Type:
Solution Manual
Resource:
Financial Accounting IFRS
Edition:
12th Edition
Author(s):
Walter T. Harrison Charles Horngren C. William Thomas Wendy M. Tietz
Chapter 1 Conceptual Framework and Financial Statements Short Exercises (10 min.) S 1-1 a. Corporation and Limited-liability partnership (LLP). If any of these businesses fails and cannot pay its liabilities, creditors cannot force the owners to pay the business’s debts from the owners’ personal assets. b. Proprietorship. There is a single owner of the business, so the owner is answerable to no other owner. c. Partnership.
If the partnership fails and cannot pay its
liabilities, creditors can force the partners to pay the business’s debts from their personal assets. A partnership affords more protection for creditors than a proprietorship because there are two or more owners to share this liability.
Chapter 1
Conceptual Framework and Financial Statements
(5 min.) S 1-2 1. Assets are the economic resources of a business that are expected to produce a benefit in the future. Owners’ equity represents the insider claims of a business, the owners’ interest in its assets. Assets and owners’ equity differ in that assets are resources and owners’ equity is a claim to assets. Assets must be at least as large as owners’ equity, so equity can be smaller than assets. 2. Both liabilities and owners’ equity are claims to assets. Liabilities are the outsider claims to the assets of a business; they are obligations to pay creditors. Owners’ equity represents the insider claims to the assets of the business; they are the owners’ residual interest in its assets after claims from its creditors.
(5-10 min.) S 1-3 a. Cash and cash equivalents A
g. Accounts payable L
b. Long-Term investment A
h. Share capital E
Financial Accounting: IFRS 12/e Solutions Manual
c. Income tax payables L
i. Short term bank borrowings L
d. Notes payable L
j. Retained earnings E
e. Wages payable L
k. Buildings A
f. Trademarks A
l. Prepaid expenses A
(5 min.) S 1-4 1. Assets and liabilities 2. Equity
(5 min.) S 1-5 1. The entity assumption applies. 2. Application of the entity assumption will separate Newman’s personal assets from the assets of Quality Food Brands. This will help Newman, investors, and lenders know how much in assets the business controls, and this knowledge will help all parties evaluate the business realistically.
Chapter 1
Conceptual Framework and Financial Statements
(5-10 min.) S 1-6 a. Going concern assumption b. Accrual accounting assumption, relevance characteristic c. Comparability characteristic d. Accrual accounting assumption
(5 min.) S 1-7 Computed amounts in boxes Total Assets
= Total Liabilities + Shareholders’ Equity
a.
$211,000
=
$50,200
+
$160,800
b.
270,000
=
50,290
+
219,710
c.
172,800
=
96,000
+
76,800
(5 min.) S 1-8 1. Owners’ Equity = Assets − Liabilities This way of determining the amount of owners’ equity applies to any company, your household, or a single Burger King outlet. 2. Liabilities = Assets − Owners’ Equity
Financial Accounting: IFRS 12/e Solutions Manual
(5 min.) S 1-9 Maxis Play Income Statement Year Ended December 31, 20X6 Millions Revenues…………………………………….. $ 262 Expenses…………………………………….. 108 Net income…………………………………... $ 154
(5 min.) S 1-10 Idea Corp. Statement of Changes in Equity Year Ended December 31, 20X6 Millions Total Equity, January 1, 20X6 ($900 + $375)……… Add: Net income ($1,530 − $975)………
$1,275 555 1,830
Less: Dividends………………………...
(45)
Total Equity, December 31, 20X6……
$1,785
Chapter 1
Conceptual Framework and Financial Statements
(10 min.) S 1-11 Atlantia Products Balance Sheet As at December 31, 20X6 ASSETS Current assets: Cash…………………………………………………… Receivables…………………………………………... Inventory……………………………………………… Total current assets………………………………… Equipment………………………………………………. Total assets……………………………………………... LIABILITIES Current liabilities: Accounts payable…………………………………… Total current liabilities……………………………... Long-term liabilities: Long-term notes payable………………………….. Total liabilities………………………………………... SHAREHOLDERS’ EQUITY Share Capital……………………………………………. Retained earnings……………………………………… Total shareholders’ equity………………………… Total liabilities and shareholders’ equity…………..
$ 7,500 11,000 10,000 28,500 24,500 $53,000
$ 10,500 10,500 25,000 $35,500
17,500 0* 17,500 $53,000
_____ *Computation of retained earnings: Total assets ($53,000) − current liabilities ($10,500) − longterm notes payable ($25,000) − share capital ($17,500) = $0
Financial Accounting: IFRS 12/e Solutions Manual
(10-15 min.) S 1-12 Apollo Medical Inc. Statement of Cash Flows Year Ended December 31, 20X6 Cash flows from operating activities: Net income………………………………………...
$ 216,300
Adjustments to reconcile net income to net cash provided by operating activities….
(66,000)
Net cash provided by operating activities…
150,300
Cash flows from investing activities: Purchases of equipment…………
$ (135,000)
Net cash used for investing activities……..
(135,000)
Cash flows from financing activities: Payment of dividends…………….
$ (32,100)
Net cash used for financing activities…….
(32,100)
Net decrease in cash………………………………..
(16,800)
Cash balance, December 31, 20X5………………
90,000
Cash balance, December 31, 20X6………………
$ 73,200
Chapter 1
Conceptual Framework and Financial Statements
(10 min.) S 1-13 a. Bank balance BS, SCF b. Net cash used for investing activities SCF c. Accounts receivable BS d. Share capital BS e. Interest expense IS f. Long-term investment g. Dividend paid
BS
SCE, SCF
h. Reserves SCE, BS i. Rent expense
IS
j. Property, plant and equipment k. Notes payable
BS
BS
l. Retained earnings SCE,
BS
m. Rental income IS n. Net income IS, SCE, SCF (15-20 min.) S1-14 a. Paying large dividends will cause retained earnings to be low. b. Heavy investing activity and paying off debts can result in a cash shortage even if net income has been high. c. The single best source of cash for a business is operating activities — net income and the related cash receipts. This Financial Accounting: IFRS 12/e Solutions Manual
source of cash is best because it is a result of the core operations of the business. d. Borrowing, issuing shares, and selling plant, property and equipment (PPE) can bring in cash even when the company has experienced losses. Reducing accounts receivable and inventory can also increase cash flow.
(5 min.) S 1-15 Ethics is a factor that should be included in every business and accounting decision, beyond the potential economic and legal consequences.
Ideally,
for
each
decision,
honesty
and
truthfulness should prevail, considering the rights of others. The decision guidelines at the end of chapter 1 spell out the considerations we should take when making decisions. Simply, we might ask ourselves three questions: (1) Is the action legal? (2) Who will be affected by the decision? (3) How will the decision make me feel afterward?
Chapter 1
Conceptual Framework and Financial Statements
Exercises Group A (10-15 min.) E 1-16A Amounts in thousands; computed amounts in boxes)
Alpha Bravo Charlie
Assets $32 21 44
=
Liabilities $12 16 21
+
Owners’ Equity $20 5 23
Alpha appears to have the strongest financial position because its liabilities make up the smallest percentage of company assets ($12 / $32 = 0.375); Alpha’s equity is the highest percentage of company assets ($20 / $32 = 0.625).
Financial Accounting: IFRS 12/e Solutions Manual
(10-15 min.) E 1-17A Req. 1
(Amounts in millions)
Total Req. 2
Assets $500 880 200 $1,580
=
Liabilities $240 600
=
$840
Resources to work with
Req. 3 Amount owed to creditors
Shareholders’ + Equity
+ $740 Req. 4 Actually owned by company shareholders
(10-20 min.) E 1-18A
1 Total shareholders’ equity, January 31, 20X6 ($60 − $12)………... Add: Issuances of shares.……………... Net income……………………….. Less: Dividends…………………………... Net loss……………………………. Total shareholders’ equity, January 31, 20X7 ($74 − $16)…………
Situation 2 Millions
3
$48 -026* (16)
$48 4 18* (12)
$58
$58
$48 16 -0(6)* $58
_____ *Must solve for these amounts.
Chapter 1
Conceptual Framework and Financial Statements
(10-15 min.) E 1-19A 1. Galaxy Hotels, Inc. Shareholders’ Assets = Liabilities + Equity Beginning amount $150,000 = $80,000 + $70,000 Multiplier for × 0.80 increase Ending amount $120,000
2. Sky Airlines, Ltd.
Beginning amount Net income Dividends Ending amount
Shareholders’ Assets − Liabilities = Equity $110,000 − $25,000 = $85,000 18,000 (3,000) $100,000
(10-15 min.) E 1-20A a. b. c. d. e. f. g. h. i. j. k. l.
Statement of cash flows Income statement Statement of cash flows Balance sheet, Statement of cash flows Balance sheet Income statement, Statement of changes in equity, Statement of cash flows Balance sheet Balance sheet Statement of changes in equity, Statement of cash flows Income statement Balance sheet Balance sheet Financial Accounting: IFRS 12/e Solutions Manual
m. n.
Balance sheet Income statement
(10-20 min.) E 1-21A Allianz Inc. Balance Sheet (Amounts in millions) As at January 31, 20X6 ASSETS LIABILITIES Cash and cash Current liabilities $5.0 equivalent Receivables 1.6 Long-term liabilities Inventories 10.0 Total liabilities Investment assets 30.0 Property and SHAREHOLDERS’ equipment, net 33.2 EQUITY Share capital Retained earnings Total shareholders’ equity Total liabilities and Total assets $79.8 shareholders’ equity
$4.0 6.0 10.0
28.6 41.2* 69.8 $79.8
_____ *Computation of retained earnings: Total assets ($79.8) − Total liabilities ($10.0) − Share capital ($28.6) = $41.2
Chapter 1
Conceptual Framework and Financial Statements
(15-25 min.) E 1-22A Req. 1 Allianz Inc. Income Statement (Amounts in millions) Year Ended January 31, 20X6 Total revenue………………………………………. Expenses: Interest expense……………………………….. Salary and other employee expenses……… Other expenses………………………………… Total expenses…………………………………. Net income………………………………………….
$77.6 $ 1.4 35.0 13.4 49.8 $27.8
Req. 2 Looking at retained earnings movements, we can calculate dividend paid.
Retained Earnings (Amounts in millions) Retained earnings, beginning of year………………
$16.4
Add: Net income for the year (Req. 1)…………………
27.8
Less: Dividends*…………………………………………... Retained earnings, end of year (from Exercise 1-21A)….
44.2 3.0 $41.2
_____ * Solve for dividends
Financial Accounting: IFRS 12/e Solutions Manual
(15-20 min.) E 1-23A Neptune Ltd. Statement of Cash Flows Year Ended December 31, 20X6 Cash flows from operating activities: Net income……………………………………. $(210,000) Adjustments to reconcile net income to net cash provided by operating activities. 120,000 Net cash used by operating activities…….. $(90,000) Cash flows from investing activities: Net cash used provided by investing activities…
250,000
Cash flows from financing activities: Net cash provided by financing activities…….. Net increase in cash………………………………………... Beginning cash balance……………………………………
(136,000) 24,000 176,000
Ending cash balance………………………………………..
$200,000
Items given that do not appear on the statement of cash flows: Total assets − Balance sheet Total liabilities − Balance sheet
Chapter 1
Conceptual Framework and Financial Statements
(15-20 min.) E 1-24A Fast Copy Center, Inc. Income Statement Month Ended July 31, 20X6 Revenue: Service revenue…………… Expenses: Salary expense……………… Rent expense………………… Utilities expense……………. Total expenses……………… Net income………………………
$604,500 $168,000 2,300 12,000 182,300 $ 422,200
Fast Copy Center, Inc. Statement Of Changes In Equity Month Ended July 31, 20X6 Total Equity, July 1, 20X6……………… $ 69,500 Add: Net income for the month………. 422,200 491,700 Less: Dividends…………………………. (4,200) Total Equity, July 31, 20X6……….. $487,500
(15-20 min.) E 1-25A
Assets Cash………… Office supplies Equipment……
Fast Copy Center, Inc. Balance Sheet As at July 31, 20X6 Liabilities $ 9,800 Accounts payable……… $ 16,000 13,700 480,000 Shareholders’ Equity Share capital.…………… 69,500 Retained earnings……… 418,000
Financial Accounting: IFRS 12/e Solutions Manual
Total assets….
Total shareholders’ equity 487,500 Total liabilities and $503,500 shareholders’ equity…… $503,500
(15-20 min.) E 1-26A Fast Copy Center, Inc. Statement Of Cash Flows Month Ended July 31, 20X6 Cash flows from operating activities: Net income……………………………………… Adjustments to reconcile net income to net cash provided by operations………… Net cash provided by operating activities Cash flows from investing activities: Acquisition of equipment…………………… Net cash used for investing activities… Cash flows from financing activities: Issuance (sale) of shares to owners………… Payment of dividends………………………….. Net cash provided by financing activities. Net increase in cash……………………………… Cash balance, July 1, 20X6……………………. Cash balance, July 31, 20X6…………………….
$ 422,200 2,300 424,500
$(480,000) (480,000)
$ 69,500 (4,200) 65,300 $ 9,800 0 $ 9,800
The ending cash balance on statement of cash flow corresponds with the balance sheet. Total income increases total equity on the statement of changes in equity, which tallies with the ending equity on the balance sheet.
Chapter 1
Conceptual Framework and Financial Statements
(10-15 min.) E 1-27A TO:
Owner of Fast Copy Center, Inc.
FROM:
Student Name
SUBJECT: Opinion of net income, dividends, financial position, and cash flows Your first month of operations was successful. Revenues totaled $604,500 and net income was $422,200. These operating results look very strong. The company was able to pay a $4,200 dividend, and this should make you happy with so quick a return on your capital investment of $69,500. Your financial position looks secure, with assets of $503,500 and liabilities of only $16,000. Your shareholders’ equity is $487,500. Operating activities generated cash of $424,500, which is respectable. You ended the month with cash of $9,800. Based on the above facts, I believe you should continue to well in your business.
Student responses may vary.
Financial Accounting: IFRS 12/e Solutions Manual
Exercises Group B (10-15 min.) E 1-28B Amounts in thousands; computed amounts in boxes)
Delta video rentals Echo entertainment Portal gift & cards
Assets $28 35 33
= Liabilities + Owners’ Equity $ 9 $19 5 30 16 17
Delta appears to have the strongest financial position because its liabilities make up the smallest percentage of company assets ($9 / $28 = 0.32). Stated differently, Delta’s equity is the highest percentage of company assets ($19 / $28 = 0.68).
Chapter 1
Conceptual Framework and Financial Statements
(10-15 min.) E 1-29B Req. 1 (Amounts in millions) Assets
Total Req. 2
= €300 420 110 €830 =
Shareholders’ Equity
Liabilities + €200 340 €540 +
Resources Req. 3 Amount to work with owed to creditors
$290
Req. 4 Actually owned by company shareholders
(10-20 min.) E 1-30B
Total shareholders’ equity, January 31, 20X6 (€40 − €6)………….. Add: Issuances of shares.…………….. Net income…………………….. Less: Dividends…………………………... Net Loss……………………………. Total shareholders’ equity, January 31, 20X7 (€78 − €24)…………. _____ *Must solve for these amounts.
Financial Accounting: IFRS 12/e Solutions Manual
1
Situation 2 Millions
3
€34 20 -0*-0-
€34 -040* (20)
€34 12 16* (8)
€54
€54
€54
(10-15 min.) E 1-31B 1. Sapphire Hotels, Inc.
Beginning amount Multiplier for increase Ending amount
Assets €135,000 × 0.80
Shareholders’ = Liabilities + Equity = €100,000 + €35,000
€108,000
2. Dolphin Travel Ltd.
Beginning amount Net income Dividends Ending amount
Shareholders’ Assets − Liabilities = Equity €95,000 − €30,000 = €65,000 24,000 (4,000) €85,000
Chapter 1
Conceptual Framework and Financial Statements
(10-15 min.) E 1-32B a. b. c. d. e. f. g. h. i. j. k. l. m. n.
Statement of changes in equity, Statement of cash flows Balance sheet Balance sheet Income statement Statement of cash flows Statement of cash flows Balance sheet Income statement, Statement of changes in equity, Statement of cash flows Balance sheet Balance sheet Balance sheet Balance sheet Income statement Balance sheet, Statement of cash flows
Financial Accounting: IFRS 12/e Solutions Manual