Solutions+ +chapter+1

Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Third Canadian Edition
CHAPTER 1
Introduction to Financial Statements ANSWERS TO QUESTIONS
1. A person cannot earn a living, spend money, buy on credit, make an investment, or pay taxes without receiving, using, or dispensing financial information. Accounting provides financial information to interested users through the preparation and distribution of financial statements and is therefore vital to our society and economic system. Ethics are important because without the expectation of ethical behaviour, the information presented in the financial statements would have no credibility for the accounting profession. It would therefore be useless to financial statement users. Yes, I agree. Investors rely on financial reports for investment decisions. If the information is incorrect the share price may rise and when the correct information is reported the share price may fall. Investors who purchased shares, relying on the incorrect information, may lose money. Likewise, managers use accounting information to make business decisions. Erroneous information can lead to suboptimal decision making which may result in financial difficulties for the business and lay-offs for employees. (a) (b) The three basic forms of business organization are (1) proprietorship, (2) partnership, and (3) corporation. Advantages of a corporation are limited liability (shareholders not being personally liable for corporate debts) and transferability of ownership. Disadvantages of a corporation are increased government regulations and the fact that corporations are taxed as a separate legal entity. Corporations may receive more favourable tax treatment than other forms of business organizations. Partnerships and proprietorships are easier to form (and dissolve) than corporations. Proprietorships and partnerships are not taxed as separate entities. The partners and proprietors pay personal income tax on their share of profits. Depending on the circumstances this may be an advantage or disadvantage. Disadvantages of proprietorships and partnerships are unlimited liability (proprietors/partners are personally liable for all debts of the business) and difficulty in obtaining financing compared to corporations. Internal users are those who plan, run, and work for the business. They include directors, management, and employees.
2.
3.
4.
5.
(a)
Solutions Manual 1-1 Chapter 1 Copyright 2006 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
(b)
External users are those outside the business who have either a present or potential direct financial interest (investors and creditors) or an indirect financial interest (taxing authorities, regulatory agencies, labour unions, customers, and economic planners).
6.
Investors use financial information to make decisions to buy, hold or sell shares of the company. For example, investors rely on accurate and timely financial reporting to evaluate the company's earnings and profitability in relation to other competitors. Creditors lend money to the company, and are not owners. They use financial reporting to evaluate the risks of granting credit or lending money and are concerned about the ability of the company to pay off its debts as it become due. (a) Operating activities are the activities that the organization undertakes to earn a profit. It includes the day-to-day activities which generate revenues and cause expenses to be incurred. In order to earn profits a company must first purchase resources they need to operate. The purchase of these resources (assets) are considered to be investing activities. Finally, the company must have sufficient funds to purchase assets and to operate. While some of the necessary cash will be generated from operations, often the company has to raise external funds by either issuing shares or borrowing money. Financing activities involve the activities undertaken by the company to raise cash externally. Two primary operating activities are the sales revenue generated from selling inventory and the expense related to the cost of sales. Two primary investing activities are the purchase of property, plant, and equipment, such as a building, and the purchase of a long-term investment. Two primary financing activities for a corporation are borrowing money (debt) and selling shares (equity).
7.
(b)
8.
Accounts receivable is classified as an operating activity because receivables are created in conjunction with the generation of revenue. An accounts receivable is created when a company earns revenue but does not collect the cash immediately. The generation of revenue is an operating activity and therefore, the accounts receivable is classified in the same manner. A bank would want to ensure that the company has sufficient cash available to repay any loans owed to the bank. If the company paid out all its cash in the form of dividends there would be no funds available to repay this debt. It is likely that the use of rounded figures would not change the decisions made by the users of the financial statements. As well, presenting the information in this manner make the statements easier to read and analyze thereby increasing their utility to the users.
9.
10.
Questions (Continued)
11. The balance sheet is prepared as at a specific point in time because it shows what the business owns (its assets) and what it owes (its liabilities). These items are constantly changing. In order to present them it is necessary to select one point in time. The other statements (earnings, retained earnings and cash flow) cover a period of time as they report activities and measure performance that takes place over time. Retained earnings are the cumulative earnings retained in a corporation. Retained earnings are increased by net earnings and are decreased by dividends and net losses. (a) The primary purpose of the cash flow statement is to provide financial information about the cash receipts and cash payments of a company for a specific period of time. The three categories of the cash flow statement are operating activities, investing activities, and financing activities. These categories represent the three principal types of business activities. The statement of earnings reports net earnings for the period. The net earnings figure from the statement of earnings is shown on the statement of retained earnings as an addition to beginning retained earnings. If there is a net loss it is deducted from the opening balance in retained earnings. The statement of retained earnings explains the change in the retained earnings balance from one period to the next. The ending balance of retained earnings is reported on the balance sheet. The cash flow statement explains the change in the cash balance from one period to the next. The ending balance of cash is reported on the balance sheet.
12.
13.
(b)
14.
(a)
(b)
(c) 15.
Yes. Net earnings does appear on the statement of earningsit is the result of subtracting expenses from revenues. In addition, net earnings appears in the statement of retained earningsit is shown as an addition to the beginning-of-period retained earnings. Indirectly, the net earnings of a company is also included in the balance sheet, as it is included in the retained earnings account, which appears in the shareholders' equity section of the balance sheet. (a) (b) The basic accounting equation is Assets = Liabilities + Shareholders Equity. The basic accounting equation represents the relationships between assets, liabilities, and shareholders' equity expressed in the balance sheet. Assets must be in balance with the claims on the assets (liabilities + shareholders' equity).
16.
Questions (Continued)
17. (a) Assets are resources owned by a business. Liabilities are claims of creditors against assets. Put more simply, liabilities are existing debts and obligations. Shareholders equity is the ownership claim on total assets. The items that affect shareholders equity are common shares (investments by shareholders) and retained earnings (through dividends, revenues, and expenses).
(b)
18. 19.
The liabilities are (b) accounts payable, (g) income tax payable and (j) long-term debt. (a) (b) (c) (d) (e) (f) (g) (h) Statement of earnings Balance sheet (assets) Statement of earnings Balance sheet (assets) Balance sheet (shareholders equity) Balance sheet (liabilities) Cash flow statement Statement of retained earnings
20. One possible complication is that the number of days included in each fiscal year will vary, thus causing reported sales to vary from year to year. However, the difference is often only a few days and in most cases does not have a material impact on the financial statements.
SOLUTIONS TO BRIEF EXERCISES (Odd)

BRIEF EXERCISE 1-1
(a) The accountants behaviour is unethical. The correct action would have been to adjust the accounting records so that they agreed to the physical count of supplies. Taking home the extra supplies is theft. If the company accountant feels that she should be compensated for her extra work, she should address her concerns by discussing the matter with her employer. To ensure all employees adhere to appropriate ethical behaviour, the company should implement clear policies outlining expectations of ethical behaviour. As well, top management must illustrate, through their own actions, that ethical behaviour is expected of all employees.
(b)
BRIEF EXERCISE 1-3

Investors Marketing managers Creditors Chief financial officer Canada Revenue Agency (a) 4 3 2 5 1 (b) External Internal External Internal External
BRIEF EXERCISE 1-5

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) BS BS SE BS BS SE SE BS BS SE SE BS
BRIEF EXERCISE 1-7

(a) (b) (c) $80,000 $50,000 = $30,000 (Shareholders equity) $45,000 + $60,000 = $105,000 (Assets) $94,000 $52,000 = $42,000 (Liabilities)
BRIEF EXERCISE 1-9

(a) (b) (c) ($700,000 + $150,000) ($500,000 $80,000) = $430,000 (Shareholders equity) ($500,000 + $100,000) + ($700,000 - $500,000+ $50,000 + $10,000) = $860,000 (Total assets) ($700,000 $90,000) ($700,000 $500,000 + $120,000) = $290,000 (Total liabilities)
BRIEF EXERCISE 1-11

(a) (b) (c) (d) (e) (f) (g) (h) NE C R R E E D E
SOLUTIONS TO EXERCISES (Odd)

EXERCISE 1-1
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) 6 1 10 2 3 9 4 7 8 5 Corporation Accounts payable Assets Creditor Financing activities Ethics Retained earnings Common shares Accounts receivable Dividends
EXERCISE 1-3
(a) (b) (c) (d) (e) (f) (g) (h) BS SE SE BS CF SE BS SE (i) (j) (k) (l) (m) (n) (o) (p) BS SE RE CF CF BS BS CF
EXERCISE 1-5
(a) L A A A A A L A L A SE SE Accounts payable and accrued liabilities Accounts receivable Capital assets Cash Goodwill and other intangibles Inventory Long-term debt Other assets Other liabilities Prepaid and other expenses Retained earnings Share capital
(b) Assets Cash Accounts receivable Inventory Prepaid and other expenses Capital assets Goodwill and other intangibles Other assets Total assets Liabilities Accounts payable and accrued liabilities Other liabilities Long-term debt Total liabilities Shareholders equity Share capital Retained earnings Total shareholders equity Total assets $548,559 = = Total liabilities $310,461 + + $ 23,315 36,319 267,221 11,292 160,625 39,682 10,105 $548,559 $217,777 54,389 38,295 $310,461 $131,768 106,330 $238,098 Shareholders equity $238,098
EXERCISE 1-7
KON INC. Statement of Earnings Year Ended December 31, 2006 Revenues Service revenue Expenses Salaries expense Rent expense Utilities expense Advertising expense Total expenses Earnings before income tax Income tax expense Net earnings $58,000 $28,000 10,400 2,400 1,800 42,600 15,400 6,000 $ 9,400 KON INC. Statement of Retained Earnings Year Ended December 31, 2006 Retained earnings, January 1 Add: Net earnings Less: Dividends Retained earnings, December 31 $57,000 9,400 66,400 7,000 $59,400
EXERCISE 1-9
(a) Camping fee revenue General store revenue Total revenue Expenses ($138,000 + $7,000) Net earnings SEA SURF CAMPGROUND, INC. Statement of Retained Earnings Year Ended December 31, 2006 Retained earnings, January 1 Add: Net earnings Less: Dividends Retained earnings, December 31 SEA SURF CAMPGROUND, INC. Balance Sheet December 31, 2006 Assets Cash Supplies Equipment Total assets Liabilities and Shareholders Equity Liabilities Accounts payable Notes payable Total liabilities Shareholders equity Common shares Retained earnings Total shareholders equity Total liabilities and shareholders equity $ 11,000 50,000 61,000 40,000 31,000 71,000 $132,000 $ 10,500 2,500 119,000 $132,000 $18,000 17,000 35,000 4,000 $31,000 $137,000 25,000 162,000 145,000 $ 17,000
(b)
EXERCISE 1-11
(a) Yu Corporation is distributing nearly all of this year's net earnings as dividends. This suggests that Yu is not pursuing rapid growth. Companies that have a lot of opportunities for growth normally retain their earnings and pay low dividends. Surya Corporation is not generating sufficient cash from operating activities to fund its investing activities. This is common for companies in their early years of existence. (c) Naguib is financing its assets mainly through equity. The company has $400,000 ($150,000 + $250,000) of total assets, which are funded 37.5% ($150,000 $400,000) by liabilities and 62.5% ($250,000 $400,000) by equity. Since equity does not have to be repaid and does not require interest payments, the company appears to be in a healthy financial position.
(b)
SOLUTIONS TO PROBLEMS (Odd)

PROBLEM 1-1B
1.
Dawn will likely operate her vegetable stand as a proprietorship because she is planning on operating it for a short time period and a proprietorship is the simplest and least costly to form and dissolve. Joseph and Sabra should form a corporation when they combine their operations. This is the best form of business for them to choose because they expect to raise significant funds in the coming year. It is easier to raise funds in a corporation. A corporation may also receive more favourable tax treatment. The professors should incorporate their business because of their concerns about the legal liabilities. A corporation is the only form of business that provides limited liability to its owners. Abdur would likely form a corporation because he needs to raise funds to invest in inventories and property, plant, and equipment. He has no savings or personal assets and it is normally easier to raise funds through a corporation. A partnership would be the most likely form of business for Mary, Richard and Jigme to choose. It is simpler to form than a corporation and less costly.
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5.
PROBLEM 1-3B
(a) Abitibi Consolidated Inc. Wilfrid Laurier University Students' Union Biovail Corporation Operating Sale of newsprint Investing Purchase long- term investments Purchase office equipment Purchase other companies Purchase of basketball equipment Purchase computers Purchase airplanes Financing Sale of shares Borrow money from a bank Sale of bonds Payment of dividends to shareholders Distribute earnings to partners Sale of shares
Payment of wages and benefits Payment of research expenses Maple Leaf Sports Payment for & Entertainment court rentals Ltd. Grant Thornton LLP WestJet Airlines Ltd. (b) Bill clients for professional services Payment for jet fuel
Financing Sale of shares is common to all corporations. Borrowing from a bank is common to all businesses. Payment of dividends is common to all corporations. Sale of bonds is common to large corporations. Earnings distributed to partners is common to all partnerships. Investing Purchase and sale of property, plant, and equipment would be common to all businessesthe types of assets would vary according to the type of business and some types of businesses require a larger investment in long-lived assets. A new business or expanding business would be more apt to acquire assets. Operating The general activities identified would be common to most businesses, although the service or product might change.
PROBLEM 1-5B
(a) (Note: amounts are in millions of dollars) (i) Total liabilities = Total assets Total shareholders equity Total liabilities = $1,716.6 $1,012.9 Total liabilities = $703.7 Total shareholders' equity = Total assets Total liabilities Total shareholders' equity = $1,837.8 $669.0 Total shareholders' equity = $1,168.8 Ending balance Beginning balance = Change in shareholders equity $1,168.8 $1,012.9 = $155.9 Dividends = (Issue of shares + Net earnings) Change in shareholders' equity Dividends = ($3.2 + $176.9*) $155.9 Dividends = $24.2 *Net earnings = Total revenues Total expenses Net earnings = $4,096.1 $3,919.2 Net earnings = $176.9 (iv) Total assets = Total liabilities + Total shareholders equity Total assets = $1,533.6 + $1,597.5 Total assets = $3,131.1 Total assets = Total liabilities + Total shareholders equity Total assets = $1,455.9 + $1,863.0 (from (vi)) Total assets = $3,318.9 End of year, total shareholders' equity = Beginning of year, total shareholders' equity + Issue of shares during year + Net earnings Dividends End of year, total shareholder's equity = $1,597.5 + $7.8 + $257.7* $0 End of year, total shareholder's equity = $1,863.0
(ii)
(iii)
(v)
(vi)
*Net earnings = Total revenues Total expenses PROBLEM 1-5B (Continued) (a) (Continued) Net earnings = $4,415.2 $4,157.5 Net earnings = $257.7 (b) The balance sheet provides a snapshot of the company "at" a point in time Therefore the differing year end date may affect the comparability of the assets, liabilities and shareholders' equity. For examples inventories may be lower after Christmas possibly making Shoppers Drug Mart's total assets lower in January than they would be if the company had its year end in May. The statement of earnings reports the results of operations over a period of time. Assuming the length of the reporting periods are the same, the effects of different year-end dates should be minimal on any assessment of performance for the two companies.
PROBLEM 1-7B
Frenette Corporation should include the following items in its cash flow statement: Cash, July 1, 2005 Cash paid to suppliers Cash paid for income tax Cash dividends paid Cash paid to buy equipment Cash received from customers FRENETTE CORPORATION Cash Flow Statement Year Ended June 30, 2006 Operating activities Cash received from customers Cash paid to suppliers Cash paid for income tax Cash provided by operating activities Investing activities Cash paid to purchase equipment Cash used by investing activities Financing activities Cash dividends paid Cash used by financing activities Increase in cash Cash, July 1, 2005 Cash, June 30, 2006 $168,000 (89,000) (20,000) $59,000 ($26,000) (26,000) ($7,000) (7,000) 26,000 30,000 $56,000
PROBLEM 1-9B
(a) 1. The $7,000 of revenue that the company earned in 2005 should not be included in the 2006 revenues. The $7,000 should be added to the beginning balance of retained earnings. In order to properly calculate the net earnings for the year all expenses must be included in the statement of earnings. Although payment is not due until 2007, income tax expense relates to 2006 and should therefore be recorded in the 2006 statement of earnings. Since the corporation did not incur or pay the $13,200 of rent expense, it should not be included in the statement of earnings. Including the $13,200 as an expense misstates the corporation's net earnings and presents misleading results. Including the cost of the ski trip as vacation expense misstates the corporation's net earnings. The $2,000 is a personal expense incurred by Pam and should not be reported on the corporation's statement of earnings. KETTLE CORPORATION Statement of Earnings Year Ended December 31, 2006 Revenue ($60,000 $7,000) Expenses Insurance expense Earnings before income tax Income tax expense Net earnings $53,000 5,000 48,000 12,000 $36,000
2.
3.
4.
(b)
Legal Notice
Copyright
Copyright 2006 by John Wiley & Sons Canada, Ltd. or related companies. All rights reserved. The data contained in these files are protected by copyright. This manual is furnished under licence and may be used only in accordance with the terms of such licence. The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified, made available on a network, used to create derivative works, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of John Wiley & Sons Canada, Ltd.

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Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Third Canadian Edition

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Third Canadian Edition

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Third Canadian Edition

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Third Canadian Edition

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Third Canadian Edition

SOLUTIONS TO BRIEF EXERCISES (Odd)

BRIEF EXERCISE 1-3

BRIEF EXERCISE 1-5

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Third Canadian Edition

BRIEF EXERCISE 1-7

BRIEF EXERCISE 1-9

BRIEF EXERCISE 1-11

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Third Canadian Edition

SOLUTIONS TO EXERCISES (Odd)

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Third Canadian Edition

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Third Canadian Edition

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Third Canadian Edition

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Third Canadian Edition

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Third Canadian Edition

SOLUTIONS TO PROBLEMS (Odd)

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Third Canadian Edition

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Third Canadian Edition

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Third Canadian Edition

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Third Canadian Edition

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Third Canadian Edition

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Third Canadian Edition

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