Fundamental Accounting Principles, Volume 1, 14th Canadian Edition Solution Manual

Name: Fundamental Accounting Principles, Volume 1, 14th Canadian Edition Solution Manual
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Last revised: October 26, 2012
1-1
SOLUTIONS MANUAL
to accompany
Fundamental Accounting Principles
14th Canadian Edition
by Larson/Jensen
Prepared by:
Tilly Jensen, Athabasca University
Wendy Popowich, Northern Alberta Institute of Technology
Susan Hurley, Northern Alberta Institute of Technology
Ruby So Koumarelas, Northern Alberta Institute of Technology
Technical checks by:
Ross Meacher
Betty Young, Red River College,
ANSR Source

Last revised: October 26, 2012
1-2
Chapter 1 Accounting in Business
Chapter Opening Vignette Critical Thinking Challenge Questions*
1. What questions might Jake need the answers to in order to get a loan from a
bank?
How many employees does he need to hire to provide services to clients? Does
Jake pay his employees a salary or a wage? How much does he pay them? Does
he have the cash in the bank to pay his employees? Does he have rental
equipment? Does he have a vehicle? Does he have insurance? Is the building
rented or purchased? If he rents a building, did he make rental payments in
advance or does he pay monthly? If the building was purchased, did he pay cash
or does he owe money on it? If he owes money, does he pay interest? If he owns a
building, how much does he pay on property taxes and utilities? If he owns a
building, how much does he pay for repairs and maintenance? What about buying
and paying for supplies? Does he advertise? If so, how much does he pay? How
much is the business actually earning? Do customers pay in advance or do they
pay per session? Do customers pay cash or on account? What is the amount of
income tax he has to pay? Are there any outstanding loans? If so, what is the
balance outstanding, the term, the payments, and the interest rate? There are
many other questions that could be asked.
2. Who else might require accounting information from Jake’s business?
Other stakeholders that might require accounting information from Jake’s
business include Canada Revenue Agency (CRA), employees, and potential
investors.
*The Chapter 1 Critical Thinking Challenge questions are asked at the beginning of this
chapter. Students are reminded at the conclusion of the chapter to refer to the Critical
Thinking Challenge questions at the beginning of the chapter. The solutions to the
Critical Thinking Challenge questions are available here in the Solutions Manual and
accessible to students at Connect.

Last revised: October 26, 2012
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Concept Review Questions
1. Jake identifies accounting knowledge as the key to success in business.
2. Businesses offering products include Danier Leather, Bauer, NIKE, and Reebok
which produce apparel; Dell, Hewlett-Packard, and Apple which produce computer
equipment; and Tilley, Levis, and GAP which produce clothing. Service business
examples include: WestJet Airlines which provides airline services; Sympatico, AOL
Canada, and CompuServe provide information communication services; and Tilden,
Hertz, and Budget which provide vehicle rental services.
3. Business organizations can be organized in one of three forms: sole proprietorship,
partnership, or corporation. These forms have implications for legal liability,
taxation, continuity, number of owners, and legal status as follows:
Sole Proprietorship Partnership Corporation
Legal entity no no yes
Limited liability no no yes
Unlimited life no no yes
Business income taxed no no yes
One owner allowed yes no yes
4. The equity section of the balance sheet reports a Virgil Klimb, Capital account. The
presence of the owner’s capital account indicates that Vertically Inclined has been
organized as a sole proprietorship.
5. The two organizations for which accounting information is available in Appendix 1 at
the end of the book are WestJet Airlines and Danier Leather.
6. Hospitals, colleges, prisons, and bus lines are examples of organizations that can be
formed as profit-oriented businesses, government units, or nonprofit
establishments.
7. Individuals responsible for marketing activities are likely interested in information
such as sales volume, advertising costs, promotion costs, salaries of sales
personnel, and sales commissions.
8. External users and their uses of accounting information include: (a) lenders for
measuring the return of loans; (b) shareholders for assessing the acquisition of
shares; (c) members of the board of directors for overseeing management; and (d)
potential employees for judging employment opportunities. Other users are
auditors, consultants, regulators, unions, suppliers, and appraisers. Internal users
and their uses of accounting information include: (a) management for overseeing
performance, financial position, and cash flow; and (b) current employees for
generating special purpose reports to assist management.
9. The internal role of accounting is to serve the organization’s internal operating
functions by providing useful information in completing their tasks more effectively
and efficiently. By providing this information, accounting helps the organization
reach its overall goals.
10. Managerial accounting tasks performed by both private and government
accountants include general accounting, cost accounting, budgeting, auditing, and
management consulting.
11. Management consulting services offered by public accounting professionals include
designing and installing accounting systems, establishing internal controls, advice

Last revised: October 26, 2012
1-4
on budgeting, guidance in information technology, and constructing employee
benefit plans.
12. In addition to preparing tax returns, tax accountants help companies plan future
transactions to minimize the amount of tax to be paid.
13. The independent auditor for Danier Leather is PricewaterhouseCoopers LLP.
14. The purpose of accounting is to provide decision makers with information helping
them make better decisions. Examples include information for people making
investments, loans and similar decisions.
15. Accounting professionals deal with a variety of information about their employers
and clients that is not generally available to the public. Ethical issues arise
concerning the possibility that accounting professionals might personally benefit by
using confidential information. There is also the possibility that their employers and
clients might be harmed if certain information is not kept confidential.
16. An income statement user must know what time period is covered to judge whether
the company’s performance is satisfactory. For example, a statement user would not
be able to assess whether the amounts of revenue and net income are satisfactory
without knowing whether they were earned over a week, a month, or a year.
17. The revenue recognition principle provides guidance that managers and auditors
need for knowing when to recognize revenue. For example, if revenue is recognized
too early, the income statement reports income earlier than it should and the
business looks more profitable than it really is. On the other hand, if the revenue is
not recognized on time, the income statement shows lower amounts of revenue and
net income than it should and the business looks less profitable than it really is.
Basically, this principle requires revenue to be recognized when it is earned and can
be measured reliably. The amount of revenue should equal the value of the assets
received from the customers.
18. The four financial statements are: the income statement, the balance sheet, the
statement of changes in equity, and the statement of cash flows.
19. An income statement reports on the business’s performance during the period. It
shows whether the business earned a net income (or net loss). The statement does
not simply report the amount of net income or loss but lists the types and amounts
of the revenues and expenses.
20. A revenue is an inflow of assets received in exchange for goods or services
provided to customers as part of the major or central operations of the business. A
revenue also may occur as a decrease in liabilities as when a service or product is
delivered having been paid for in advance.
21. A business’s equity is increased by investments into the business made by the
owner and by net income. It is decreased by withdrawals made by the owner and by
a net loss, which is the excess of expenses over revenues.
22. The balance sheet reports on the financial position of a business at a specific point
in time. It is often called the statement of financial position. It provides information
that helps users understand a company’s financial status. The balance sheet lists
the types and dollar amounts of assets, liabilities, and equity of the business.

Last revised: October 26, 2012
1-5
23. (a) Assets are probable future economic benefits obtained or controlled by a
particular entity as a result of past transactions or events. (b) Liabilities are probable
future sacrifices of economic benefits arising from present obligations of a
particular entity to transfer assets or provide services to other entities in the future
as a result of past transactions or events. (c) Equity is the residual interest in the
assets of an entity that remains after deducting its liabilities. (d) The term “net
assets” means the same thing as equity, which is also determined as assets less
liabilities.
QUICK STUDY
Quick Study 1-1
There are a variety of questions and this list is certainly not exhaustive:
1. How much was spent on advertising last year? And/or how much is projected to be
spent this year?
2. What is the effect of advertising on sales? And/or what is the projected effect of
advertising on this year’s sales?
3. How much was spent on delivering flowers last year? And/or how much is projected
to be spent this year?
4. How much will it cost to create a webpage and sell flowers online?
5. Can sales be increased by selling online? And/or what is the experience of our
competitors in this regard?
6. When pricing flowers, how much is being charged for delivery?
7. Are there enough sales staff to answer phones/emails and/or are sales being lost
because of insufficient staffing and/or staffing issues?
Quick Study 1-2
a. Accounting Meeting with the mechanical staff to determine new machine
requirements for next year.
b. Recordkeeping Data entry of sales orders received via the telephone.
c. Accounting Analyzing a sales report to determine if the discount policy is
effective in getting customers to buy in multiple quantities.
d. Recordkeeping Listing cheques received in the mail.
Quick Study 1-3
a. Highlands United Church Non-business d. CDI College Business
b. Royal Alexandra Hospital Non-business e. Loblaw Business
c. RBC Business f. World Vision Non-business

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Last revised: October 26, 2012
1-6
Quick Study 1-4
Accounting professionals practice in four
broad fields including:
Accounting-related opportunities within
each field are numerous and include:
Financial accounting - Statement preparation
- Statement analysis
- Auditing
- Regulatory
- Consulting
- Planning
- Criminal investigation
Managerial accounting - General accounting
- Cost accounting
- Budgeting
- Internal auditing
- Management advisory services
Taxation - Preparation
- Planning
- Regulatory
- Investigations
- Consulting
Accounting-related - Lenders
- Consultants
- Analysts
- Traders
- Managers
- Directors
- Underwriters
- Planners
- Appraisers
Quick Study 1-5
Accounting information could be used to determine if a product should be sold or if an
investment should be made.

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Last revised: October 26, 2012
1-7
Quick Study 1-6
The four elements need to be addressed as follows:
1. Is it the Truth? No, personal dinners with a spouse are not business expenses so
you are not being truthful in submitting these as part of the expense report.
2. Is it Fair to all concerned? No, it is not fair to the owner(s) of the business, to the
other employees, or to your spouse (since they are likely not aware of the deceit).
3. Will it build goodwill and better friendships? It may build a good relationship with
the restaurant owners where you take your spouse but it will damage goodwill
between the employer and you as well as strain friendships with other employees.
4. Will it be beneficial to all concerned? It will benefit you, your spouse, and the
restaurant owner but it will not benefit the business owner(s) and the other
employees.
Conclusion: The behaviour in the situation described appears to be unethical based on
the application of the Rotary 4-Way Test.
Quick Study 1-7
a. Business entity principle
b. Revenue recognition principle
c. Cost principle
Quick Study 1-8
1. Revenue Recognition
2. Cost
3. Business Entity
4. Going Concern
5. Monetary Unit
Quick Study 1-9
Monetary Unit a.

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Last revised: October 26, 2012
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Quick Study 1-20
BENNISH CONSULTING
Income Statement
For Month Ended May 31, 2014
Revenues:
Consulting fees earned ..................................... $18
Interest revenue................................................. 2
Total revenues........................................................... $20
Operating expenses:
Rent expense ..................................................... 22
Net loss .................................................................... $ 2
BENNISH CONSULTING
Statement of Changes in Equity
For Month Ended May 31, 2014
Joan Bennish, capital, May 1.............................. $ 0
Add: Investments by owner ............................ 30
Total ............................................................... $30
Less: Withdrawals by owner .............................. $ 5
Net loss ...................................................... 2

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Last revised: October 26, 2012
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Exercise 1-4 (concluded)
b.
1. Is it the Truth? It appears that the three people ahead of you entered without
tickets which is deceitful. They may have fabricated a story to enter and/or the
ticket-taker is part of the deceit.
2. Is it Fair to all concerned? It is unfair to the paying patrons of the theatre and
unfair to the owner of the theatre.
3. Will it build goodwill and better friendships? In the long run, these types of
relationships (between the ticket-taker and the three individuals admitted without
tickets) are not what goodwill and true friendships are based upon. Having
observed the event, your respect for the ticket-taker and the three individuals
admitted without tickets will be negatively affected.
4. Will it be beneficial to all concerned? In the short run, it will benefit the three
people who were admitted without paying and the ticket-taker, if an acquaintance,
may have accrued future benefits from the three people admitted. If this
transgression is discovered by the ticket-taker’s supervisor, the ticket-taker will
likely lose their job which is certainly not beneficial. The owner(s) of the theatre
do not benefit from this event, nor do other patrons because if it is known that
such things occur, ticket prices will be priced to include the cost of this kind of
lost sale.
Conclusion: The behaviour in the situation described appears to be unethical based
on the application of the Rotary 4-Way Test.
c.
1. Is it the Truth? The cashier is not being truthful by providing receipts only upon
request because the cash register would be showing fewer drop-in customers
than actually occur.
2. Is it Fair to all concerned? No, it is not fair to the paying customers (prices may

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