Financial Accounting: A User Perspective , 6th Canadian Edition Solution Manual

Name: Financial Accounting: A User Perspective , 6th Canadian Edition Solution Manual
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Financial Accounting: A User Perspective, Sixth Canadian Edition Hoskin, Fizzell, Cherry
Solutions Manual 1-1 Chapter 1
CHAPTER 1
Overview of Corporate Financial Reporting
ASSESSING YOUR RECALL SOLUTIONS
1-1 Accounting, as an information system, provides economic
information to users to allow them to determine whether the
entity is operating effectively and efficiently. In addition,
accounting facilitates the making of important decisions in the
management of the entity, such as whether new assets should
be purchased or leased or whether equity financing should be
used as opposed to debt financing.
1-2 A private corporation is one whose ownership shares are held
by a small number of individuals. This makes the transfer of
ownership more difficult, as the shares do not trade on a public
stock exchange. A public corporation has shares held by a
larger number of individuals or entities, and these shares are
bought and sold on a public stock exchange (such as the
Toronto Stock Exchange).

Financial Accounting: A User Perspective, Sixth Canadian Edition Hoskin, Fizzell, Cherry
Solutions Manual 1-2 Chapter 1
1-3 Shareholders – These users are interested in the performance
of their investment in the company. They will use the financial
statements to evaluate how well management is handling their
investment.
Financial Institutions – These users are interested in
evaluating the company to decide whether to lend money to it.
They will use the statements to evaluate the risk that will be
taken in making the loan.
Taxing Authorities – These users establish the rules for how
taxable income will be measured. They are interested in the fair
measurement of the financial position of the company so that
the appropriate tax will be paid. Note, however, that income
taxes are not paid based on the net earnings reported in the
financial statements; rather, income taxes are based on taxable
income. In preparing the tax return, the financial statements’ net
income is the starting point and is then adjusted to arrive at
taxable income.
Financial Analysts – These users provide investment advice
to their customers. They are interested in evaluating the
investment potential of various companies. They will want to
evaluate not only individual companies, but also make cross-
company comparisons.
Credit Rating Agencies – These agencies evaluate
companies as to their credit risks. These ratings are then
supplied to investors who want to make investments in these
companies, either through their common shares or through their
debt.
(Note: there are other users discussed in the chapter that
would be equally acceptable answers to this question.)

Financial Accounting: A User Perspective, Sixth Canadian Edition Hoskin, Fizzell, Cherry
Solutions Manual 1-3 Chapter 1
1-4 Financial accounting is governed by a set of accounting
guidelines. These guidelines are referred to as Generally
Accepted Accounting Principles (GAAP) or Financial Reporting
Standards. The Accounting Standards Board (AcSB) of the
Canadian Institute of Chartered Accountants (CICA) sets
accounting and reporting standards for private companies
following accounting standards for private enterprises. The
International Accounting Standards Board (IASB) sets

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Financial Accounting: A User Perspective, Sixth Canadian Edition Hoskin, Fizzell, Cherry
Solutions Manual 1-7 Chapter 1
users a fair idea of the riskiness of the mix of assets and
liabilities of the company.
Cash Flow Statement: This statement measures the inflow
and outflow of cash during a specific period of time. It is very
useful in measuring the performance of the company as well as
predicting future cash flows since it gives details about the
inflow and outflow of cash broken down into operating,
investing, and financing activities. It explains the change in
cash between the beginning and the end of the period.
1-11 The notes to the financial statements provide more detail about
items in the financial statements and are cross-referenced. The
first or second note to the financial statements often discusses
the Summary of Accounting Policies, which describes the
choices made by management from among the

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