Financial Accounting, Sixth Canadian Edition Solution Manual

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SOLUTION MANUALChris DereshDouglas CollegeFinancial AccountingSixth Canadian EditionWalter T. Harrison, Jr.Baylor UniversityCharles T. HorngrenStanford UniversityC. William (Bill) ThomasBaylor UniversityWendy M. TietzKent State UniversityGreg BerberichUniversity of WaterlooCatherine SeguinUniversity of Toronto

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Resource Manual for Harrison et al.,Financial Accounting, 6ce1-1CHAPTER OVERVIEWCHAPTER 1The Financial StatementsThe chapter begins with an introduction to Canadian Tire Corporation, a Canadian-based retailcompany. The topic of financial statements is presented identifying that many decisions comefrom analyzing these reports. Following this discussion, the text defines accounting as thelanguage of business and identifies the users of accounting information. The chapter nextdiscusses the differences between Financial and Managerial accounting disciplines and describesthe different forms of business: proprietorship, partnership, and corporation.The chapter then explores financial standards and the multiple sets of Generally AcceptedAccounting Principles (GAAP) for Canada. The section references International FinancialReporting Standards (IFRS) for publicly accountable entities (PAEs) and Accounting Standards forPrivate Enterprises (ASPE) for Canadian privately held companies. Next the chapter discusses thequalitative characteristics of the accounting conceptual framework: relevance, faithfulrepresentation, comparability, verifiability, timeliness, and understandability and the underlyingassumptions of the framework including: the going-concern assumption, the separate-entityassumption, the historical-cost assumption, and the stable-monetary-unit assumption.Next the chapter focuses on each of the financial statements: Income Statement, Statement ofRetained Earnings, Balance Sheet, and Statement of Cash Flows. The respective elements of eachstatement are discussed including what each reports and/or measures. The various components ofowners’ (shareholders’) equity—revenue, expense, net income, net loss, retained earnings, anddividends—are also defined. The relationship between assets, liabilities and equity known as theaccounting equation is introduced in the discussion of the balance sheet. In addition, theclassifications such as current assets and current liabilities are introduced. The operating,investing and financing activities within the cash flow statement are introduced and discussedrelative to cash receipts and payments. The notes to Financial Statements are also mentioned inthis section. Decision Guidelines help explain how people use the financial statements in decisionmaking.The chapter concludes with a section on fraud as it relates to the financial statements, andpossible reasons for its occurrence. Examples are given, which leads into an introduction to thetopic of ethics in Accounting and ethical behaviour of accountants, and decision guidelines formaking ethical judgments. At the end of the chapter a summary problem reviews the incomestatement, statement of retained earnings, balance sheet, and statement of cash flows and requiresthe student to assess the company’s performance and financial position.

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Resource Manual for Harrison et al.,Financial Accounting, 6ce1-2LEARNING OBJECTIVESAfter studying Chapter 1, students should be able to:1.Explainwhy accounting is the language of business2.Describethe purpose of each financial statement andexplainthe elements of each one3.Explainaccounting’s conceptual framework and underlying assumptions4.Explainthe relationships among the financial statements5.Makeethical business decisionsSUGGESTED PRIORITY OF CHAPTER TOPICSMUST COVERMultiple sets of GAAP (generally accepted accounting principles)Relevance, faithful representation, comparability, verifiability, timeliness, understandabilitycharacteristics; cost constraint, separate entity assumption, historical-cost assumption, going-concern assumption, and stable-monetary-unit assumptionFinancial Statements: Income statement, Statement of retained earnings, and Balance sheetAccounting equationEthical considerations in accounting and businessRECOMMENDEDTypes of business organizationsStatement of Cash flow and types of cash flowsIF TIME PERMITSUsingCanadian Tire Corporation’sfinancial statements

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Resource Manual for Harrison et al.,Financial Accounting, 6ce1-3CHAPTER OUTLINEOBJECTIVE 1: Explain why accounting is the language of businessA.Accounting is an information system that measures business activities, processes data intoreports, and reports results to decision makers. Exhibit 1-1 illustrates the flow of informationin an accounting system.Financial statementsreport this information to users.B.Accounting information is used by1.Managersto set goals, evaluate those goals, and take corrective action.2.Investorsto decide whether to invest in a business or evaluate an investment.3.Creditorsto evaluate a borrower’s ability to make required payments.4.Government and regulatory bodiessuch as Canada Revenue Agency (CRA) to ensureorganizations pay the correct amount of taxes.5.Individualsto make investment decisions and/or manage a bank account.6.Not-for-profit organizations,which use accounting information in virtually the sameway as profit organizations.C.Accounting information can be classified into two categories:1.Financial accountingprovides information for managers inside the business and fordecision makers outside the organization, such as investor and creditors.2.Management accountinggenerates inside information for internal use by management.D.Types of business organizations (summarized in Exhibit 1-2):1.Proprietorship—an unincorporated business with a single owner. The owner hasunlimited liability, which means that the owner assumes personal responsibility for thedebts of the business.2.Partnership—an unincorporated business with two or more owners. Each partner hasunlimited liability.3.Corporation—an incorporated business owned by shareholders whose ownership isevidenced by the number of shares held. Shareholders elect the members of the board ofdirectors, which sets policy for the corporation and appoints officers. A shareholder haslimited liability. A corporation is distinct from its owners and has many of the rightsentitled to a person.OBJECTIVE 2: Describe the purpose of each financial statement and explain the elements ofeach oneA.Generally Accepted Accounting principles (or GAAP)are the professional guidelines thatgovern how accountants record, measure, and report financial information.1.The Chartered Professional Accountants (CPA) establishes GAAP.2.There are multiple sets of GAAP and each is applicable according to the type of entity ororganization.a.Publicly accountable enterprises (PAEs)must applyInternational FinancialReporting Standards (IFRS),which are standards set by the InternationalAccounting Standards Board (IASB) to enhance the comparability of financialinformation reported by public enterprises around the world. IFRS was effectiveJanuary 1, 2011, for Canadian public companies.b.Private enterprisesapply theAccounting Standards for Private Enterprises(ASPE). However, private enterprises have the option of using IFRS or ASPE.

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Resource Manual for Harrison et al.,Financial Accounting, 6ce1-4c.Other sets of GAAP are applicable to not-for-profit organizations, pension plans, andgovernment entities.3.A summary of IFRS-ASPE differences is presented at the end of the chapter.4.The financial statements provide a company’s financial results for users to makedecisions. The income statement for Canadian Tire Corporation is presented.B.The financial statements provide answers tofour basic questions. The financial statementsthat would be used to answer these questions are summarized in Exhibit 1-3.1.How well did the company perform during the year? (The answer is found on the incomestatement)2.Why did the company’s retained earnings change during the year? (The answer is foundon the statement of retained earnings.)3.What is the company’s financial position at the end of the year? (The answer is found onthe balance sheet.)4.How much cash did the company generate and spend during the year? (The answer isfound on the statement of cash flows.)C.TheIncome Statement (or statement of profit or loss)reports the revenues, expenses, andnet income or net loss of a company for a specified period of time. (The ConsolidatedStatements of Income forCanadian Tire Corporationis illustrated in Exhibit 1-4.)1.Canadian Tire Corporationhas chosen a fiscal year ending at the same time as thecalendar year.However, a company can choose a fiscal year that is not the same as acalendar year. Most of Canada’s big banks have a fiscal year-end of October 31.2.Canadian Tire Corporationreports operating results for two fiscal years forcomparability purposes enabling users to detect any trends.3. The income statement has two main elements: income and expenses.a.Income includes revenue earned through the sale of goods and services and gains.b.Gains reflect an increase in the economic benefits to a company usually due to atransaction outside of the company’s ordinary business activities. For example, thesale of a long-lived asset that exceeds the carrying amount on a company’s books.c.Expenses consist of costs incurred to purchase goods and services to run a business andlosses.d.Losses are the opposite of gains and reflect a decrease in the economic benefits to acompany usually due to a transaction outside of the company’s ordinary businessactivities. For example, the sale of a long-lived asset that does not exceed thecarrying amount on a company’s books.4.The majorexpenseforCanadian Tire Corporationis calledCost of Goods Sold,which represents the cost of the goodsCanadian Tire Corporationsold to itscustomers.5.The Income Statement reports net income or net loss that is equal to Total Revenuesand Gains less Total Expenses and Losses or the amount of income or loss that is leftafter total expenses have been deducted from total income.6.Net income is sometimes known as net earnings or net profit.D.TheStatement of Retained Earningsreports the changes in a company’s retained earningsduring a specified period and reflects the accumulated net income of the company since itstarted business. (The Consolidated Statements of Retained Earnings forCanadian TireCorporationis illustrated in Exhibit 1-5.)1.The Net Income reported on the income statement is added to the opening balance ofretained earnings.

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Resource Manual for Harrison et al.,Financial Accounting, 6ce1-52.After a company earns net income, the board of directors must decide whether to retainthe income for use in the business or to pay dividends. Dividends reduce retainedearnings.Canadian Tire Corporationdeclared dividends of $154 million in 2014.E.TheBalance Sheet (or statement of financial position under IFRS)reports a company’sfinancial position at a moment in time. (The Consolidated Balance Sheets ofCanadianTire Corporationis illustrated in Exhibit 1-6.)1.The balance sheet is dated as of the last day of the period. The amount of assets reportedis the amount of assetsCanadian Tire Corporationowned as of the last day of theaccounting period. The other financial statements cover a period of time.2.The balance sheet reports three main categories: Assets, Liabilities, and Shareholders’Equity (Canadian Tire Corporation’sterm for owners’ equity). The relationshipbetween these categories is known as theaccounting equation, where assets always equalthe sum of liabilities and owners’ equity: A = L + OE. Exhibit 1-7 illustrates theaccounting equation using the 2014 figures from the Balance Sheet ofCanadian TireCorporation.TeachingTipBeginning assets and shareholders’ equity are $120,000 and $30,000, respectively. Liabilitiesincreased $15,000 during the year, and the ending assets are $145,000. What was the endingshareholders’ equity?Assets = Liabilities + Shareholders’EquityBeginning of year $120,000 = X +$30,000X =$90,000End of year $145,000 = (90,000 + 15,000) +XX = $40,0003.Assetsare economic resources owned by a business that are expected to be of benefit inthe future. Assets are divided into two categories: current and non-current (long-term)assets.a.Current assetsare those assets that the company expects to convert to cash, sell,or consume during the next 12 months or within the business’s normal operatingcycle if longer than a year.i.Theoperating cycleis the time span during which (a) cash is used to acquiregoods and services, and (b) these goods and services are sold to customers,from whom the business collects cash.ii.Examples of current assets are:Cash.Receivables—the amount that a company expects to collect from itscustomers who bought merchandise on credit.Inventory—the merchandiseCanadian Tire Corporationsells to itscustomers.Prepaid expenses—the amount of advertising, rent, insurance, and/orsupplies thatCanadian Tire Corporationhas already paid for but hasnot yet used.b.Non-current assets (or long-term assets)consist mainly of property, plant, andequipment. These assets are partially used, or amortized.Canadian TireCorporationalso reportsGoodwill and Intangible Assets. Intangible Assetsareassets with no physical form such as patents and trademarks.Other Assetsis acategory for assetsnotreported elsewhere on the balance sheet.

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Resource Manual for Harrison et al.,Financial Accounting, 6ce1-6TeachingTipAsk students how a business comes up with the funds to acquire additional assets. Lead studentsto see that a company can borrow (liabilities), or use invested funds (owners’ equity), orhopefully, earn it (also owners’ equity). Later, you can associate the terms “contributed capital”and “retained earnings” with the latter two. Students may say that a company buys assets withcash; however, remind them that this would not change total assets.4.Liabilitiesare debts the entity owes as a result of a past event, and which it expectsto payoff in the future using some of its assets.Liabilitiesare also divided into current and non-current/long-term categories.a.Current liabilitiesare debts that are payable within one year or within theentity’s normal operating cycle if longer than a year.i.Examples of current liabilitiesare:Accounts payablerepresents amounts owed for goods and services thathave been purchased but not yet paid for. The wordpayableindicates aliability.Notes payable—amounts borrowed with a promise to pay back withinthe yearIncome taxes payableis the amount owed to the government for incometaxes.b.Non-current liabilities (or long-term liabilities)are due in periods beyond thenext twelve months.5.Owners’ Equityis the owners’ remaining interest in the assets of the company afterdeducting all its liabilities.a.Owners’ equity or shareholders’ equity in the case of a corporation likeCanadian TireCorporationhas four common components:i.Share capital refers to the amounts contributed by shareholders in exchangefor shares.ii.Retained earnings, which comes from the statement of retained earnings,represents the amount of net income that has been reinvested in the business.Revenuesare amounts earned by delivering goods or services.Revenues increase net income and therefore also increase retainedearnings.Expensesare the costs of operating a business. Expenses decreasenet income and therefore also decrease retained earnings.If expenses exceed revenues, the result is anetloss.Dividendsare distributions of assets (usually cash) to theshareholders. The amount of dividends declared is determined afternet income is computed. Dividends decrease retained earningsbecause they represent the amount of the net income that is notreinvested in the business.b.The owners’ equity of proprietorships and of partnerships makes no distinctionbetween what is invested and what is earned. The equity of each owner is accountedfor under the single heading,Capital.F.TheStatement of Cash Flowsreports the sources and uses of cash from the three majoractivities of a business--operating, investing, and financing. (The Consolidated Statements ofCash Flows forCanadian Tire Corporationis illustrated in Exhibit 1-8.)1.The three major activities include:

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Resource Manual for Harrison et al.,Financial Accounting, 6ce1-7a.Operating Activitiesrelate to the transactions and other events that determine netincome/ (loss).i.Cash receipts from a company’s sales of its primary goods and services.ii.Cash payments to suppliers and employees for the goods and services theyprovide to generatesales.b.Investing Activitiesrelate to the purchase and sale of long-term assets that acompany uses to conduct is operations.Canadian Tire Corporationpays cash topurchase assets and receives cash when assets are sold.c.Financing Activitiesrelate to the way a company acquires the funds used forinvesting and operating activities. A business can finance its activities by borrowingfrom a bank or other lender, issuing shares to its owners, and paying dividends.TeachingTipAsk students where their money comes from and what they use it for. Categorize theirsuggestions as operating, investing, or financing activities.1.Operating—salaries/wagesfrom jobs; rent payments, food, etc.2. Investing—purchasing or selling investments; buying a house3. Financing—borrowing or repaying moneyOr,Set up three unlabelled columns on the board (or screen, etc.). Ask students to call out any kind ofactivity associated with a business. You can drop each item into the appropriate column and thenask students to come up with names for the columns.TeachingTipAsk students which of the three activities is most important and why.Operating activitiesare the most important because without them there is no need for the othertwo. Investing activities are of secondary importance because a company’s current and futureoperating effectiveness is determined by wise investment decisions.G.Notes to the financial statementsare provided as an integral part of the financial statementsand should be read carefully as part of a review of the financial statements.H.Two parties have criticalfinancial reporting responsibilities: a company’s management andits independent outside (or external) auditor. Company management has the primary financialreporting duties because they are responsible for designing, maintaining, and monitoring thecompany’s financial reporting process and for preparing the financial statements based on theinformation generated by this process. The auditor’s responsibility is to gather evidenceregarding the financial information reported by management, and then decide whether theinformation reported in the financial statements complies with the applicable GAAP.

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Resource Manual for Harrison et al.,Financial Accounting, 6ce1-8OBJECTIVE 3: Explain the relationships among the financial statementsA.Exhibit 1-9 summarizes the relationships among the financial statements1.Theincome statementis the only financial statement that lists revenues andexpenses.a.Net income (or net loss), the difference between revenues and expenses, is reportedon the income statement.b.This amount is then used on the statement of retained earnings.2.Thestatement of retained earningsreports the following:a. The beginning balance of retained earnings;b. The addition of net income or the subtraction of net loss to that beginning balance;c. The subtraction of dividends; andd. The ending balance of retained earnings.e. The ending balance is used on the balance sheet.3.Thebalance sheetis the only financial statement that reports all assets, liabilities, andowners’ equity. The balance sheet must show that the assets equal the sum of liabilitiesand owners’ equity.4.Thestatement of cash flowreports cash flows from three types of business activities—operating, investing, and financing.a.A net cash flow is reported for each activity.b.The ending cash balance is reported. This amount should also be reported on balancesheet.TeachingTipAsk students which of the financial statements is prepared first and why? Incomestatement to determine profit/(loss) to prepare the next financial statement (Statement ofretained earnings or statement of changes in owners’ equity).Ask students which of the financial statements is prepared second and why? Statement ofretained earnings (statement of changes in owners’ equity) to determine the ending capitalbalance to prepare the next financial statement (Balance Sheet).B.TheDecision Guidelinessummarize how people use financial statements in their decisionmaking process.OBJECTIVE 4: Explain accounting’s conceptual framework and underlying assumptionsA.Theoverall objectiveof financial reporting is to provide useful information to users to makeinvesting and lending decisions. The characteristics of useful information include: relevance,faithful representation, comparability, verifiability, timeliness and understandability. (Exhibit1-10 provides an overview of accounting’s conceptual framework.)1.Therelevance characteristicmust be considered to ensure the financial statementsprovide information to the user that is useful. To be relevant, financial information mustprovide predictive and/or confirmatory value and must be material in nature or magnitudethat omitting or misstating it could affect the decisions of an informed user.2.Thefaithful representation (or reliability) characteristicstates that accounting recordsshould be based on accurate data. The actual cost of assets or services is usually morereliable than market value.NOTE: Consider the conflict between information that is timely (based onestimates) and reliable that may require additional time to ensure accuracythat may render the statements irrelevant.

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Resource Manual for Harrison et al.,Financial Accounting, 6ce1-9B.There are four accounting assumptions underlying the conceptual framework.1.Thegoing-concern assumptionassumes that the entity will remain in operation for theforeseeable future. The market values of assets may vary from year to year, and for thisreason cost is deemed to be preferable to market value for measurement purposes.2.Theseparate-entity assumptionstates that each entity is an economic unit and iskept separate from other entities including the activities of its owners.TeachingTipAssume that you own three businesses and maintain one chequebook for all three. How can thissituation prevent you from maximizing your profits? (If one or two of the businesses areunprofitable, then you would make more money without them. However, you would have no wayof knowing.) The entity concept would require a separate set of records for each business.3.Thehistorical-cost assumptionstates that assets should be recorded at actual cost.TeachingTipYou purchased some land on January 1 of the current year. You had to borrow $100,000 for 2years at 10% interest at the local bank that appraised the land for $105,000. You will eventuallypay $100,000 plus $20,000 for the interest. On December 31 of the current year, you receive anoffer for the land for $110,000, but you do not want to sell the land. At what value should the landbe reported on the balance sheet? The original cost (excluding interest) of $100,000.4.Thestable-monetary-unit assumptionallows accountants to ignore the effect ofinflation in the accounting records thus reporting under the assumption that the value ofthe currency is stable.OBJECTIVE 5: Make ethical business decisionsA.The facts and circumstances surrounding accounting decisions may not always make themclear cut, and yet the decision may determine whether the company shows a profit or a lossinaparticular period. Three factors influence business and accounting decisions: economic,legal, and ethical factors.1.Economicfactor states that the decision being made should maximize the economicbenefits to the decision maker.2.Legalfactor is based on the proposition that free societies are governed by laws that arewritten to provide, clarify, and to prevent abuse of the rights of individuals or society.3.Ethicalfactor recognizes that while certain actions might be both economically profitableand legal, they may still not be right. Ethical standards are established to enforce a higherlevel of conduct than that imposed by law. They are shaped by our cultural,socioeconomic, and religious backgrounds and are needed to guide judgment when makingbusiness decisions. CPA has adopted a code of professional conduct that emphasizes theimportance of ethical behaviour of accountants in the decision-making process of investorsand creditors.B. Fraud is the intentional misrepresentation of facts done to persuade another party to act in a waythat causes financial damage to that party. Two types are given focus: misappropriation of assetsand fraudulent financial reporting. Misappropriation is committed by stealing assets from acompany and then covering up the theft by adjusting the accounting records. Fraudulentfinancial reporting is committed by company managers who make false and misleading entriesin the accounting records, usually to present a more favourable financial picture than would bepresented if the actual results were disclosed.TeachingTip

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Resource Manual for Harrison et al.,Financial Accounting, 6ce1-10Use the fraud examples to lead into a discussion onEthics. Ethicsplay an important role inaccounting. Accounting information is used in making decisions that involve huge economicconsequences. There always exists a temptation to report information in your favour when youcan. We saw the effects of doing so in many of the scandals that were reported prominently in thenews in 2002. One well-known company was Enron Corporation, which understated its liabilitiesand overstated its profit.C.TheDecision Guidelinessummarize four questions that help in making ethical businessdecisions.D.A summary of IFRS and ASPE differences is presented.

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Resource Manual for Harrison et al.,Financial Accounting, 6ce1-11ASSIGNMENT GRIDAssignment, Topic(s), Learning Objective(s), Estimated Time in Minutes, Level of DifficultyQ1 Understanding financial statements 1 1-2 EasyQ2 Understanding financial statements 1 1-2 EasyQ3 Understanding financial statements 2 1-2 EasyQ4 Understanding financial statements 3 1-2 EasyQ5 Understanding financial statements 3 1-2 EasyQ6 Understanding financial statements 3 1-2 EasyQ7 Understanding financial statements 3 1-2 EasyQ8 Understanding financial statements 3 1-2 EasyQ9 Understanding financial statements 3 1-2 EasyQ10 Understanding financial statements 3 1-2 EasyQ11 Understanding financial statements 3 1-2 EasyQ12 Understanding financial statements 3 1-2 EasyQ13 Understanding financial statements 3 1-2 EasyQ14 Understanding financial statements 3 1-2 EasyQ15 Understanding financial statements 3 1-2 EasyS1-1 Distinguish between assets, liabilities, and equity 2 5 EasyS1-2 Applying the accounting equation 2 5 EasyS1-3 Using the accounting equation 2 5 EasyS1-4 Classifying assets, liabilities, and owners’ equity 2 5-10 EasyS1-5 Using the income statement 2 5 EasyS1-6 Preparing an Income Statement 2 5-10 EasyS1-7 Preparing a statement of Retained earnings 2 5 EasyS1-8 Preparing a balance sheet 2 10-15 EasyS1-9 Preparing a statement of cash flows 2 10-15 EasyS1-10 Applying accounting assumptions 4 5 EasyS1-11 Making ethical judgments 5 5 EasyS1-12 Classifying items on the financial statement 2 10 EasyE1-13 Organizing a business 1 10 MediumE1-14 Describe the purpose of the financial statements 2 10 EasyE1-15 Applying accounting assumptions 4 5-10 MediumE1-16 Using the accounting equation 2 5-15 MediumE1-17 Using the accounting equation; evaluating business 2 10-15 MediumE1-18 Applying the accounting equation 2 10-20 MediumE1-19 Applying the accounting equation 2 10-15 MediumE1-20 Identifying financial statement information 2 10-15 MediumE1-21 Applying the accounting equation, understanding the balance sheet 2 10-20 MediumE1-22 Understanding the income statement 2 15-25 MediumE1-23 Using the financial statements 2 15-20 MediumE1-24 Preparing an income statement and a statement of retained earnings 2 15-20 MediumE1-25 Preparing a balance sheet 2 15-20 MediumE1-26 Preparing a statement of cash flows 2 15-20 MediumE1-27 Using financial statements for decision making 2 10-15 MediumE1-28 Relationships among financial statements 3 15-20 MediumP1-29A Using financial statements and applying assumptions and characteristics to the incomestatement, 4 15-20 DifficultP1-30A Applying the accounting equation; understanding financial statements 2, 3 30-40Medium

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Resource Manual for Harrison et al.,Financial Accounting, 6ce1-12P1-31A Understanding the balance sheet 2 20-25 MediumP1-32A Understanding the balance sheet, entity assumption 2, 4 20-25 MediumP1-33A Preparing and using the income statement, statement of retained earnings, and balancesheet 3 30-45 MediumP1-34A Preparing a statement of cash flows 2 20 MediumP1-35A Analyzing a company’s financial statements; relationships among the financialstatements 2, 3 40-50 MediumP1-36A Understanding the balance sheet 2, 3 10-15 MediumP1-37B Applying assumptions and characteristics to the income statement 2, 3, 4 15-20 DifficultP1-38B Applying the accounting equation; understanding the financial statements, 2, 3, 4 30-45MediumP1-39B Understanding the balance sheet 2, 3 30-40 MediumP1-40B Understanding the balance sheet, entity assumption 2 20-25 MediumP1-41B Understanding the income statement, statement of retained earnings, balance sheet;relationships among the financial statements 2, 4 20-25 MediumP1-42B Preparing a statement of cash flows 2, 3 30-45 MediumP1-43B Analyzing a company’s financial statements; relationships among the financialstatements 2 20 MediumP1-44B Analyzing a company’s financial statements; relationships among the financialstatements 2, 3 40-50 MediumDecision Case 1 Evaluating business operations; using financial statements 2 20-30 MediumDecision Case 2 Analyzing a company’s financial statement 2 15-20 MediumEthical Issue—Making ethical business decisions 5 20-30 MediumFocus on Financials—Evaluating business operations 2 20-30 MediumFocus on Analysis—Evaluating a company by using financial statements 2 20-30 MediumGroup ProjectANSWER KEY TO CHAPTER 1 QUIZ1. D2. B3. A4. C5. D6. C7. A8. C9. A10. C

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Resource Manual for Harrison et al.,Financial Accounting, 6ce1-13Name:_Date:Section:CHAPTER 1TEN-MINUTE QUIZCircle the letter of the best response.1.Which of the following statements is false?A.Accounting is the information system that measures business activities, processes thatinformation into reports, and communicates the results to decision makers.B.Financial statements report financial information about a business entity to decision makers.C.Owners of a corporation are not personally liable for the debts of the corporation. D.Thepurpose of financial accounting is to provide information to people inside the entity, such as theowners and managers.2.Mary owns and operates a fabric shop. Mary needs to borrow money to expand; therefore, sheprepared financial statements to present to her banker. Mary recorded the assets of her store at thecost she paid for them 2 years ago rather than when she transferred them to her business this year.Mary has violated which of the following principles or concepts?A. Reliability principleB. Separate Entity AssumptionC. Going-concern principleD. Stable-monetary-unit concept3.Which of the following is false?A. Owners’ Equity – Assets = LiabilitiesB. Assets = Owners’ Equity + LiabilitiesC. Owners’ Equity = Assets – LiabilitiesD. Liabilities = Assets – Owners’ Equity4.SMT Inc. experienced an increase in total assets of $2,000 during the current year. During thesame year, total liabilities decreased $6,000. If dividends for the year were $10,000 and the ownersmade no additional investment, how much was net income?A. $14,000B. $6,000C. $18,000D. $2,0005.Which of the following statements is true?A. The cash flow statement reports all changes in assets, liabilities, and shareholders’ equity of thebusiness during the period.B. Revenues and expenses are reported only on the balance sheet.C. The income statement reports cash flows from three types of business activities--cash receipts,cash payments, and investing.D. On the statement of retained earnings, any dividends for the period are subtracted from thebeginning balance of retained earnings.

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Resource Manual for Harrison et al.,Financial Accounting, 6ce1-14Table1-1The following information is taken from the accounting records after current periodoperations and presented in random order.Accounts payable$ 9Service revenue38Cash25Equipment110Common shares200Retained earnings (ending balance)??Dividends15Accounts receivable4Land100Office supplies5Utilities expense2Salary expense18Cash receipts:Cash payments:Collections from customers30Acquisition of land50Sale of equipment15Issuance of shares to owners90Dividends15To suppliers56.Total assets are:A. $150.B. $181.C. $244.D. $158.7.Net income is:A. $20.B. $13.C. $120.D. $38.8.Cash flow from financing activities is:A. $(85).B. $(55).C. $75.D. $(15).9.The ending balance in Retained Earnings is:A. $35.B. $55.C. $75.D. $15.10. On which financial statement can the Beginning balance in retained earnings be found?A. Balance sheetB. Income statementC. Statement of retained earningsD. Both A and C

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