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

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-1Chapter 1CHAPTER 1Overview of Corporate Financial ReportingASSESSING YOUR RECALL SOLUTIONS1-1Accounting,asaninformationsystem,provideseconomicinformation to users to allow them to determine whether theentityisoperatingeffectivelyandefficiently.Inaddition,accounting facilitates the making of important decisions in themanagement of the entity, such as whether new assets shouldbe purchased or leased or whether equity financing should beused as opposed to debt financing.1-2A private corporation is one whose ownership shares are heldby a small number of individuals. This makes the transfer ofownership more difficult,as the shares do not trade on a publicstock exchange.A public corporation has shares held by alarger number of individuals or entities,and these shares arebought and sold on a public stock exchange (such as theToronto Stock Exchange).

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-2Chapter 11-3Shareholders–These users are interested in the performanceof their investment in the company. They will use the financialstatements to evaluate how well management is handling theirinvestment.FinancialInstitutions–Theseusersareinterestedinevaluating the company to decide whether to lend money to it.They will use the statements to evaluate the risk that will betaken in making the loan.Taxing Authorities–These users establish the rules for howtaxable income will be measured. They are interested in the fairmeasurement of the financial position of the company so thatthe appropriate tax will be paid. Note, however, that incometaxes are not paid based on thenet earningsreported in thefinancial statements; rather, income taxes are based on taxableincome. In preparing the tax return, the financial statements’netincome is the starting point and is then adjusted to arrive attaxable income.Financial Analysts–These users provide investment advicetotheircustomers.Theyareinterestedinevaluatingtheinvestment potential of various companies. They will want toevaluate not only individual companies, but also make cross-company comparisons.CreditRatingAgencies–Theseagenciesevaluatecompaniesastotheircreditrisks.Theseratingsarethensupplied to investors who want to make investments in thesecompanies, either through their common shares or through theirdebt.(Note:there are other users discussed in the chapter thatwould be equally acceptable answers to this question.)

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-3Chapter 11-4Financialaccountingisgovernedbyasetofaccountingguidelines.These guidelines are referred to as GenerallyAccepted Accounting Principles (GAAP)or Financial ReportingStandards. The Accounting Standards Board (AcSB) of theCanadianInstituteofCharteredAccountants(CICA)setsaccountingandreportingstandardsforprivatecompaniesfollowingaccountingstandardsforprivateenterprises.TheInternationalAccountingStandardsBoard(IASB)setstheInternational Financial Reporting Standards (IFRS) for publiccompanies,These guidelines have the force of law becausethey are recognized in both federal and provincialstatutesthatgovern companies.1-5The main role of the International Accounting Standards Board(IASB)istopromotetheharmonizationofinternationalaccounting standards around the world.To that effect, theIASB has developed relationships with standard-setting bodiesin many countries, including the Accounting Standards Board ofthe Canadian Institute of Chartered Accountants in Canada andthe Financial Accounting Standards Board in the United States,intryingtoencouragethemtochangetheiraccountingstandardstointernationalstandards.InCanada,effectiveJanuary 1, 2011, IFRS must be implemented as the financialreporting standard for public companies.

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-4Chapter 11-6The major qualitative characteristics that accounting informationshould possess are:Understandability–The information must be understandableto a reasonably well-informed user.Relevance–The information must be relevant for the decisionunderconsideration.Relevanceconsistsofseveralsub-characteristics:Predictive Value–The informationis useful in predictingfuture results, such as income or cash flow, and thereforeshouldbehelpfultouserswhomakedecisionsthatdepend on predictions of future events.ConfirmatoryValue–The information must provide theuser with the ability toevaluate the outcomes of previousdecisions, giving them feedback on their past decisions.Reliability–The information must be reliable to be of use to adecision maker. Reliability hasfivesub-characteristics:Representational Faithfulness–The information mustrepresent what it purports to represent.Substance Over Form–Accountants need to conveythe underlying substance of the transaction rather thanjust record and repeat transactions according to requiredtransactions.They need to look beyond the accountingstandardsandensurethattheinformationconveyseconomic reality.Neutrality–The information must not be produced in abiased way relative to the effects it has on the entity beingmeasured.Prudence–Accountants and users must use cautionwhen making judgements since accounting transactionsandmeasurementsarenotalwaysexactandofteninclude uncertainties.Completeness–Preparersneedtoensurethatthefinancial statementscontainall of the information thatusers need in order to make informed decisions.Comparability–Information produced by different companiesmustbeunderstoodbyuserssothattheycanmakecomparisons across companies. Companies are not required tousethesameaccountingmethods.Therefore,usersmust

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-5Chapter 1understand the impact of the various methods allowed underCanadianprivateenterpriseGAAPand IFRS.1-7Thethreemajortypesofactivitiesinwhichallcompaniesengage are financing, investing, and operating activities.Financingreferstotheactivityofobtainingfundsforthecompany to operate. Two primary sources of funds are ownersand creditors.Some typical financing activities are:short-andlong-term borrowing, repayment of debt, dividend payments,and new issuance of shares.Investingrefers to the activity of using funds generated byfinancing activities to acquire assets that will generate profits inthe future. Investments include the purchase of property, plant,and equipment and the purchase and sale of investments inother companies.Operatingactivities are associated with developing, producing,marketing,andsellingtheproductsand/orservicesofthecompany.Theyare mainlyconcerned with theday-to-dayactivities of the company.1-8The three major categories of items that appear in a typicalstatementoffinancialposition(balancesheet)areassets,liabilities, and shareholders’ equity.Assetsare those things that a company owns or has the rightto use and which have probable future value. The company isable to perform its activities and thereby generate profits withthehelpofitsassets,whichmeansthattheyareincomeearning. Assets may be current or non-current. Current assetswill be converted into cash within the next year or operatingcycle.Examplesincludecash,inventory,andaccountsreceivable. Non-current assets are those assets whose benefitsmay be realized over a period longer than one year or operatingcycle.Examplesincludeproperty,plant,andequipment,patents, trademarks, etc.Liabilitiesare the amounts that the company owes to othersand which require a probable future sacrifice ofresources.Liabilities may be classified as current and non-current. Current

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-6Chapter 1liabilities include notes payable due within one year, accountspayable,accruedexpenses,anddividendspayable.Non-current liabilities include long-term debt, long-term warrantiespayable, and pension liabilities.Shareholders’ Equityrepresents the wealth or the ownershipinterestoftheowners.Shareholders’equitymayalsobedefined as the difference between the assets and liabilities of acompany:Shareholders’ Equity = Assets–LiabilitiesTherearetwomajorshareholders’equityaccounts:sharecapitalandretainedearnings.Sharecapitalrepresentstheamount that investors originally paid for the shares that thecompany issued.Retained earnings consist of the earnings ofthe company less the dividends paid.1-9Thestatementofearningsdescribestheresultsoftheoperating activities from the beginning of the period to the endof the current period. Net earnings is defined as income lessexpenses. Income is money or resources that flow into thecompanyfromoperating activities. Expensesare moneyorresourcesthatflowoutofthecompanyfromoperatingactivities.The investing and financing activities aretypicallydepicted on the statement of financial position.1-10The three main financial statements contained in all annualreports are thestatement of earnings, thestatement of financialposition (balance sheet), and the cash flow statement.Statement of Earnings:The income statement records theinflow of revenues and the outflow of expenses over the year.Assuch,itmeasurestheincrease(ordecrease)intheshareholders’ wealth during the period. The statement helpsinvestors evaluate the performance of the company during theperiod and it is useful in forecasting the future results of thecompany.StatementofFinancialPosition(BalanceSheet):Thestatement of financial positiongives the financial status of thecompany at a particular point in time. Since it divulges thedetails of assets, liabilities, and shareholders’ equity, it gives

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-7Chapter 1users a fair idea of the riskiness of the mix of assets andliabilities of the company.Cash Flow Statement:This statement measures the inflowand outflow of cash during a specific period of time. It is veryuseful in measuring the performance of the company as well aspredicting future cash flows since it gives details about theinflowandoutflowofcashbrokendownintooperating,investing, and financing activities. It explains the change incash between the beginning and the end of the period.1-11The notes to the financial statements provide more detail aboutitems in the financial statements and are cross-referenced. Thefirst or second note to the financial statements often discussestheSummaryofAccountingPolicies,whichdescribesthechoicesmadebymanagementfromamongthepossiblechoices and judgments acceptable underCanadianGAAPforprivate enterprises or IFRS.1-12The Management Discussion and Analysis (MD&A) section ofthe annual report provides an overview of the previous year, adiscussionoftherisksfacingthecompany,andsomeinformation about future plans.Many companies use this partof the report to make more extensive, detailed comments onthe company and its operating results. Often the information ispresented from the company's perspective.

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-8Chapter 11-13The objective of an auditor in his/her report to the shareholdersis to inform them whether the information given by the companyis presented fairly and whether the company has adhered toIFRS/GAAP in preparing its financial statements. An auditormayrenderdifferenttypesofopinions,dependingonthesituation. The different types of opinions are:1.Unqualified or “Clean” Opinion–IFRS/GAAP has beenfollowed and the information reported is fair.2.Qualified Opinion–With the exception of certain noteditems, the information is fair.3.Adverse Opinion–IFRS/GAAP has not been followedand the information reported does not reflect the truestate of affairs of the company.1-14The introduction and increased power of computer systemsallows accountants to capture a variety of financial informationand rapidly summarize it into financial statements and reports.Computersalsoenablemanagerstoaccessfinancialinformationquicklyandasoftentheywish.Financialstatements can be updated in real time and are always current.

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-9Chapter 1APPLYING YOUR KNOWLEDGE SOLUTIONS1-15a.The "principle of caution", according to Nils Vinge, ensuresthat the company maintains a strong financial position bychoosing non-aggressive business practices. For instance,in order to ensure that the company is not burdened by highlevels of debt which pose business risks, the company has apractise of always paying for business expenses withtheirown funds.In that manner, the company is using their ownmoney to grow, rather than using the money of lender orinvestors to fund growth with the risk of not meeting futurerepayment obligations.b.Mr. Vinge learned that using its accounting information tomonitor the company's financial health can lead to futuresuccess and growth. By keeping the accounting informationup to date, they can monitor inventory levels, determine theneed for price increasesor markdowns, and to manageearnings by monitoring revenues and controlling costs.1-16a.While historical cost is a much more reliable measure, itmeasures only one attribute about the land—its purchaseprice. While this cost would be relevant to establish theamount of profit if the company were to sell the land, it wouldnot be very relevant for much else. The current market valuewould be quite relevant if the company were trying to decidewhether to sell the land. The selling price for a comparablesite would therefore be relevant, but may not be a reliablemeasure of the fair value of the company’s land. While thesitethatsoldwas“comparable,”therewillalwaysbedifferences between various sites of land that may makethem non-comparable. If the company intends to sell theland, then the market value may be the most relevant valuetoreportonthestatementoffinancialposition(balancesheet). On the other hand, if the company intends to use theland to build a plant, then the current market value of theland would not be that relevant.Prudence would suggestthat users must use caution when making judgements sincethe fair value of the land is subjective and will often includeuncertainties

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-10Chapter 1b.Thefairvalue would likely be most relevant to a bankerbecause if the company defaults on the loan, the land wouldserve as collateral and the bank would be able to recover theprincipal of its loan from its sale. The historical cost wouldhave little or no relevance.c.Investors would also be interested in thefairvalue of theland.This would provide a better indication of the value ofthe company’s assets allowing investors to better assess therisk and return associated with investing in the company.1-17One of the fundamental characteristics of reliability isprudence.Prudencemay result in the exclusion of information that a usermay find relevant.For example, a user may find it relevant toknow that the asset land, which is recorded on thestatement offinancial position (balance sheet)at historical cost, is now worthtwice as much as the amount the company paid for it.Thisincrease in this asset’s value may have a significant impact onthefinancialresultsofthecompany–showingthatthecompany is in better shape than if only historical costs wereused.Prudence, however, does not permit increasing the valueof the land (although it calls for reducing the value of assetswhen necessary).Thus, this piece of information, althoughrelevant, would not be recorded on the balance sheet.Becauseofthepotentialtooverstateassetsandtherebyinfluence user’sdecision-making through the introductionofbias (a non-neutral estimate of an asset’s value), conservatismis often considered the over-riding characteristic.1-18This information would suggest that Matrix Technologies mightface reduced sales revenues andnet earningsin the future.Also, thecollectabilityof any amount owing to Matrix from thecustomer may be in doubt. Readers of the quarterly reportwould likely find such information relevant, as it would help inpredicting reduced levels of futureearningsand cash flow.Providing the information now about an expected future declineinsalesprovidesmoretimelyinformationtousersofthequarterly report, and thus, enables them to make earlier andbetter-informed investment decisions.Neutrality would dictatethat the information regarding the financial difficulties of a major

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-11Chapter 1customer should be made transparent to the user and nothidden or biased. Prudence would be used to realize that theamount of the impact of the customers' financial difficulties canonly be estimated on Matrix's financial statements.1-19Two possible reasons that users have difficulty understandingandevaluatingfinancialinformationaregenerallackofaccountingknowledgeandtheincreasingcomplexityofbusiness transactions. Standards setters attempt to address theknowledge factor implied in accounting but stating that it isexpected that users have a basic understanding of accountingprinciplesbeforetheyattempttoreadandusefinancialstatements.Thefinancialstatements and related notes will notthemselvesprovideyouwiththetoolstounderstandthefinancialstatements.You must have that base knowledgebeforeusingthefinancialstatements.Withtheincreasingcomplexityof business transactions, standards setters try tostress substance over form and representational faithfulness toensure that the economic reality of the transaction is givenpriority over the legal form of the transaction so a to not "mask"the position of the company or results of its operations.1-20Examples of Canadian Tire’s financing transactions:1.Shareissuancetoraisecapitalforpurchasingproperty, plant & equipment2.Issuance of long-term debt to raise capitalExamples of CanadianTire’s investing transactions:1.Purchase of buildings to house their retail stores2.Purchase of shelving racks and other displaysExamplesofCanadian Tire’s operating transactions:1.Purchase of inventory from suppliers2.Sale of goods and services

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-12Chapter 11-21Examples ofHudson Bay Company’s financing transactions:1.Issuance of shares to investors to raise capital forthe purchasing ofproperty, plant and equipment2.Issuanceoflong-termdebttoraisenecessarycapitaltobuildnewstoresorinvestinnewretailtechnologies (such as online shopping)Examples ofHudson Bay Company’s investing transactions:1.Purchaseofbuildingsandequipmentforretailoperations2.Purchase ofbuilding and vehicles for adistributionnetwork to move inventory between warehouses andretail storesExamplesofHudson Bay Company’s operating transactions:1.Sale ofretail inventory to customers2.Payment of salaries and wages toemployees1-22Examples of Scotiabank’s financing transactions:1.Issuance of shares to investors to raise capital tomeet regulatory requirements2.Issuanceoflong-termdebttoraisenecessarycapital to have funds available to lend money (providemortgages and loans) to customersExamples of Scotiabank's investing transactions:1.Purchase of buildings and equipment for in branchoperations2.Purchase of information technology equipment andsoftwaretomaintainthebankingtransactionsandprovide online access for customersExamples of Scotiabank's operating transactions:1. Sale of services and banking supplies (cheques,deposit books, etc.) to customers2. Payment of salaries and wages to employees

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-13Chapter 11-23Astatement of earningspresents the results of the operatingactivitiesofacompanyforaperiodoftime.Acashflowstatement reports the net cash flows of a company for a periodof time.Astatement of earningspresents mainly the results ofthe operating activities while a cash flow statement reports cashflows relating to operating, investing, and financing activities. Astatementofearningsgivesthenetearnings(netincome/profits) of a company whereas a cash flow statementexplains the inflows and outflows of cash for the period. Thestatement of earningsincludes items that are not related tocash, such asdepreciation. The cash flow statement includesitems related only to cash.1-24Sales revenue would be found on thestatement of earningsand represents the amounts charged to customers for the saleof goods and services.Accounts receivable appears on thebalance sheet and represents claims to cash for the sale ofgoods and services that have not yet been paid for by thecustomer.Accountsreceivable representsan asset ofthecompany. The connection between these two accounts is thataccounts receivable are created from sales that have beenmade on credit.1-25Wagespayable would be found on the balance sheetandrepresentstheamountthatthecompanyowestotheemployees for time worked but not yet paid to the employees.Wages expense would be found on the on the statement ofearningsandrepresentstheamountofsalariesincurred(earned by the employees) during the period.Wages payablerepresentsaliabilityofthecompanyandwagesexpenserepresentsauseoftheresourcesofthecompany.Theconnection between these two accounts is that wages payableare created from wages expense for time that has been workedby the employees that they have not been paid for yet.

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-14Chapter 11-26a.CLb.ISc.ISd.NCAe.CAf.ISg.SCFh.SCi.CAj.NCL1-27a.CLb.CAc.ISd.NCLe.CAf.IS and REg.SCFh.SCFi.ISj.IS1-28a.NCAb.ISc.SCFd.ISe.REf.ISg.REh.SCF and NCLi.ISj.NCA

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-15Chapter 11-29a.OAb.OAc.FAd.IAe.FAf.IAg.IA, gain or loss would affect OA in the indirect methodh.FA1-30a.IAb.OAc.OAd.FAe.OAf.OAg.FA1-31a.BSb.BSc.BSd.SEe.SEf.Ng.SEh.Ni.Nj.BS

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-16Chapter 11-32a.BSb.SEc.BSd.BSe.SEf.SEg.N (shown on statement of cash flows)h.BSi.N (liability has been discharged)j.BS1-33There were no items that appeared on both the balance sheetand the income statement.This is to be expected becauserevenues(expenses)representincreases(decreases)ineconomic resources and only appear on an income statementwhereasassets(liabilities)representeconomicresourcesowned (obligations owed) by the company and only appear ona balance sheet.1-34ABCDCurrent Assets$570,000$600,000$180,000$990,000Non-current Assets780,000735,000390,000660,000Total Assets1,350,0001,335,000570,0001,650,000Current Liabilities375,000345,000135,000390,000Non-current Liabilities337,000330,000105,000225,000Shareholders’ Equity638,000660,000330,0001,035,000Total Liabilities andShareholders’ Equity1,350,0001,335,000570,0001,650,000

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-17Chapter 11-35ABCDCurrent Assets$ 650,000$420,000$150,000$ 320,000Non-current Assets1,150,000380,000210,000760,000Total Assets1,800,000800,000360,0001,080,000Current Liabilities750,000170,00050,000410,000Non-current Liab.500,000205,000120,000270,000Shareholders’ Equity550,000425,000190,000400,000Total Liabilities andShareholders’ Equity1,800,000800,000360,0001,080,0001-36ABCDRetained EarningsDec. 31, Year 1$100,000$420,000$1,475,000$930,000NetEarnings40,000160,000550,000290,000Dividends declaredand paid10,00050,000225,000140,000Retained EarningsDec. 31, Year 2130,000530,0001,800,0001,080,000

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-18Chapter 11-37a.A Slice of LifeStatement of EarningsFor the month ofNovember, 2xxxSales$23,870Cost of ingredients used$7,130Employee wages5,120Rent1,200Electricity670Water420Telephone220Total Expenses14,760Net Earnings$9,110b.Other costs that Jason might have incurred in November notlisted above include:1.Depreciationof kitchen facilities and equipment2. Income taxes3.Depreciationof pizza delivery vehicles4.Otheremployeebenefitcostssuch asemployerportion of CPP and EI

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-19Chapter 11-38a.Scents UnlimitedStatement of EarningsFor the month of May, 2xxxSales$24,730Cost of goods sold$10,733Employee wages7,000Telephone160Electricity and Water370Rent1,500Gas and Repairs329Total Expenses20,092Net Earnings$ 4,638b.Other costs that Lydia might have incurred in May not listedabove include:1.Depreciation of vehicles and equipment2. Income taxes3.Cost of any certifications, licences or associationmemberships4.Otheremployeebenefitcostssuch asemployerportion of CPP and EI

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-20Chapter 11-39a.Call Of The WildLtd.Statement of EarningsFor the month of July, 2xxxRevenue from excursions$ 171,430Employee Wages$ 49,860Advertising14,610Supplies Expense25,629Gas &Repairs Expense3,460Telephone & Electricity1,532Total expenses95,091Net income$ 76,339b.Other costs Michelle might have incurred in July that werenot listed above include:1.Depreciationof tents and rafting equipment2. Income taxes3. Interest paid on any outstanding loans4.Otheremployeebenefitcostssuch asemployerportion of CPP and EI1-40a.ItemClassificationSupply of ingredientsAssetWages owedLiabilityBank loan owed to the bankLiabilityCash held in chequing accountAssetCost of ovens & refrigeratorsAssetPrepaid rent for DecemberAssetCommon sharesShareholders’ equityRetained EarningsShareholders’ equity

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-21Chapter 11-40 (continued)b.A Slice of LifeBalance SheetJuly 31, 2xxxCash$ 3,490Wages owed$1,460Ingredients670Bank loan11,000Prepaid rent1,200Common Shares5,000Equipment14,300Retained Earnings2,200Total Assets$ 19,660TotalLiabilities andShareholders’Equity$19,660c.It is unlikely that Jason will have an account called ‘accountsreceivable’ since most of his sales will be on a cash basis. Ifcustomers purchased pizza and other food items on credit,then Jason would have an accounts receivable section onhis balance sheet that would represent the amount that he isowedfromhiscustomers.However,pizzaparlourssellproductsthatarerelativelyinexpensive,thereforemostcustomers, if not all, will have enough funds to pay for theirpurchase in their wallet, which is why it is unlikely that Jasonwill have an account called“accounts receivable”.It may benecessary for him to have an accounts receivable account ifhe has customers that purchase frequently and/or in largequantities, such as a school.In that case, it wouldbeappropriate to ship a large order of pizzas along with aninvoice. Until the invoice is paid (by the school for example),the amount owing would be an “accounts receivable”.

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-22Chapter 11-41a.ItemClassificationInventoryAssetWages owed to employeesLiabilityBank loan owed to the bankLiabilityCash held in chequing accountAssetCost of refrigeratorAssetPrepaid rent for JuneAssetCommon sharesShareholders’ equityRetained EarningsShareholders’ equityb.Scents UnlimitedBalance SheetMay 31, 2xxxCash$ 8,361Wages owed$950Inventory1,100Bank loan8,000Prepaid rent1,500Common Shares18,000Refrigerator18,695Retained Earnings2,706Total Assets$ 29,656Total Liabilities andShareholders’ Equity$29,656

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-23Chapter 11-41 (continued)c.It is unlikely that Lydia will have an account called ‘accountsreceivable’ since most of her sales will be on a cash basis. Ifcustomers purchased flowers and other items on credit, thenLydia would have an accounts receivable section on herbalance sheet that would represent the amount that she isowedfromhercustomers.However,floristshopssellproductsthatarerelativelyinexpensive,thereforemostcustomers, if not all, will have enough funds to pay for theirpurchase in their wallet, which is why it is unlikely that Lydiawill have an account called “accounts receivable”.It may benecessary for her to have an accounts receivable account ifshe has customers that purchase frequently and/or in largequantities, such as a event planner. In that case, it would beappropriate to ship a large order of flowers along with aninvoice.Until the invoice is paid (by the event planner forexample),theamountowingwouldbean“accountsreceivable”.

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-24Chapter 11-42a.ItemClassificationBank loan owed to bankLiabilitySupplies on handAssetCash in bank accountsAssetCommon sharesShareholders’ equityCost of tents and raftsAssetRetained earningsShareholders’ equityAmount prepaid by customersfor August tripsLiabilityVehiclesAssetb.Call Of The Wild Ltd.Balance SheetAs at July 31, 2xxxCash$33,670Amounts paid forSupplies on hand 13,420trips in August$19,140Vehicles38,400Bank loan24,000Cost of tents/rafts34,100Common shares20,000Retained Earnings56,450$119,590$119,590c.Inventory refers to products that have been purchased forresale to customers. Michelle’s business does not have anyproducts,butinsteaditprovidesaservice,raftingexcursions.Thus, the real product is not inventory but aservice.d.Michelle’sbusiness does not produce a product for whichcustomers would be extended credit. Michelle would wanther customers to pay in advance.Unlike a car dealershipwhere the company can repossess the car if the customerdoesnotpay,itwouldnotbepossibleforMichelletorepossess a rafting excursion once it is complete. And likethe pizzaparlour, the cost for the service is notthatlarge socustomers will be able to afford to pay right away. Thus,Michelle’sbusinessisnotlikelytohaveanaccountsreceivable account.

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-25Chapter 11-43Bombardier Inc.Assets-Inventory ofAircraft-Inventory ofRail vehiclesLiabilities-Long-term debtSobeysInc.Assets-Inventory (groceries, pharmaceutical products)-Shelving-EquipmentLiabilities-Wages payableMcCain Foods LimitedAssets-Processing and PackagingEquipment-Inventory ofingredients and finished food productsLiabilities-AccountspayableRoyal BankAssets-Receivables-CashLiabilities-Deposits from CustomersSuncor Energy Inc.Assets-Cash-Oil and gas properties and drilling and extraction equipmentLiabilities-Bonds payable

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-26Chapter 11-43 (continued)Westjet AirlinesAssets-Airplanes-Airportterminallicensingcontractsandagreements(intangible asset)Liabilities-Depositsfromcustomersforfutureflights(unearnedrevenue)Danier LeatherInc.Assets-Inventory for sale-Raw materials and supplies to manufacture clothingLiabilities-Wages payable1-44Bombardier Inc.Statement of Earnings-Manufacturing Labour-Income tax expenseSobeysInc.Statement of Earnings-Cost of goods sold (grocery items)-General&administrative expensesMcCain Foods LimitedStatement of Earnings-Sales revenue-Cost of goods sold (processed and packaged food)

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-27Chapter 11-44 (continued)Royal BankStatement of Earnings-Interest revenue (from customer loans)-Interest expense (on customer deposits)Suncor Energy Inc.Statement of Earnings-Sales revenue-Research and explorationexpensesWestjet AirlinesStatement of Earnings-Sales revenue-FuelexpenseDanier Leather Inc.Statement of Earnings-Sales revenue-Cost of goods sold1-45Bombardier Inc.Statement of Cash Flows-Increase/decrease in inventory-Purchase of manufacturing equipmentSobeysInc.Statement of Cash Flows-Increase in inventory-Issuance of common sharesMcCain Foods LimitedStatement of Cash Flows-Debt issuance-Purchase ofraw foods and packaging supplies

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-28Chapter 11-45 (continued)Royal BankStatement of Cash Flows-Purchase of securities-Increase/decrease in customer depositsSuncor Energy Inc.Statement of Cash Flows-Cashproceedsfromthesaleofunsuccessfulpropertiesexplored (dry wells)-ResearchcostsWestjet AirlinesStatement of Cash Flows-Issuing bonds-Paying down long-term debtDanier Leather Inc.Statement of Cash Flows-Product sales-Increase in inventory

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-29Chapter 1USER PERSPECTIVE SOLUTIONS1-46-acquisition financing strategy (rent or buy);-forecast of cash flows;-availability and dependability of grocery suppliers to be used;-proximity of other grocery stores as competitors;-number of customers living in the local area;-taxes and zoning by-laws or restrictions that might apply;-management and junior staff needed;-suitability of store (size, type, space; age of building, parkinglots for customers);-equipment and furniture needed.1-47Discussion points can be raised regarding the points listed in 1-46above.1-48Accounting for inventory at its current market price rather thanat its historical cost would be more relevant for users in that itwouldhelpthemtobetterpredictthefuturecashflowsgenerated from the sale of that inventory (predictive value).Atthe same time, accounting for inventory at its current marketprice would be less reliable, because market value tends tofluctuate, and is thus less verifiable than historical cost. Due tothepotentialuncertaintyindeterminingmarketvalue,theprinciple of conservatism also applies, suggesting the use ofhistorical cost.

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Financial Accounting: A User Perspective, Sixth Canadian EditionHoskin, Fizzell, CherrySolutions Manual1-30Chapter 11-49Similar to question 1-48: Accounting for equipment at its currentmarket price rather than at its historical cost would be morerelevant for users in that it would help them to better predict thefuture cash flows in two ways: the cash flows generated fromthesaleoftheequipmentandthecashflowsrequiredtoreplace the equipment (predictive value).At the same time,accounting for equipment at its current market price would beless reliable, because market value tends to fluctuate, and isthus less verifiable thandepreciatedhistorical cost. Due to thepotential uncertainty in determining market value, the principleof conservatism also applies, suggesting the use ofdepreciatedhistorical cost.1-50The classified balance sheet assists users in predicting thecompany’s cash flows by differentiating between those assetsand liabilities that will become due within the next operatingcycle, and those that will not.Current assets represent assetsthat will be used up within the next operating cycle.Currentliabilities represent liabilities that must be paid within the nextoperating cycle.By identifying these separately from long-termassets and liabilities, the company is reporting the expectedfuturecashinflowsandoutflowsforthenextperiod.Theclassification should be neutral and non-biased such that itpresents the actual substance of the transaction, rather thanpresenting it to make management look good.This informationis relevant to users for its predictive value.

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