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Accounting For Managers, 1st Canadian Edition Solution Manual

Accounting For Managers, 1st Canadian Edition Solution Manual provides structured notes and analysis for in-depth understanding.

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    CHAPTER 1 Solutions to Problems Problem 1.1 The Information Age has provided business with an increased quantity and improved quality of the information that is available in real time for planning, decisionmaking , and control. As a result, more people in the organization are now involved in decisionmaking , and timelier and more accurate decisions can be made. This has also facilitated an expansion in the scope of business decisions beyond cost accounting to include strategic performance measurement, risk management, connecting strategy with operations, looking to the future, and environmental awareness. In response, accounting practices have expanded to include systems that measure and support this new realm of business practices, such as: value - based management, quality management, environmental accounting, activity - based management, strategic management and lean accounting. Problem 1.2 Arising from the Industrial Revolution were large, complex companies that were characterized by multiple product lines, automation and complex processes, and large - scale operations. As organizations became more diversified and decentralized, more emphasis was placed on measuring profitability and addressing other issues such as performance measurement, quality management, and customer service. This created a need for different and more accurate information for decision making. It is quite possible that many companies could not succeed in our current business environment without having the benefit of management accounting to assist in planning, decisionmaking and control. P roblem 1.3 a ) S corekeeping b) Problem solving c) Problem solving d) Decision making e) Scorekeeping f) Scorekeeping

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    Problem 1.4 a) Scorekeeping b) Scorekeeping c) Problem solving d) Decision making e) Decision making f) Problem solving Problem 1.5 a) Planning , control b) Planning, c ontrol c) Control , decision - making d) Control e) Planning, decision - making f) Control g) Control h) Planning, control, decision - making Problem 1.6 a) The way a company costs its products is an internal issue and does not concern external shareholders. b) It was not necessary to report these changes to external stakeholders because the changes would not have impacted the final results reported in the financial statements. In the future, the effect should be increased profit assuming the new costing method provides for more accurate pricing. Problem 1.7 The best action Chang could take would be to engage external auditors to review the statements for accuracy and reliability. But that could be expensive, so she may first want to discuss with Mr. Rosen any anomalies that might have arisen during the year, such as a) Have all the year - end accruals been recorded correctly? b) Were there any significant changes in accounting methods, like depreciation or inventory? c) Were there any significant events that might have an impact on profit (flood, inflation, market conditions)?

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    Problem 1.8 Both are correct. The financial indicators that Aldo is proposing are important for assessing past performance and are considered lagging indicators. Non - financial measures, as proposed by Belinda, are leading indicators and are better for showing trends. They help to predict future performance. In reality, both financial and non - financial performance measures are important in evaluating divisional performance as indicated by the popular balance scorecard.

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    CHAPTER 2 Solutions to Problems Problem 2 .1 Value - based management uses a variety of techniques to measure increases in shareholder value, which is assumed to be the primary goal of all business organizations. Shareholder value refers to the economic value of an investment by discounting future cash flows to their present value using the cost of capital for the business. To achieve shareholder value, a business must generate profits in their markets for goods and services (product markets) that exceed the cost of capital (the weighted average cost of equity and borrowings) in the capital market. Problem 2 .2 The responsibilities of the board include setting the company’s strategicgoals, providing leadership to senior management, monitoring business performance, and reportingto shareholders. This means the board should set the company’s strategic aims and ensure that the necessary financial and human resources are in place for the company to meet its objectives and review management performance. The role of a Board is to provide leadership of the company within a framework of prudent and effective controls which enables risk to be assessed and managed. These controls include many accounting controls including budgets, capital expenditure evaluations, etc . Under governance legislation, the financial reports of a company are the responsibility of the directors.Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy the financial position of the company at any time and to ensure that financial reports comply with generally accepted accounting principles. They are also responsible for safeguarding the company’s assets and for taking reasonable steps to prevent and detect fraud. P roblem 2 .3 Shareholder value analysis emphasizes the processes by which shareholder value is achieved. Shareholder value can be determined by using such measures as total shareholder return, market value added, shareholder value added, and economic value added. This form ofvalue analysis compares cost with the value to the customer. Consequently, improving shareholdervalue is inextricably linked with both strategy and accounting.

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    In practice, the pursuit of shareholder value (or economic value added) can be achievedthrough the introduction of new or redesigned products and services, the management of costs, the development of performance measurement systems, and improved decision making. Problem 2 .4 An audit of financial statements is an examination of the accounting records of a company carried out by an independent auditor to ensure that the records have been properly maintained, the financial statements do not contain any misrepresentations, and the statements and other financial information fairly represents the organization’s financial position. Auditors carry out their audits in accordance with Canadian Auditing Standards . An audit normally includes examination of evidence relevant to the amounts and disclosures in financial reports, an assessment of significant estimates and judgments made by directors in preparing the financial reports, and an opinion as to whether the accounting policies are appropriate, consistent, and adequately disclosed. Problem 2 .5 The objectives of the audit committee are to: • Help directors meet their responsibilities, especially for accountability • Provide better communication between directors and external auditors • Enhance the external auditor’s independence • Increase the credibility and objectivity of financial reports • Strengthen the role of the outside directors by facilitating in - depth discussions among directorson the committee, management, and external auditors Problem 2 .6 Under governance legislation, the directors are responsible for the financial reports of a company. This involves taking responsibility for keeping proper accounting records that disclose with reasonable accuracy the financial position of the company at any time and to ensure that financial reports comply with generally accepted accounting principles. They are also responsible for safeguarding the company’s assets and for taking reasonable steps to prevent and detect fraud. In the process of preparing the financial statements, directors are responsible for selecting suitable accounting policies and applying them consistently. When required to make judgments and estimates, the board must ensure they are reasonable and

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    prudent. Further, directors must prepare financial reports under the assumption the company is a going concern. This is not to say the directors are the individuals that actually prepare the financial statements. This is almost always delegated to professionals, managers and other employees; however, the responsibility always remains with the directors.

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    CHAPTER 3 Solutions to Problems Problem 3 .1 Transaction Profit Cash Flow Assets (not cash) Liabilities Owner contributes cash Increase Buys equipment on credit Increase Increase Buys inventory on credit Increase Increase Takes out a loan from the bank Increase Increase Sells goods on credit Increase Increase Pays cash for expenses Decrease Decrease Pays cash to suppliers Decrease Decrease Receives cash from customers Increase Decrease Depreciates equipment Decrease Decrease Problem 3 .2 a) A business entity is a person, company, corporation or other legal business that is considered independent of its owners for accounting purposes. b) The accrual principle requires income to be recognized in the accounting records when it is earned, and expenses are recognized when they are incurred. It does not allow for recording transactions on a cash basis. c) The matching principle is a corollary of the accrual principle and is based on the premise that “related” income and expenses have to be recorded in the same accounting period. That is, the income earned for a particular period has to be matched with the expenses that produced that income. d) When financial reports are prepared assuming that the business will continue in operations for the foreseeable future, this is known as a going concern . This assumption has a significant impact on asset valuations, as asset values for liquidation are unlikely to equal asset values of a business that will be continuing operations.

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    e) Consistency refers to using the same accounting standards and principles from year to year. Sometimes changes may affect how the financial situation is presented. P roblem 3 .3 a) Social cost : is a cost that would normally be incurred by the business, but through decisions or circumstances, has been transferred to society. b) Opportunity cost : is not an actual transfer of cash. Instead, it is the cost associated with not doing something; the cost of a lost opportunity from t aking one decision over another. c) Sunk cost : are costs that were incurred in the past and cannot be changed. Therefore they are irrelevant to decisions about the future. d) Cash cost : is the amount of cash actually expended to acquire something of value. It involves an actual transfer of cash. Problem 3 .4 The four main categories of internal control for information systems are as follows . 1. Security controls , including personnel, access, and software controls, are put in place to prevent unauthorized access, modification or destruction of stored data, the most common of which is password protection. 2. The purpose of application controls is to prevent, detect, and correct transaction data entry processing errors so that the information that is produced is reliable, complete and accurate . These controls will be found at the input, processing and output levels . 3. Network controls , such as firewalls and data encryption, are aimed at protecting the systems from external threats such as viruses, hacking or theft. 4. Contingency controls must be put in place in case the other controls fail or there is a major disaster. They are designed to get the business back to full operations as quickly as possible after a failure or event. The most common contingency control is keeping data back - up files off - site in a secure place.

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    Problem 3 .5 Transaction Profit: Income less expenses Cash Flow Assets (not cash) Liabilities and Equity Issues shares to public Increase Increase Borrows money over five years Increase Increase Pays cash for equipment Decrease Increase Buys inventory on credit Increase Increase Sells goods on credit Increase Increase Pays cash for salaries, rent, etc. Decrease Decrease Pays cash to suppliers Decrease Decrease Receives cash from customers Increase Decrease Depreciates equipment Decrease Decrease

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    Problem 3.6 a) Profit for the year: Income $ 135,000 Less: Advertising $ 15,000 Rent 10,000 Salaries 75,000 100,000 Profit $ 35,000 b) Capital at the end of the year: Beginning capital $ 71,000 Plus: profit for the year 35,000 Capital at the end of the year $ 106,000 OR Bank $ 5,000 Accounts receivable 12,000 Fixed assets 100,000 Total assets 117,000 Less: liabilities - Accounts payable 11,000 $ 106,000

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    CHAPTER 4 Solutions to Problems Problem 4 .1 a. Gross profit = Sales – Cost of Sales = $100,000 – $60,000 = $40,000 b. Gross profit margin = Gross profit ÷ Sales = $40,000 ÷ $100,000 = 40% c. Net profit = Gross profit – Expenses = $40,000 – $30,000 – $2,000 = $8,000 d. Net profit margin = Net profit ÷ Sales = $8,000 ÷ $100,000 = 8% Problem 4.2 Users of financial statements are defined by the Framework for the Preparation and Presentation of Financial Statements as existing and potential investors, employees, lenders, suppliers and trade creditors, customers, government and the public. Management is not defined as a user because management has the ability to determine the form and content of the information to meet its own needs. The reporting of information to meet the needs of management is beyond the scope of the Framework . Problem 4 . 3 Management is responsible for the preparation of financial statements in accordance with the applicable financial reporting framework, including their fair presentation. M anagement is also responsible for such internalcontrol as it determines are necessary to enable the preparation of fi nancial statements that are freefrom material misstatement, whether due to fraud or error. P roblem 4 . 4 Canadian legislation requires that organization’s financial statements present fairly the financial position, financial performance, and cash flows of an entity; be prepared according to generally accepted accounting principles (GAAP); and be audited or reviewed to ensure that this is the case. The principles , outlined in the CICA Handbook, guides management in preparing financial statements that comply with this legislation. Part I of the CICA Handbook consists of InternationalFinancial Reporting Standards (IFRS) and is applicable to public entities. Part II of the CICA Handbook consists of AccountingStandards for Private Enterprises (ASPE) and applies to private

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    companies (although they can chooseto use Part I if they wish) . Part III applies to not - for - profit organizations. Apart from these specific issues, not - for - profit organizations apply ASPE. There are also separate accounting standards for the public sector or government. These “parts” areoften referred to as the financial reporting framework . Problem 4 . 5 The purpose of the Conceptual Framework for Financial Reporting is to limit the differences in the definitions of the elements of financial statements created by the variety of social, economic, and legal circumstances from country to country, and by different countries having to consider the needs of different users of financial statements when setting national requirements. This has also resulted in the use of different criteria for the recognition of items in the financial statements and in a preference for different bases of measurement. The conceptual framework harmonizes regulations, accounting standards, and procedures relating to the preparation and presentation of financial statements. It also provides a basis for establishing an appropriate standard to use when an accounting policy is needed. Problem 4. 6 Confirmative value : Financial information has confirmatory value if it provides feedback about (confirms orchanges) previous evaluations. Predictive value : Financial information has predictive value if it can be used to predict future outcomes. Financial information need not be a prediction or forecast to have predictive value. Financial information with predictive value is employed by users in making their own predictions. Materiality : Information has materiality if its omission or misstatement could influence the economic decisions of users made on the basis of financial reports .

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    Problem 4 . 7 (a) Kazam Services -- Record of Transactions Property, Plant & Equipment Accounts Receivable Cash (Bank) Accounts Payable Long - term Loan Capital Beginning balance $500,000 $125,000 $(35,000) $(90,000) $(300,000) $(200,000) Long term loan for building 150,000 (150,000) Received from debtors (45,000) 45,000 Paid creditors (30,000) 30,000 Invoiced customers 70,000 (70,000) Paid salaries (15,000) 15,000 Paid office expenses (5,000) 5,000 Depreciation (20,000) 20,000 Ending balance $630,000 $150,000 $(40,000) $(60,000) $(450,000) $(230,000) (b) Kazam Services Statement of Comprehensive Income Service Income $70,000 Less: Expenses 40,000 Operating Profit $30,000 Kazam Services Statement of Financial Position Assets Current assets: Accounts receivable $150,000 Non - current assets: Property, plant, & equip. $650,000 Less: Accum. depreciation 20,000 630,000 Total assets $780,000 Liabilities Current liabilities: Bank overdraft $40,000

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    Accounts payable 60,000 Total current liabilities $100,000 Non - current liabilities: Long - term loans 450,000 Total liabilities $550,000 Equity Capital $200,000 Retained earnings 30,000 Total equity $230,000 Total liabilities and equity $780,000 Problem 4 . 8 (a) Working capital: Current assets $125,000 Less: current liabilities 75,000 $50,000 (b) Total assets: Non - current assets $250,000 Current assets 125,000 $375,000 (c) Shareholders’ equity: Total assets $375,000 Less: Total liabilities ($75,000 + $125,000) 200,000 $175,000

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    Problem 4. 9 Answer e: Although the operating profit has increased (from $137,000 to $139,000), the operating margin has decreased (from 11.7% to 11.1%) as a result of a reduction in the gross margin (from 39.1% to 37%) and higher expenses (from $323,000 to $324,000), despite sales growth (of 6.4%). 2012 2011 Sales $1,250,000 $1,175,000 Less: Cost of goods sold 787,000 715,000 Gross margin 463,000 37.0% 460,000 39.1% Less: Sell ing & admin expenses 324,000 323,000 $139,000 11.1% $137,000 11.7% Problem 4. 10 a. Prepayment The annual payment is 24 × $ 400 = $ 9,600 (this is $ 800/month). The prepayment at March 31 is 9/12 (Apr – Dec) @ $ 800 = $ 7,200.  Profit is reduced by $ 2,400 (expense: 3 months @ $ 800).  Asset in the statement of financial position is increased by $ 7,200 (prepayment is an asset: 9 months @ $ 800).  Cash flow is reduced by $ 9,600 (payment December 31 ). NB: The effect of the prepayment of $ 7,200 is to carry forward the expense to the next financial year. b. Accrual The simple solution is to divide $ 6,000 by 12 months and charge $ 500/ month to profit. However, this ignores seasonal fluctuations and cash flow differences from quarter to quarter. The quarterly bills have been paid during the year, but the last quarterly bill was in November. Therefore the business is missing one month’s expense (that is, December). To determine the amount we need to calculate the seasonal charges:  $ 6,000 × 70% = $ 4,200 for September – February/6 months = $ 700/month.  $ 6,000 × 30% = $ 1,800 for March – August/6 months = $ 300/month.  Accrue for one month (December) = $ 700.

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