difficulty: M Time: 15 min. AACSB: Analytic and Ethics CPA: cpa.e001, cpa.t001 and cpa.t005 CM: Reporting

EXERCISE 2.7 a.

(in thousands) 2021

2020

Working capital: $1,447.2 – $463.6 = $983.6

Working capital: $1,544.4 – $359.6 = $1,184.8

Current Assets – Current Liabilities

Current ratio: $1,447.2 $463.6

= 3.1:1

$1,544.4 $359.6

= 4.3:1

Current Assets Current Liabilities

Debt to total assets ratio: ($463.6 + $753.7) ($1,447.2 + $1,689.4)

= 38.8%

($359.6 + $1,102.4) ($1,544.4 + $1,476.5)

= 48.4%

Total Liabilities Total Assets

Gildan‘s liquidity deteriorated in 2021 when compared to 2020, while remaining strong. Its solvency improved and also remained strong.

EXERCISE 2.7 (CONTINUED) c. 2021

Working capital (in thousands) Current ratio Debt to total assets ratio

Gildan

Aritzia

Canada Goose

$983.6 3.1:1 38.8%

$106.1 1.4:1 68.4%

$634.8 3.4:1 60.2%

n/a 1.8 :1 22.8%

Industry

2020

Working capital (thousands) Current ratio Debt to total assets ratio

Gildan

Aritzia

Canada Goose

Industry

$1,184.8 4.3:1 48.4%

$77.6 1.5:1 68.0%

$322.9 2.5:1 53.6%

n/a 1.4:1 21.6%

Based on working capital and the current ratio, Aritzia‘s liquidity for 2021 and 2020 is the worst (lowest) of the three companies, as the current ratio is below that of Gildan and Canada Goose. Aritzia‘s current ratio is below industry average in 2021, but is slightly above in 2020. In 2021, Aritzia and Canada Goose improved working capital while Gildan‘s declined. Both the working capital and current ratios deteriorated for Gildan. The industry average current ratio also improved. Based on the debt to total assets ratio, Gildan‘s solvency is the best (lowest) of the three companies but worse than the industry average. Canada Goose and Aritzia‘s solvency deteriorated. Aritzia‘s solvency is the worst of the three companies. LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

EXERCISE 2.8 a.

(in millions) 2021

2020

Basic earnings per share:

$625.6 409.8

$582.8 400.3

= $1.53 per share

= $1.46 per share

Income available to common shareholders Weighted average number of common shares

Price-earnings ratio: $37.79 $1.53

= 24.7 times

Price-earnings ratio: $33.84 $1.46

= 23.2 times

Market price per share Basic earnings per share

The increase in the basic earnings per share during the year would indicate that profitability has improved in 2021.

Saputo's income rose by 7.3% in 2021. On a per share basis, earnings per share increased by 4.8% because there were more shares outstanding. Since earning per share is the denominator in the priceearnings ratio, one would expect the price-earnings ratio to decline. Instead, the price-earnings ratio increased due to the 11.7% increase in share market price.

Investors appear to be more optimistic about Saputo's future profitability as its price-earnings ratio has increased

LO 2 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

EXERCISE 2.9 a. 7 b. 10 c. 11 d. 3 e. 2 f. 8

g. h. i. j. k. l.

1 6 4 5 9 12

LO 3 BT: K Difficulty: M Time: 20 min. AACSB: None CPA: cpa.t001 CM: Reporting

EXERCISE 2.10 1.

a. b.

The historical cost basis of accounting is involved in this situation. The historical cost basis of accounting has been followed. The land is for use and should be reported at its historical cost.

The fair value measurement basis of accounting is involved in this situation. The historical cost principle has not been violated since the parcel of land is being held for resale and not for use. The land should be reported at fair value.

a. b.

The assumption involved in this situation is the going concern assumption. The going concern assumption has been violated. The elements on the statement of financial position should have been classified between current and non-current. The cost constraint is involved in this situation along with materiality. There has been no violation of the cost constraint. The practice adopted is acceptable. The fundamental qualitative characteristic is relevance. By disclosing the additional information, the financial statement user is informed of relevant information in decision making. There is no violation of any assumption, constraint or measurement basis. The fundamental qualitative characteristic is timeliness. By releasing the financial statements on a timely basis, the financial statement user is informed sooner of relevant information in decision making. There is no violation of any assumption, constraint or measurement basis.

EXERCISE 2.10 (CONTINUED) 7.

The fundamental qualitative characteristic is free from material error. By counting the inventory, the asset measurement is verified and the information on the financial statements becomes more reliable and the amounts are faithfully represented. There is no violation of any assumption, constraint or measurement basis.

LO 3 BT: C Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

SOLUTIONS TO PROBLEMS PROBLEM 2.1A

Item

Statement of Financial Position Category

Accounts receivable

Current assets

Accounts payable

Current liabilities

Accumulated depreciation - buildings

Non-current assets

Accumulated depreciation - machinery

Non-current assets

Bank loan payable (due after one year)

Non-current liabilities

Cash

Current assets

Common shares

Shareholders‘ equity

Deferred revenue

Current liabilities

Goodwill

Non-current assets

Inventory

Current assets

Land and buildings

Non-current assets

Machinery

Non-current assets

Prepaid expenses

Current assets

Retained earnings

Shareholders‘ equity

LO 1 BT: K Difficulty: S Time: 15 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 2.2A a. Item

Statement of Financial Position Category

Accounts receivable Accumulated amortization—intangibles Accumulated depreciation—aircraft Accumulated depreciation—buildings Accumulated depreciation—machinery and equipment Accumulated depreciation—simulators Aircraft Buildings and land Cash Machinery and equipment Intangible assets Inventory Other assets (non-current) Prepaid expenses

Current assets Intangible assets (contra account) Property, plant, and equipment (contra account) Property, plant, and equipment (contra account) Property, plant, and equipment (contra account)

Simulators Other assets (current) Assets under construction

Property, plant, and equipment Current assets Property, plant, and equipment

Property, plant, and equipment (contra account) Property, plant, and equipment Property, plant, and equipment Current assets Property, plant, and equipment Intangible assets Current assets Other assets Current assets

PROBLEM 2.2A (CONTINUED) b. CAE Inc. Statement of Financial Position (partial) March 31, 2021 (in millions)

Assets Current assets Cash Accounts receivable Inventory Prepaid expenses Other current assets Total current assets Property, plant, and equipment Aircraft Less: Accumulated depreciation Machinery and equipment Less: Accumulated depreciation Simulators Less: Accumulated depreciation Buildings and land Less: Accumulated depreciation Assets under construction Total property, plant, and equipment Intangible assets Less: Accumulated amortization

$ 926.1 518.6 647.8 52.1 1,234.0 $3,378.6 $

91.9 15.8

$ 192.9 144.6 $2,140.6 717.5 $ 513.8 231.7

76.1

48.3 1,423.1 282.1 139.8 1,969.4 $2,750.7 694.9

Other assets Total assets

2,055.8 1,344.6 $8,748.4

LO 1 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 2.3A a. Item Accounts payable and accrued liabilities Current portion of long-term debt Deferred income tax liabilities (long-term) Income taxes payable Long-term debt Other current liabilities Other long-term liabilities Other shareholders‘ equity items Retained earnings Share capital

Statement of Financial Position Category Current liabilities Current liabilities Non-current liabilities Current liabilities Non-current liabilities Current liabilities Non-current liabilities Shareholders‘ equity Shareholders‘ equity Shareholders‘ equity

PROBLEM 2.3A (CONTINUED) b.

CAE Inc. Statement of Financial Position (partial) Liabilities and Shareholders' Equity March 31, 2021 (in millions)

Current liabilities Accounts payable and accrued liabilities Income taxes payable Other current liabilities Current portion of long-term debt Total current liabilities Non-current liabilities Long-term debt Other long-term liabilities Deferred income tax liabilities Total non-current liabilities Total liabilities Shareholders' equity Share capital Retained earnings Other shareholders‘ equity items Total shareholders‘ equity Total liabilities and shareholders' equity

$ 945.6 16.2 1,455.2 216.3 $2,633.3 $2,135.2 643.6 123.5 2,902.3 5,535.6 $1,516.2 1,543.7 152.9 3,212.8 $8,748.4

c. Yes, these two amounts agree. Assets of $8,748.4 million equal total liabilities plus shareholders‘ equity of the same amount. LO 1 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 2.4A a. BISKANE CORPORATION Statement of Income Year Ended December 31, 2024 Revenues Service revenue Interest income Total revenues Expenses Salaries expense Operating expense Depreciation expense Repairs and maintenance expense Insurance expense Utilities expense Interest expense Supplies expense Total expenses Income (loss) before income tax Income tax expense Net income (loss)

$167,900 600 $168,500 $135,000 43,500 2,800 3,700 2,000 1,700 2,500 500 191,700 (23,200) 0 ($23,200)

[Revenues – Expenses = Net income or (loss)]

PROBLEM 2.4A (CONTINUED) BISKANE CORPORATION Statement of Changes in Equity Year Ended December 31, 2024

Balance, January 1 Issued common shares Net income (loss) Dividends declared Balance, December 31

Common Shares

Retained Earnings

$45,000 15,000

$167,800

_ _____ $60,000

(23,200) (4,000) $140,600

Total Equity $212,800 15,000 (23,200) (4,000) $200,600

(Beginning equity ± Changes to equity = Ending equity) [Ending retained earnings = Beginning retained earnings ± Net income or (loss) – dividends declared]

PROBLEM 2.4A (CONTINUED) a. (continued) BISKANE CORPORATION Statement of Financial Position December 31, 2024 Assets Current assets Cash Trading investments Accounts receivable Supplies Prepaid insurance Total current assets

$ 17,000 40,000 22,400 100 2,400

Property, plant, and equipment Land $106,000 Buildings $65,000 Less: Accumulated depreciation—buildings 17,500 47,500 Equipment $45,000 Less: Accumulated depreciation—equipment 18,500 26,500 Total property, plant, and equipment Total assets Liabilities and Shareholders' Equity Current liabilities Accounts payable $12,000 Salaries payable 19,300 Current portion of bank loan payable 5,500 Total current liabilities Non-current liabilities Bank loan payable ($30,000 - $5,500) Total liabilities Shareholders' equity Common shares $ 60,000 Retained earnings 140,600 Total shareholders‘ equity Total liabilities and shareholders' equity

$ 81,900

180,000 $261,900

$ 36,800 24,500 61,300

200,600 $261,900

(Assets = Liabilities + Shareholders‘ equity)

PROBLEM 2.4A (CONTINUED) b.

The statement of income reports the net income or loss for the period. This figure is then used in the statement of changes in equity, along with dividends declared and any issues (or repurchases) of shares, to calculate the balances in common shares and retained earnings at the end of the period. These ending balances are then used in the statement of financial position to determine shareholders‘ equity and complete the accounting equation.

LO 1 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 2.5A a. 1.

Working capital

Current assets – Current liabilities $ 162,565 – $98,000 = $64,565

Current ratio

Current assets Current liabilities $162,565

1.7 :1

35.4%

$98,000 3.

Debt to total assets

Total liabilities Total assets $363,000 $1,026,765

Basic earnings per share

Price-earnings ratio

Income available to common shareholders Weighted average number of common shares $125,100 = $1.79 70,000 Market price per share Basic earnings per share $24.00 = 13.4 times $1.79

Ogimaa‘s liquidity has deteriorated dramatically as evidenced by a reduction in the working capital relative to 2023 as well as the lower current ratio. In addition, the solvency has also deteriorated as the debt to total assets ratio is higher in 2024. Ogimaa‘s profitability has also suffered as the basic earnings per share ratio decreased in 2024, as have investors‘ expectations for future profitability as indicated by the decrease in price-earnings ratio. This is assuming the weighted average number of shares has not materially changed in 2024.

LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance.

PROBLEM 2.6A a. Working capital Chen Caissie

= = =

Current ratio

Current assets – Current liabilities $407,200 – $166,325 = $190,400 – $133,700 = Current assets Current liabilities

Chen $407,200

$240,875 $56,700

Caissie =

2.4 :1

$166,325

$190,400

1.4 :1

$133,700

Chen is significantly more liquid than Caissie. It has a higher current ratio and more current assets available to pay current liabilities as they come due. b. Debt to total assets

Chen ($166,325 + $108,500) ($407,200 + $532,000)

Total liabilities Total assets Caissie

= 29.3%

($133,700 + $40,700)

52.8%

($190,400 + $139,700)

Caissie is considerably less solvent than Chen. Caissie's debt to total assets ratio of 52.8% is almost double that of Chen‘s ratio of 29.3%. The lower the percentage of debt to total assets, the lower the risk that a company may be unable to pay its debts as they come due.

PROBLEM 2.6A (CONTINUED) c. Service revenue Operating expenses Interest expense Income tax expense Total expenses

Chen $1,800,000 1,458,000 10,000 85,000 1,553,000

Caissie $620,000 438,000 4,000 35,400 477,400

Net income

$ 247,000

$142,600

Basic earnings per share =

Income available to common shareholders Weighted average number of common shares

Chen

Caissie

$247,000 = $3.25 76,000 Price-earnings ratio Chen $25.00 $3.25

= 7.7 times

$142,600 62,000 =

= $2.30

Market price per share Basic earnings per share Caissie $15.00 $2.30

= 6.5 times

Based on the price-earnings ratio, investors believe that Chen will be more profitable than Caissie in the future. It is not meaningful to compare basic earnings per share between companies. LO 2 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

PROBLEM 2.7A a. Oats Ltd. Barley Ltd. 1.

Working capital

$3,000 + $8,000 + $40,000 $8,000 + $5,500 + $14,000 – $20,000 – $18,000 = $31,000 = $9,500

Current ratio

$51,000 $20,000

Debt to total assets

Basic earnings per share

$12,000 3,500

= $3.43

$27,000 4,500

= $6.00

Price-earnings ratio

$95 $3.43

= 27.7 times

$10 $6

= 1.7 times

= 2.6:1

$20,000 + $75,000 = 54.0% $51,000 + $125,000

$27,500 $18,000

= 1.5:1

$18,000 + $25,000 = 22.3% $27,500 + $165,000

Liquidity With a current ratio of 2.6:1, Oats is more liquid than Barley and Oats has a stronger ratio than the industry average of 1.7:1 whereas Barley is lower than the industry average. Solvency Barley is more solvent than Oats as evidenced by its lower debt to total assets ratio, which is better than the industry average of 49%. Oats‘ debt to total assets is higher than the industry average, so it is less solvent than the industry standard. Profitability Although the basic earnings per share ratio does not provide a basis for comparison by investors, the price-earnings ratio can be calculated to compare to each other or to the industry average of 20.0 times. The price-earnings ratio, which reveals investors‘ sentiment concerning future profitability, shows that Oats is favoured over Barley. Oats also has a higher price-earnings ratio than the industry‘s ratio of 20.0. Barley is substantially lower than the industry ratio indicating that investors are not as optimistic about its future earning potential even though it has a higher earnings per share than Oats. There is a large difference in the debt to total assets ratio of the companies. Debt to total assets is very high for Oats, increasing the risk

of the investment made by shareholders. Oats may be financing future growth with debt and their investors may be comfortable with a high debt to total assets ratio. LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

PROBLEM 2.8A a.

The higher the amount of working capital, the better a company‘ liquidity. From 2022 to 2024 Pitka Corporation‘s working capital deteriorated and showed a constant downward trend over the three-year period. A higher current ratio is evidence of better liquidity for a company (assuming the components of the current assets are also liquid). Although the current ratio stayed the same from 2022 to 2023, it deteriorated 2023 to 2024 and is low. A smaller (lower) debt to total assets ratio shows evidence of better solvency. The percentage of total liabilities to total assets increased from 2022 to 2023, showing deterioration in the solvency for Pitka. On the other hand, the ratio improved substantially from 2023 to 2024. The higher the basic earnings per share, the better the profitability. Profitability decreased from 2022 to 2023, but improved from 2023 to 2024. The investors appeared to have less confidence in the future net income of Pitka as evidenced by Pitka's price-earnings ratio, which declined from 2022 to 2023. This view changed as demonstrated by the climb in the price-earnings ratio from 2023 to 2024.

Liquidity Pitka‘s current ratio, although steady in 2022 and 2023, declined slightly in 2024. This trend is of concern given the low level of liquidity the company has with a current ratio of 1.1:1.

Solvency Pitka‘s debt to total assets ratio improved in the last year. It appears to be reasonable in size, as does the solvency of the company in 2024. Profitability Pitka‘s profitability declined and then recovered as is demonstrated by the basic earnings per share ratio. The price-earnings ratio in 2024 indicates expectations of improving profitability.

LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

PROBLEM 2.9A a.

The objective of financial reporting is to provide information that is useful to existing and potential investors and creditors in making decisions about providing resources to the company. In this case, the information will be used by the team‘s bank. Bucky‘s suggestions concerning how elements should be reported on the financial statements do not meet the objective of financial reporting. His suggestions would lead to a violation of the fundamental basis on which financial statements are prepared: accrual accounting. The suggested changes to the financial statements would not portray economic reality and would not faithfully represent the performance of the business and its financial position at December 31, 2024. Bucky‘s suggestions show bias and an attempt to portray a financial picture that would be perceived as more favourable than it is in reality.

1. Failing to include the estimated expenses for utilities and the corresponding liability for the utilities already consumed by December 31, 2024 violates accrual accounting. The expense was incurred and a liability exists, and although the exact amount is not known, a reasonable estimate can be made as this type of expense occurs often. The definitions of the elements have been met. Failing to include the expense would represent an error of omission done on purpose to increase the profitability and reduce the liabilities of the company at December 31, 2024. 2. Unless the company uses the revaluation model for all of its longlived assets, increasing the value of the building to its fair value would violate the historical cost basis of accounting. It is likely far more relevant to the financial statement user of this company to see the original purchase price of the building rather than its fair value as it is unlikely to be resold soon. Assets and revenue (from the recording of an unrealized gain from the increase in the value of the asset) would be overstated if Bucky‘s instructions were followed. 3. The signing bonus paid to Wayne Crosby does not represent an asset at December 31, 2024. No future benefit can be derived from this payment as it was not conditional upon the occurrence of a future event. Consequently, the expenditure does not fit the definition of an asset.

LO 3 BT: E Difficulty: C Time: 30 min. AACSB: None CPA: cpa.t001 CM: Reporting

PROBLEM 2.10A a.

The advantage of the fair value basis of accounting is that it represents a more up-to-date measurement of the value of the asset reported. Consequently, the amounts reported are more relevant to the financial statement users. The disadvantage of the fair value basis of accounting and corresponding advantage of historical cost is that historical cost is more reliable and shows the amount paid for the asset. The historical cost might provide a more faithful representation because it can be easily verified and is neutral.

The reason a company might choose to adopt the fair value basis of accounting for real estate is that assets reported on the statement of financial position will have higher values than they would using the historical cost basis. It is inherent in the nature of real estate that the land will increase in value over time. Creditors will find the fair value a more relevant basis for making lending decisions. The increase in the assets will cause a corresponding increase in equity.

The reason a company might choose to adopt the historical cost basis of accounting for real estate is that assets reported on the statement of financial position will have more faithful representation because it reports the actual cost of the asset when it was acquired and this measurement can be easily verified and it is neutral. There is also a significant cost to obtaining reliable fair value information, on a regular basis, to be reported in the financial statements.

When comparing public real estate companies, the reader is well advised to read the accounting policy note to the financial statements disclosing the measurement policy used for the real estate property. One would need to determine the corresponding fair value for real estate for the company that used the historical cost basis of accounting. In fact, this information is required to be disclosed for real estate companies, even if they adopted the historical cost basis of accounting, to improve comparability and disclosure. Otherwise, trying to compare businesses that use different bases of accounting would be very difficult.

LO 3 BT: E Difficulty: C Time: 30 min. AACSB: None CPA: cpa.t001 CM: Reporting

PROBLEM 2.1B Item Accumulated amortization—patents and trademarks Accumulated depreciation—industrial machinery and equipment Bank overdraft Cash Common (ordinary) shares Current borrowings and debts Income tax payable (current) Industrial machinery and equipment Inventories Land Long-term investments Non-current borrowings and debts Patents and trademarks Prepaid expenses Trade accounts payable Trade accounts receivable

Statement of Financial Position Category Intangible assets (contra account) Property, plant, and equipment (contra account) Current liabilities Current assets Share capital Current liabilities Current liabilities Property, plant, and equipment Current assets Property, plant, and equipment Non-current assets Non-current liabilities Intangible assets Current assets Current liabilities Current assets

LO 1 BT: K Difficulty: S Time: 15 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 2.2B a. Item Accounts receivable Accumulated amortization— patent Accumulated depreciation— buildings Accumulated depreciation— equipment Buildings Cash Equipment Goodwill Inventory Land Patent Prepaid expenses Trading investments

Statement of Financial Position Category Current assets Intangible assets Property, plant, and equipment (contra account) Property, plant, and equipment (contra account) Property, plant, and equipment Current assets Property, plant, and equipment Goodwill (after intangibles) Current assets Property, plant, and equipment Intangible assets Current assets Current assets

PROBLEM 2.2B (CONTINUED) b. DEVON LIMITED Statement of Financial Position (partial) December 31, 2024 Assets Current assets Cash Trading investments Accounts receivable Inventory Prepaid expenses Total current assets Property, plant, and equipment Land Buildings Less: Accumulated depreciation Equipment Less: Accumulated depreciation Total property, plant, and equipment Intangible assets Patent Less: Accumulated amortization Goodwill Total assets $724,230

$100,460 52,520 13,345 105,320 13,950 $285,595

$207,290 $ 58,275 27,595 $287,400 146,550

30,680 140,850 378,820 29,225 9,000

20,225 39,590

LO 1 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 2.3B a. Item Accounts payable Common shares Current portion of mortgage payable Mortgage payable Retained earnings Deferred revenue

Category Current liabilities Shareholders‘ equity Current liabilities Non-current liabilities Shareholders‘ equity Current liabilities

b. DEVON LIMITED Statement of Financial Position (partial) December 31, 2024 Liabilities and Shareholders' Equity Current liabilities Accounts payable Deferred revenue Current portion of mortgage payable Total current liabilities Non-current liabilities Mortgage payable Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders' equity

$ 13,100 14,180 29,000 $ 56,280 231,255 287,535 $115,400 321,295 436,695 $724,230

Yes, the total assets of $724,230 matches the total liabilities and shareholders‘ equity.

LO 1 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 2.4B a. BEAULIEU LIMITED Statement of Income Year Ended December 31, 2024 Revenues Service revenue Interest income Total revenues Expenses Salaries expense Interest expense Depreciation expense Utilities expense Insurance expense Total expenses Income before income tax Income tax expense Net Income

$193,100 500 $193,600 $145,600 8,000 5,400 3,700 2,400 165,100 28,500 5,000 $23,500

[Revenues – Expenses = Net income or (loss)]

BEAULIEU LIMITED Statement of Changes in Equity Year Ended December 31, 2024

Balance, January 1 Issued common shares Net income Dividends declared Balance, December 31

Common Shares

Retained Earnings

$25,000 20,000

$34,000

_ _____ $45,000

23,500 (3,500) $54,000

Total Equity $59,000 20,000 23,500 (3,500) $99,000

(Beginning equity ± Changes in equity = Ending equity) [Ending retained earnings = Beginning retained earnings ± Net income or (loss) – dividends declared]

PROBLEM 2.4B (CONTINUED) a. (continued) BEAULIEU LIMITED Statement of Financial Position December 31, 2024 Assets Current assets Cash Accounts receivable Prepaid insurance Total current assets Long-term investments Property, plant, and equipment Land Buildings $105,000 Less: Accumulated depreciation—buildings 12,000 Equipment $ 32,000 Less: Accumulated depreciation—equipment 19,200 Total property, plant, and equipment Total assets

$11,170 7,500 250 $ 18,920 20,000 $145,800 93,000 12,800 251,600 $290,520

Liabilities and Shareholders' Equity Current liabilities Accounts payable Salaries payable Current portion of mortgage payable Total current liabilities Non-current liabilities Mortgage payable ($175,800 - $35,100) Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders‘ equity Total liabilities and shareholders' equity

$ 9,550 6,170 35,100 $ 50,820 140,700 191,520 $45,000 54,000 99,000 $290,520

PROBLEM 2.4B (CONTINUED) b.

The statement of income reports the net income or loss for the period. This figure is then used in the statement of changes in equity, along with dividends declared and issues (or repurchases) of shares to calculate the balances in common shares and retained earnings at the end of the period. These ending balances are then used in the statement of financial position, to determine shareholders‘ equity and complete the accounting equation.

LO 1 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting

PROBLEM 2.5B a. Working capital

Current ratio

Current assets – Current liabilities $253,850 – $156,550 =

$97,300

Current assets Current liabilities $253,850

1.6 :1

40.1%

$156,550

Debt to total assets

Total liabilities Total assets $288,550 $719,150 Income available to common shareholders

Basic earnings per share

Price-earnings ratio

Weighted average number of common shares $96,600 = $2.42 40,000 Market price per share Basic earnings per share $30.00 = 12.4 $2.42

times

Fast‘s liquidity has improved as the working capital is larger in 2024 and the current ratio is greater than that of 2023. The solvency has improved as the debt to total assets ratio is a smaller percentage in 2024 than in 2023. Fast‘s profitability has improved dramatically as the basic earnings per share ratio has increased by a large amount in 2024, as has the priceearnings ratio, suggesting that investors are excited about the company‘s future prospects.

LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

PROBLEM 2.6B a. Working capital Belliveau

Current assets – Current liabilities $180,000 – $75,000 = $700,000 – $300,000 =

= = =

Shields Current ratio

Current assets Current liabilities

Belliveau $180,000

$105,000 $400,000

Shields =

$700,000

2.4 :1

$75,000

2.3 :1

$300,000

Belliveau is slightly more liquid than Shields as it has a higher current ratio, even though its absolute working capital amount is lower. b. Debt to total assets

Total liabilities Total assets

Belliveau ($75,000 + $190,000) ($180,000 + $600,000)

Shields = 34.0%

($300,000 + $200,000) ($700,000 + $800,000)

= 33.3%

The debt to asset ratios are similar and both companies are solvent. The lower the percentage of debt to total assets, the lower the risk that a company may be unable to pay its debts as they come due.

PROBLEM 2.6B (CONTINUED) c. Service revenue Operating expenses Interest expense Income tax expense Total expenses

Belliveau $450,000 390,000 6,000 10,000 406,000

Shields $890,000 679,000 10,000 65,000 754,000

Net income

$ 44,000

$136,000

Basic earnings per share =

Income available to common shareholders Weighted average number of common shares

Belliveau $44,000 200,000

= $0.22

Price-earnings ratio Belliveau $2.50 $0.22

Shields

= 11.4 times

$136,000 200,000 =

= $0.68

Market price per share Basic earnings per share Shields $6.00 $0.68

= 8.8 times

Investors have higher expectations for Belliveau‘s future profitability, as evidenced by the price-earnings ratio. It is not useful to compare basic earnings per share between companies. LO 2 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

PROBLEM 2.7B a. Clear Ltd.

Dot Ltd.

$2,000 + $18,000 + $48,000 – $30,000 = 38,000

$14,000 + $8,000 + $22,000 – $30,000 = $14,000

Working capital

Current ratio

Debt to total assets

Basic earnings per share

$16,000 1,800

= $8.89

$22,000 11,000

= $2.00

Price-earnings ratio

$78.00 $8.89

= 8.8 times

$28.00 $2.00

= 14.0 times

$68,000 $30,000

= 2.3:1

$30,000 + $178,000 = 72.2% $68,000 + $220,000

$44,000 $30,000

= 1.5:1

$30,000 + $90,000 $44,000 + $236,000

= 42.9%

Liquidity Both companies are liquid, with Clear having a stronger position with a current ratio that is higher than the industry average of 1.7:1. Solvency Dot is more solvent than Clear as evidenced by its lower debt to total assets ratio. Dot also has a debt to total assets ratio that is lower than the industry average of 52%. Profitability Although the basic earnings per share ratio does not provide a basis for comparison, investors appear to have more confidence in the future net income of Dot as evidenced by Dot‘s price-earnings ratio. Both Clear and Dot have lower price-earnings ratios than the industry average of 16.1.

LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

PROBLEM 2.8B a.

The higher the amount of working capital, the better a business‘ liquidity. From 2022 to 2023, Giasson Corporation‘s working capital improved. It then deteriorated from 2023 to 2024, decreasing by $17,000. A higher current ratio is evidence of better liquidity for a business, assuming all components of current assets are also liquid. The current ratio for Giasson has been deteriorating steadily from 2022 to 2024. The corporation remains liquid, as its current ratio was 1.5:1 in 2024. A smaller debt to total assets ratio shows evidence of better solvency. The percentage of total liabilities to total assets increased from 2022 to 2023, showing deterioration in the solvency for Giasson. On the other hand, this ratio improved from 2023 to 2024. Less than half of the company‘s assets have been financed using debt. The higher the basic earnings per share, the better evidence of improved profitability. Profitability increased from 2022 to 2023 but declined significantly from 2023 to 2024 indicating poorer profitability. The investors appear to have less confidence in the future profitability of Giasson as evidenced by Giasson's price-earnings ratio which declined from 2022 to 2024.

Liquidity Giasson‘s current ratio, although declining over the past two years, demonstrates adequate liquidity. There is $1.50 of current assets available to cover each $1 of current liabilities. Solvency Giasson‘s debt to total assets ratio, although deteriorating from 2022 to 2024, remains modest in size and so the solvency of the company continues to be good. Profitability Giasson‘s profitability is declining as is demonstrated by the basic earnings per share ratio and the price-earnings ratio.

LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and Finance

PROBLEM 2.9B a.

The objective of financial reporting is to provide information that is useful to existing and potential investors and creditors in making decisions about providing resources to the company. Virginia‘s suggestions concerning how elements should be reported on the financial statements do not meet the objective of financial reporting. Two of her suggestions would lead to a violation of the fundamental basis on which financial statements are prepared: accrual accounting. The suggested changes to the financial statements would not portray the economic reality and would not faithfully represent the performance of the construction company and the financial position at its year end. Virginia‘s suggestions show bias and an attempt to portray a financial picture that would be perceived as more favourable than it is in reality.

1. Failing to include the estimated expense and the related liability for the damages that have already occurred by the end of the year violates accrual accounting. The expense was incurred and a liability exists that can be estimated. The definitions of the elements have been met. Failing to include the expense would represent an error of omission done on purpose to increase the profitability and reduce the liabilities of the construction company at its year end. 2. The suggestion of increasing the revenues from construction would result not only in the recording of revenue but the recording of an accounts receivable. The revenue from construction has not been earned as no work has been performed. Furthermore, no account receivable should be recorded because no asset exists yet. Because revenue would be overstated if recorded, equity would also be overstated if Virginia‘s instructions were followed. Virginia‘s suggestions would not faithfully represent the reality of the performance of Ace Construction Limited for the current fiscal year.