Type:
Solution Manual
Financial Accounting A Global Resource: Perspective Edition:
1st Edition
Author(s):
Rod Monger
Lecture Notes
3
Answers to Learning Outcomes Questions
6
Learning Outcome 1 Learning Outcome 2 Learning Outcome 3 Learning Outcome 4 Learning Outcome 5 Learning Outcome 6
6 7 9 11 11 12
Answers to Review Questions
14
Answers to Terminology Practice
19
Answers to Application Exercises
21
Case Analysis
25
Additional Case: Aussie Pies (A)
28
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Lecture Notes Introduction This chapter was designed based on some of the ideas of Dr. Harvey J. Brightman who teaches a master university teaching program. Dr. Brightman believes that perhaps the most important element in students’ perception of teaching quality is how organized the instructor is. Does the student understand what the ‘big picture’ is and how each topic fits into it? Dr. Brightman also believes that one of the best ways to convey the organization of the course is through what he refers to as a “visual scaffold.” The Financial Accounting Reporting System in this chapter is intended to provide this visual scaffold. Figure 1.9 introduces this visual based on only entities (the business, customers, suppliers and so forth) and external users. Then the Financial Accounting Reporting System is ‘fleshed out’ over the remainder of the chapter – in Figure 1.25, Figure 1.27, Figure 1.28 and finally the full version in Figure 1.30. Once students have the Financial Accounting Reporting System in mind, it should be much easier in the following chapters to demonstrate how the chapter topic fits into the overall scheme. Dr. Brightman is also an advocate of the ‘hook.’ His view, which I share, is that students are not naturally curious and their appetite for the material at hand must be whetted. This can be done by demonstrating in a constructive way that the student does not know how to solve a particular type of problem and will be able to do so after learning the material. Or perhaps by demonstrating the usefulness of the material in a way student may not have thought about before. I have used the second approach by discussing Warren Buffet’s success in building Berkshire Hathaway. What I wanted to demonstrate is that whether a student chooses accounting as a major or simply studies accounting as a general business curriculum requirement, it is important to overall success in business. Dr. Brightman does not use hooks chapter-by-chapter but rather for “modules” of material. His position on this has strongly influenced the way I have organized the book into five parts. Also see: www.themasterteacherprogram.com Brightman, H. “Mentoring Faculty to Improve Teaching and Learning”. Decision Sciences Journal of Innovative Education. Vol. 3(2), p.191-204, 2005. Chapter Lecture
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This chapter may take considerable time to work through but it pays off later by establishing basic concepts. I use PowerPoint to work through the concepts slowly. Although the text does not introduce an actual set of financial statements until Chapter 3, I think it is useful for students to look at them. In the web site, the financial statements for Emirates Airline are included and I would ask the students on the first day of class to download the most recent year and look it over. At least they have an idea what actual financial statements are like rather than talking about them in the abstract.
Learning Outcome 1 Learning Outcome 1 introduces external users including investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public. I ask students at this point two questions: 1. Do you agree that a business has an obligation to all these external users? Or do you believe a business has an obligation only to its owners? If students say that they have an obligation to all external users, as some will, then I ask: 2. If the interests of different users is in conflict, how do you determine which is the most important? Learning Outcome 2 The pivotal concept in Learning Outcome 2 is the owner or owners of a business as a separate entity from the business itself. It is relatively easy for a student to see that a customer or supplier is a separate entity, but easy to confuse with the owner. Sometimes I use this example: A business has one owner. The business owns a truck which it no longer has a use for. The owner decides to take the truck and use it on his weekend farm. I then ask the students: Has a transaction taken place here or not? Learning Outcome 3 This is where the four financial statements are introduced. In this textbook, the formal names of the statements based on IFRS are used – statement of comprehensive income, statement of financial position, statement of changes in equity and statement of cash flows. The emphasis on the formal names was to make the terminology consistent but also to reinforce the concept of comprehensive income which requires a somewhat different mindset than when the focus is only on profit or loss.
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However, once I have introduced the four statements, I then narrow the discussion to the statement of comprehensive income and statement of financial position. Thus, I spend far more time on these two statements. I tell the students that the statement of comprehensive income is the ‘recycle bin’ of accounting. It deals with only financial information of the past. Nothing on the statement of comprehensive income relates to the future. I then tell them that all items on the statement of financial position must have future use to the business. Assets will be used by the business in the future; liabilities must be settled by the business in the future. In later chapters when I am working with students on whether to capitalize or expense an item, for example, I come back to this perspective and ask – Does the item have any future relevance to the business? At this point, I also like to stop and work some of the back-of-chapter application exercises with the students to make sure they have practice in class putting the statements together correctly – especially the statement of comprehensive income and statement of financial position. Learning Outcome 4 On the accounting process, I have used a synthesized version of the steps in accounting. Automated systems have rendered the trial balance less important. It is these days simply one of the various reports that can be demanded of the system. But also I wanted to focus the student on the major steps – recording transactions, adjusting the ledger accounts, preparing the financial statements and closing temporary accounts. In Chapter 1, I only introduce these steps saying that Part II covers the accounting process in detail. Learning Outcome 5 I also do not spend much time on generally accepted accounting principles and accounting standards other than to draw the distinction between the accounting process and accounting standards. I tell students that we will examine accounting standards at a basic level in Parts III and IV. Learning Outcome 6 Again, I touch on the issues in this learning outcome only to illustrate the place they have in the Financial Accounting Reporting System, but defer more discussion until later chapters.
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Answers to Learning Outcomes Questions Learning Outcome 1 Describe the financial information needs of internal and external users. On Your Own 1. Who are internal users and what uses do they make of accounting information? Internal users include managers, other employees and members of the board of directors. They use managerial accounting information for planning, decision-making and control. This information is typically not made available to external users. 2. List the types of external users and describe the information requirements of each. Investors – Those who provide risk capital and their advisors. Their primary needs are for information to help them decide whether to buy, hold or sell equity securities in the company, and whether the company can pay dividends. Employees – Employees and their representative groups who need information about the stability and the profitability of the business. Employees need financial information to be able to assess the company’s ability to provide employment opportunities, and to pay compensation and retirement benefits. Lenders – The major concern of lenders is whether their loans and the associated interest will be paid when due. Financial information is needed to understand whether the business entity can pay its debts, and if not, what assets are available to secure debts. Suppliers and other trade creditors – Suppliers and other trade creditors, like lenders, are interested in whether amounts they are owed by the company will be paid. Customers – Customers, especially those which are dependent on the business, are interested in the long-term viability of the entity. Governments and their agencies – Governments and agencies need information for regulatory purposes, taxation and to develop national income and other statistics. Public – The public needs financial information for a variety of purposes such as understanding the contributions to the local economy. 3. For what does financial accounting account? . . 6
Financial accounting accounts for financial information only which is the monetary unit concept. Non-financial information is typically not included. 4. What uses do external users make of accounting information? External users use financial accounting information to evaluate the financial position, performance and changes in financial position of the business entity. 5. Why are internal users more interested in future-oriented information? This answer to this question is not directly addressed but is implied by the information presented. Internal users – which include managers, other employees and members of the board – are all involved in planning and decision-making that will affect future financial results. While internal users rely on financial information about the past to understand how the business has performed, they also need to make predictions about future financial performance. Examples include the amount of sales in upcoming years or the price that the business can charge its customers. 6. Why is future-oriented financial estimates typically not provided to external users? Future-oriented financial estimates may reveal plans that management does not want the public to know. For example, management may plan to lower the price of a certain product in the coming year. If this were reported in financial accounting results, then it could alert competitors to the future plans of the business and therefore create a competitive disadvantage.
Learning Outcome 2 Define a business entity and describe the three major forms of business organization. On Your Own 1. Give examples of the types of entities that typically engage in transactions with a business entity. Entities which typically engage in transactions include customers, suppliers, employees, investors and creditors. 2.
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In a previous example, Didier Bihayintore, a sole proprietor, uses the trade name Didier’s Restaurant. Are Didier Bihayintore and Didier’s Restaurant the same business entity or separate business entities?
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