Accounting For Managers, 1st Canadian Edition Solution Manual

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CHAPTER1Solutions to ProblemsProblem1.1The Information Age has provided business with an increased quantity and improvedqualityofthe information that is available in real time for planning, decisionmaking,andcontrol. As a result, more people in the organization are now involved indecisionmaking,andtimelierandmoreaccurate decisions can be made.This has also facilitated an expansion in the scope of business decisions beyond costaccounting to include strategic performance measurement, risk management,connecting strategy with operations, looking to the future, and environmentalawareness. In response, accounting practices have expanded to include systems thatmeasure and support this new realm of business practices, such as: value-basedmanagement, quality management, environmental accounting, activity-basedmanagement, strategic managementand lean accounting.Problem1.2Arising from the Industrial Revolution were large, complexcompanies that werecharacterized by multiple product lines, automation and complex processes, and large-scale operations. As organizations became more diversified and decentralized, moreemphasis was placed on measuring profitabilityand addressing other issues such asperformance measurement, quality management, and customer service. This created aneed for different and more accurate information for decision making.It is quite possible that many companies couldnotsucceed in our current businessenvironment without having the benefit of management accounting to assist in planning,decisionmaking and control.Problem1.3a)Scorekeepingb)Problem solvingc)Problem solvingd)Decision makinge)Scorekeepingf)Scorekeeping

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Problem 1.4a)Scorekeepingb)Scorekeepingc)Problem solvingd)Decision makinge)Decision makingf)Problem solvingProblem 1.5a)Planning, controlb)Planning, controlc)Control, decision-makingd)Controle)Planning, decision-makingf)Controlg)Controlh)Planning, control, decision-makingProblem 1.6a)The way a company costs its products is an internal issue and does not concernexternal shareholders.b)It was not necessary to report these changes to external stakeholders becausethe changes would not have impacted the final results reported in the financialstatements. In the future, the effect should be increased profit assuming the newcosting method provides for more accurate pricing.Problem 1.7The best action Chang could take would be to engage external auditors to review thestatements for accuracy and reliability.But that could be expensive, so she may firstwant to discuss with Mr. Rosen any anomalies that might have arisen during the year,such asa)Have all the year-end accruals been recorded correctly?b)Were there any significant changes in accounting methods, like depreciation orinventory?c)Were there any significant events that might have an impact on profit (flood,inflation, market conditions)?

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Problem 1.8Both are correct. The financial indicators that Aldo is proposing are important forassessing past performance and are considered lagging indicators. Non-financialmeasures, as proposed by Belinda, are leading indicators and are better for showingtrends. They help to predict future performance.In reality,both financial and non-financial performance measures are important inevaluating divisional performance as indicated by the popular balance scorecard.

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CHAPTER2Solutions to ProblemsProblem2.1Value-based management uses a variety of techniques to measure increases inshareholder value, which is assumed to be the primary goal of all businessorganizations. Shareholder valuerefers to the economic value of an investment bydiscounting future cash flows to their present value using the cost of capital for thebusiness. To achieve shareholder value, a business must generate profits in theirmarkets for goods and services (product markets) that exceed the cost of capital (theweighted average cost of equity and borrowings) in the capital market.Problem2.2Theresponsibilities of the board include setting the company’s strategicgoals, providingleadership to senior management, monitoring business performance, and reportingtoshareholders.This means the board should set the company’s strategic aims andensure that the necessary financial and human resources are in place for the companyto meet its objectives and review management performance.The role of a Board is to provide leadership of the company within a framework ofprudent and effectivecontrols which enables risk to be assessed and managed. Thesecontrols include many accounting controls including budgets, capital expenditureevaluations, etc.Under governance legislation, the financial reports of a company are the responsibilityof the directors.Directors are responsible for keeping proper accounting records thatdisclose with reasonable accuracy the financial position of the company at any time andto ensure that financial reports comply with generally accepted accounting principles.They are also responsible for safeguarding the company’s assets and for takingreasonable steps to prevent and detect fraud.Problem2.3Shareholder value analysis emphasizes the processes by which shareholder value isachieved. Shareholder value canbe determined by using such measures as totalshareholder return, market value added, shareholder value added, and economic valueadded.This form ofvalue analysis compares cost with the value to the customer.Consequently, improving shareholdervalue is inextricably linked with both strategy andaccounting.

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In practice, the pursuit of shareholder value (or economic value added) can beachievedthrough the introduction of new or redesigned products and services, themanagement of costs, the development of performance measurement systems, andimproved decision making.Problem2.4An audit of financial statements is an examination of the accounting records of acompany carried out by an independent auditor to ensure that the records have beenproperly maintained, the financial statements do not contain any misrepresentations,and the statements and other financial information fairly represents the organization’sfinancial position.Auditors carry out their audits in accordance with Canadian AuditingStandards. Anaudit normally includes examination of evidence relevant to the amounts anddisclosures in financial reports, an assessment of significant estimates and judgmentsmade by directors in preparing the financial reports, and an opinion as to whether theaccounting policies are appropriate, consistent, and adequately disclosed.Problem2.5The objectives of the audit committee are to:•Help directors meet theirresponsibilities, especially for accountability•Provide better communication between directors and external auditors•Enhance the external auditor’s independence•Increase the credibility and objectivity of financial reports•Strengthen the role of the outside directors by facilitating in-depth discussionsamong directorson the committee, management, and external auditorsProblem2.6Under governance legislation, the directors are responsible for the financial reports of acompany. This involves taking responsibility for keeping proper accounting records thatdisclose with reasonable accuracy the financial position of the company at any time andto ensure that financial reports comply with generally accepted accounting principles.They are also responsible for safeguarding the company’s assets and for takingreasonable steps to prevent and detect fraud.In the process of preparing the financial statements, directors are responsible forselecting suitable accounting policies and applying them consistently. When required tomake judgments and estimates,the boardmust ensure they are reasonable and

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prudent. Further, directors must prepare financial reports under the assumption thecompany is a going concern.This is not to say the directors are the individuals that actually prepare the financialstatements. This is almost always delegated to professionals, managers and otheremployees; however, the responsibility always remains with the directors.

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CHAPTER3Solutions to ProblemsProblem3.1TransactionProfitCash FlowAssets(not cash)LiabilitiesOwner contributes cashIncreaseBuys equipment on creditIncreaseIncreaseBuys inventory oncreditIncreaseIncreaseTakes out a loan from the bankIncreaseIncreaseSells goods on creditIncreaseIncreasePays cash for expensesDecreaseDecreasePays cash to suppliersDecreaseDecreaseReceives cash fromcustomersIncreaseDecreaseDepreciates equipmentDecreaseDecreaseProblem3.2a)Abusiness entityis a person, company, corporation or other legal business that isconsidered independent of its owners for accounting purposes.b) Theaccrual principlerequires income to be recognized in the accounting recordswhen it is earned, and expenses are recognized when they are incurred.It does notallow for recording transactions on a cash basis.c) Thematching principleis a corollary of the accrual principle and is based on thepremisethat“related” income and expenses have to be recorded in the sameaccounting period. That is, the income earned for a particular period has to be matchedwith the expenses that produced that income.d)When financial reports are prepared assuming that the business will continue inoperations for the foreseeable future, this is known as agoing concern. Thisassumption has a significant impact on asset valuations, as asset valuesforliquidationare unlikely to equal asset values of a business that will be continuing operations.

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e)Consistencyrefers to using the same accounting standards and principles fromyear to year. Sometimes changes mayaffecthow the financial situation is presented.Problem3.3a)Social cost:is a cost that would normally be incurred by the business, but throughdecisions or circumstances, has been transferred to society.b)Opportunity cost: is not an actual transfer of cash. Instead,itis the cost associatedwith not doing something; the cost of a lost opportunity fromtaking one decisionover another.c)Sunk cost: are costs that were incurred in the pastand cannot be changed.Therefore they are irrelevant to decisions about the future.d)Cash cost: is the amount of cash actually expended to acquire something of value.It involves an actual transfer of cash.Problem3.4The four maincategories of internal control for information systems are as follows.1.Security controls, including personnel, access, and software controls, are put inplace to prevent unauthorized access, modification or destruction of stored data, themost common of which is password protection.2. The purpose ofapplication controlsis to prevent, detect, and correct transactiondata entry processing errorsso that the information that is produced is reliable,complete and accurate. These controls will be found at the input, processing and outputlevels.3.Network controls, such as firewalls and data encryption, are aimed at protecting thesystems from external threats such as viruses, hacking or theft.4.Contingency controlsmust be put in place in case the other controls fail or there isa major disaster. They are designed to get the business back to full operations asquickly as possible after a failure or event. The most common contingency control iskeeping data back-up files off-site in a secure place.

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Problem3.5TransactionProfit:Income lessexpensesCash FlowAssets(not cash)Liabilitiesand EquityIssues shares to publicIncreaseIncreaseBorrows money over five yearsIncreaseIncreasePays cash forequipmentDecreaseIncreaseBuys inventory on creditIncreaseIncreaseSells goods on creditIncreaseIncreasePays cash for salaries, rent, etc.DecreaseDecreasePays cash to suppliersDecreaseDecreaseReceives cash fromcustomersIncreaseDecreaseDepreciates equipmentDecreaseDecrease

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Problem 3.6a)Profit for the year:Income$ 135,000Less: Advertising$ 15,000Rent10,000Salaries75,000100,000Profit$35,000b)Capital at the end of the year:Beginning capital$71,000Plus: profit for the year35,000Capital at the end of the year$ 106,000ORBank$5,000Accounts receivable12,000Fixed assets100,000Total assets117,000Less: liabilities-Accounts payable11,000$ 106,000

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CHAPTER4Solutions to ProblemsProblem4.1a.Gross profit = Sales–Cost of Sales = $100,000–$60,000 =$40,000b.Gross profit margin = Gross profit ÷ Sales = $40,000 ÷ $100,000 =40%c.Net profit = Gross profit–Expenses = $40,000–$30,000–$2,000 =$8,000d.Net profit margin = Net profit ÷ Sales = $8,000 ÷ $100,000 =8%Problem 4.2Users of financial statements are defined by theFramework for the Preparation andPresentation of Financial Statementsasexisting and potentialinvestors, employees,lenders, suppliers and trade creditors, customers, government and the public.Management is not defined as a user because management has the ability to determinethe form and content of the informationto meet its ownneeds. The reporting ofinformation to meet the needs of management is beyond the scope of theFramework.Problem4.3Management is responsible for the preparation of financial statements in accordancewith the applicable financial reporting framework,including their fairpresentation.Management is also responsible for such internalcontrol as it determinesarenecessaryto enable the preparation of financial statements that are freefrommaterial misstatement, whether due to fraud or error.Problem4.4Canadian legislation requires that organization’s financial statements present fairly thefinancial position, financial performance, and cash flows of an entity; be preparedaccording to generally accepted accounting principles (GAAP); and be audited orreviewed to ensure that this is the case. The principles, outlinedin theCICAHandbook,guides management in preparing financial statements that comply with this legislation.Part I of theCICAHandbookconsists ofInternationalFinancial Reporting Standards(IFRS)and is applicable to public entities. Part II of theCICAHandbookconsists ofAccountingStandards for PrivateEnterprises(ASPE)and applies to private

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companies (although they can chooseto use Part I if they wish).Part III applies to not-for-profit organizations.Apart from these specific issues, not-for-profit organizationsapply ASPE. There are also separate accounting standards for the public sector orgovernment.These “parts” areoftenreferred to as the financial reporting framework.Problem4.5The purpose of theConceptual Framework for Financial Reportingis to limit thedifferences in the definitions of the elements of financial statements created by thevariety of social, economic, and legal circumstances from country to country, and bydifferent countries having to consider the needs of different users of financial statementswhen setting national requirements. This has also resulted in the use of different criteriafor the recognition of items in the financial statements and in a preference for differentbases of measurement. The conceptual framework harmonizes regulations, accountingstandards, and procedures relating to the preparation and presentation of financialstatements. It also provides a basis for establishing an appropriate standard to usewhen an accounting policy is needed.Problem 4.6Confirmative value:Financial information hasconfirmatory valueif it providesfeedback about (confirms orchanges) previous evaluations.Predictive value:Financial information haspredictive valueif it can be used to predictfuture outcomes. Financial information need not be a prediction or forecast to havepredictive value. Financial information with predictive value is employed by users inmaking their own predictions.Materiality:Informationhasmaterialityif its omission ormisstatement could influencethe economic decisions of users made on the basis of financial reports.

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Problem4.7(a)Kazam Services--Record of TransactionsProperty,Plant &EquipmentAccountsReceivableCash(Bank)AccountsPayableLong-termLoanCapitalBeginning balance$500,000$125,000$(35,000)$(90,000)$(300,000)$(200,000)Long term loan for building150,000(150,000)Received from debtors(45,000)45,000Paid creditors(30,000)30,000Invoiced customers70,000(70,000)Paid salaries(15,000)15,000Paid office expenses(5,000)5,000Depreciation(20,000)20,000Ending balance$630,000$150,000$(40,000)$(60,000)$(450,000)$(230,000)(b)Kazam ServicesStatement of Comprehensive IncomeService Income$70,000Less: Expenses40,000Operating Profit$30,000Kazam ServicesStatement of Financial PositionAssetsCurrent assets:Accounts receivable$150,000Non-current assets:Property, plant, & equip.$650,000Less:Accum. depreciation20,000630,000Total assets$780,000LiabilitiesCurrent liabilities:Bank overdraft$40,000

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Accounts payable60,000Total current liabilities$100,000Non-current liabilities:Long-term loans450,000Total liabilities$550,000EquityCapital$200,000Retained earnings30,000Total equity$230,000Total liabilities and equity$780,000Problem4.8(a)Working capital:Current assets$125,000Less: current liabilities75,000$50,000(b)Total assets:Non-current assets$250,000Current assets125,000$375,000(c)Shareholders’ equity:Total assets$375,000Less:Totalliabilities($75,000 + $125,000)200,000$175,000

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Problem 4.9Answer e: Although the operating profit has increased (from $137,000 to $139,000), theoperating margin has decreased (from 11.7% to 11.1%) as a result of a reduction in thegross margin (from 39.1% to 37%) and higher expenses (from $323,000 to $324,000),despite sales growth (of 6.4%).20122011Sales$1,250,000$1,175,000Less: Cost of goods sold787,000715,000Gross margin463,00037.0%460,00039.1%Less: Selling&adminexpenses324,000323,000$139,00011.1%$137,00011.7%Problem 4.10a.PrepaymentThe annual payment is 24 ×$400 =$9,600 (this is$800/month). The prepayment atMarch31is 9/12 (Apr–Dec) @$800 =$7,200.Profit is reduced by$2,400 (expense: 3 months @$800).Asset in thestatement of financial positionis increased by$7,200(prepayment is an asset: 9 months @$800).Cash flow is reduced by$9,600 (payment December31).NB: The effect of the prepayment of$7,200 is to carry forward the expense to thenext financial year.b.AccrualThe simple solution is to divide$6,000 by 12 months and charge$500/monthto profit.However, this ignores seasonal fluctuations and cash flow differences from quarter toquarter.The quarterly bills have been paid during the year, but thelast quarterly bill was inNovember. Therefore the business is missing one month’s expense (that is, December).To determine the amount we need to calculate the seasonal charges:$6,000 × 70% =$4,200 for September–February/6months=$700/month.$6,000 × 30% =$1,800 for March–August/6months=$300/month.Accrue for one month (December) =$700.

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