Financial Accounting 4th Canadian Edition Solution Manual

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Chapter 1BusinessDecisions and Financial AccountingANSWERS TO QUESTIONS1.Accounting isa system ofanalyzing,recording, andsummarizingthe results of abusiness’s activitiesand then reporting them to decision makers.2.An advantage of operating as a sole proprietorship, rather than a corporation, is that it iseasy to establish. Another advantage is that income from a sole proprietorship is taxedonly once in the hands of the individual proprietor (income from a corporation is taxed inthe corporation and then again in the hands of the individual proprietor). A disadvantageof operating as a sole proprietorship, rather than a corporation, is that the individualproprietor can be held responsible for the debts of the business.3.Financial accounting focuses on preparing and using the financial statements that aremade available to owners and external users such as customers, creditors, and potentialinvestors who are interested in reading them. Managerial accounting focuses on otheraccounting reports that are not released to the general public, but instead are preparedand used by employees, supervisors, and managers who run the company.4.Financial reports are used by both internal and external groups and individuals. Theinternal groups are comprised of the various managers of the business. The externalgroups include investors, creditors, governmental agencies, other interested parties, andthe public at large.5.The business itself, not the individualshareholderswho own the business, is viewed asowning the assets and owing the liabilities on its balance sheet. A business’s balancesheet includes the assets, liabilities, andshareholders’equity of only that business andnotthe personal assets, liabilities, and equityof theshareholders. The financialstatements of a company show the results of the business activities of only that company.6.(a) Operating–These activities are directly related toearning profits. They includebuyingsupplies, makingproducts, serving customers, cleaning thepremises, advertising, rentinga building, repairingequipment, and obtaining insurance coverage.(b) Investing–These activities involve buying and selling productive resources with longlives(such as buildings, land, equipment, and tools), purchasing investments,and lendingto others.(c) Financing–Any borrowing from banks, repaying bank loans, receivingcontributions fromshareholders, or paying dividends toshareholdersareconsideredfinancing activities.

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-27.The heading of each of the fourprimaryfinancial statements should include the following:(a) Name of the business(b) Name of the statement(c) Date of the statement, or the period of time8.(a) The purpose of the balance sheet is to report the financial position (assets,liabilitiesandshareholders’equity) of a business at apoint in time.(b) The purpose of the income statement is to present information about the revenues,expenses, and net income of a business for a specified period of time.(c)Thestatementofretainedearningsreportsthewaythatnetincomeandthedistribution of dividends affected the financial position of the company during the period.(d)The purpose of the statement of cash flows is to summarize how abusiness’soperating, investing, and financing activities caused its cash balance to change over aparticular period of time.9.The income statement, statement of retained earnings, and statement of cash flowswouldbedated “Forthe Year EndedDecember 31, 2014,” because they report the inflows andoutflows of resources during a period of time. In contrast, the balance sheetwould bedated “At December 31, 2014,” because it represents the assets, liabilities andshareholders’equity at a specific date.10.Net income is the excess of total revenues over total expenses. A net loss occurs if totalexpenses exceed total revenues.11.The accounting equation for the balance sheet is: Assets = Liabilities +Shareholders’Equity. Assets are theeconomicresourcescontrolled by the company.Liabilities areamounts owed by the business.Shareholders’equity is theowners’ claims to thebusiness.It includes amountscontributed to the business (by investors throughpurchasing the company’s shares)and the amounts earned and accumulated throughprofitable business operations.12.The equation for the income statement is Revenues–Expenses = Net Income.Revenues are increases in a company’s resources, arising primarily from its operatingactivities. Expenses are decreases in a company’s resources, arising primarily fromitsoperating activities. Net Income is equal to revenues minus expenses.(If expenses aregreater than revenues, the company has a Net Loss.)13.The equation for the statement of retained earnings is: Beginning Retained Earnings +Net Income-Dividends = Ending Retained Earnings. It begins with beginning-of-the-yearretained earnings which is the prior year’s ending retained earnings reported on theprioryear’sbalance sheet. The current year's net incomereported on the income statement isadded and the current year's dividends are subtracted from this amount. The endingretained earnings amount is reported on the end-of-yearbalance sheet.

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-314.The equation for the statement of cash flows is: Cash flows from operating activities +Cash flows from investing activities + Cash flows from financing activities = Change incash for the period. Change in cash for the period +Beginning cash balance =Endingcash balance. The net cash flows for the period represent the increase or decrease incash that occurred during the period. Cash flows from operating activities are cash flowsdirectly related to earning income (normal business activity). Cash flows from investingactivities include cash flows that are related to the acquisition or sale of the company’slong-term assets. Cash flows from financing activities are directly related to the financingof the company.15.Currently, theChartered Professional Accountants of Canada (CPA)is given the primaryresponsibilityfor settingthe detailed rulesthatbecomeGenerally AcceptedAccountingPrinciples(GAAP) inCanada.(Internationally, the International Accounting StandardsBoard (IASB) has the responsibility for setting accounting rules known as InternationalFinancial Reporting Standards (IFRS).)16.The main goal of accounting rules is to ensurethatcompanies produceusefulfinancialinformationforpresent and potential investors, lenders, and other creditors in makingdecisions in their capacity as capital providers. Financial information must showrelevance and faithful representation, as well as be comparable, verifiable, timely, andunderstandable.17.An ethical dilemmais a situation where following one moral principle would result inviolating another. Three steps that should be considered when evaluating ethicaldilemmas are:(a) Identify who will benefit from the situation(often, the manager or employee) and howothers will be harmed (other employees, the company’s reputation, owners, creditors, andthe public in general).(b) Identify the alternative courses of action.(c) Choose the alternative that is the most ethical–that which you would be proud tohave reported inthe news media. Often, there is no one right answer and hard choiceswill need to be made.Following strong ethical practices is akeypart of ensuring goodfinancial reporting by businesses of all sizes.

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-418.Accounting frauds and cases involving academic dishonesty are similar in many respects.Both involve deceiving others in an attempt to influence their actions or decisions, oftenresulting in temporary personal gain for the deceiver. For example, when an accountingfraud is committed, financial statement users may be misled into making decisions theywouldn’t have made had the fraud not occurred (e.g., creditors might loan money to thecompany, investors might invest in the company, orshareholdersmight reward topmanagers with big bonuses). When academic dishonesty is committed,instructorsmightassign a higher grade than is warranted by the student’s individual contribution. Anothersimilarity is that, as a consequence of the deception, innocent bystandersmaybeadversely affected by fraudandacademic dishonesty.Fraud may require the company tocharge higher prices to customers to cover costs incurred as a result of the fraud.Academic dishonesty may lead to stricter grading standards, with significant deductionstaken for inadequate documentation of sources referenced.A final similarity is that iffraudand academic dishonesty areultimately uncovered, bothare likely tolead to adverse long-term consequences for the perpetrator. Fraudsters may be fined, imprisoned, andencounter an abrupt end totheir careers. Students who cheat may be penalized throughlowercourse gradesorexpulsion, andmightfind it impossible to obtain academicreferences for employment applications.

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-5Authors' Recommended Solution Time(Time in minutes)Mini-exercisesExercisesProblemsSkillsDevelopmentCases*Continuing CaseNo.TimeNo.TimeNo.TimeNo.TimeNo.Time13110CP1-145120145211210CP1-210220312315CP1-36033046425PA1-14543056525PA1-21052066610PA1-35063076715PB1-44574584810PA1-55094920PB1-1451031010PB1-210113113PB1-345126123PB1-410136PB1-5501461561612* Due to the nature ofcases, it is very difficult to estimate the amount of time students willneed to complete them. As with any open-ended project, it is possible for students to devote alarge amount of time to these assignments.While students often benefit from the extra effort,we find that some become frustrated by the perceived difficulty of the task.You can reducestudent frustration and anxiety by making your expectations clear, and by offering suggestions(about how to research topics or what companies to select).The skills developed by thesecases are indicated below.CaseFinancialAnalysisResearchEthicalReasoningCriticalThinkingTechnologyWritingTeamwork1x2x3xxxxx4xxx5xxx6xxx7xx

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-6ANSWERS TO MINI-EXERCISESM1-1AbbreviationFull Designation1. CPAChartered Professional Accountant2. GAAPGenerally Accepted Accounting Principles3. IASBInternational Accounting Standards Board4. CSACanadian SecuritiesAdministrators5. IFRSInternational Financial Reporting Standards6. ASPEAccounting Standards for Private EnterprisesM1-2Term or AbbreviationDefinitionFDEACIGBKJH(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)Investing activitiesPrivate companyCorporationAccountingPartnershipAcSBFinancing activitiesUnit of measureGAAPPublic companyOperating activitiesA.A system that collects and processes financialinformation about an organization andreports thatinformation to decision makers.B.Measurement of information about a business in themonetary unit (dollars or other national currency).C.An unincorporated business owned by two or morepersons.D.A company that sells shares privately and is notrequired to release its financial statements to thepublic.E.An incorporated business that issues shares asevidence of ownership.F.Buying and selling productive resources with long lives.G.Transactions with lenders (borrowing and repayingcash) andshareholders(selling company sharesandpaying dividends).H.Activities directly related to running the business toearn profit.I.Accounting Standards Board.J.A company that has its sharesbought and sold byinvestors on established stock exchanges.K.Generally accepted accounting principles.

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-7M1-3TermDefinitionFICABHDGEJ(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)RelevanceFaithful RepresentationComparabilitySeparate EntityAssetsLiabilitiesShareholders’EquityRevenuesExpensesUnit of MeasureA.The financial reports of a business are assumed toinclude the results of only that business’s activities.B.The resources owned by a business.C.Financial information that can be compared acrossbusinesses because similaraccounting methods havebeen applied.D.The total amounts invested and reinvested in thebusiness by its owners.E.The costs of business necessary to earn revenues.F.A feature of financial information that allows it toinfluence a decision.G.Earned by selling goods or services to customers.H.The amounts owed by the business.I.Financial information that depicts the economicsubstance of business activities.J.The assumption that states that results of businessactivities should be reported in an appropriate monetaryunit.M1-4L(B/S)(1) Accounts PayableA(B/S)(2) Accounts ReceivableA(B/S)(3) CashE(I/S)(4) Income Tax ExpenseE(I/S)(5)Sellingand Administrative ExpensesR(I/S)(6) Sales RevenueL(B/S)(7)Notes PayableSE(B/S)(8)Retained EarningsM1-5A(B/S)(1) Accounts ReceivableR(I/S)(2) Sales RevenueA(B/S)(3) EquipmentE(I/S)(4) Supplies ExpenseA(B/S)(5) CashE(I/S)(6)Advertising ExpenseL(B/S)(7) Accounts PayableSE(B/S)(8) RetainedEarnings

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-8M1-6A(B/S)(1) Accounts ReceivableE(I/S)(2)Selling and Administrative ExpensesA(B/S)(3) CashA(B/S)(4)EquipmentE(I/S)(5)AdvertisingExpensesR(I/S)(6) Sales RevenueL(B/S)(7)Notes PayableSE(B/S)(8)Retained EarningsL(B/S)(9) Accounts PayableM1-7L(B/S)(1) Accounts PayableSE(B/S)(2)Contributed CapitalA(B/S)(3) EquipmentA(B/S)(4) Accounts ReceivableL(B/S)(5) Notes PayableA(B/S)(6) CashSE(B/S)(7) RetainedEarningsE(I/S)(8)Selling andAdministrative ExpensesR(I/S)(9) Sales RevenueA(B/S)(10)SuppliesM1-8SRE*(1)DividendsB/S(2)Total Shareholders’ EquityI/S(3) Sales RevenueB/S(4) Total AssetsSCF(5) Cash Flows fromOperating ActivitiesB/S(6) Total LiabilitiesI/S, SRE(7) Net IncomeSCF(8) Cash Flows from Financing Activities* An argument could be made for also including SCF as a plausible answer because the SCFreports “Dividends paid in cash.” Theanswer SCF has been excluded here because(technically) the caption would have to read “Dividends paid in cash” if it were to be reportedon the SCF.

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-9M1-9ElementFinancial StatementD(1)Cash Flows from Financing ActivitiesA. Balance SheetB(2)ExpensesB. Income StatementD(3)Cash Flows from Investing ActivitiesC. Statement of Retained EarningsA(4)AssetsD. Statement of Cash FlowsC(5)DividendsB(6)RevenuesD(7)Cash Flows from Operating ActivitiesA(8)LiabilitiesM1-10(F)(1) Cash paid for dividendsO(2) Cash collected from customersF(3)Cash received when signing a note(O)(4) Cash paid to employees(I)(5) Cash paid topurchase equipmentF(6)Cash received from issuingsharesM1-11(I)(1) Cash paid to purchase equipmentO(2) Cash collected from clientsI(3)Cash received from selling equipment(F)(4) Cash paid for dividends(O)(5) Cash paid to suppliersF(6)Cash received from issuing sharesM1-12STONECULTURE CORPORATIONStatement of Retained EarningsFor the Year Ended December 31, 2013Retained Earnings, January 1, 2013$0Add: Net Income36,000Subtract: Dividends(15,000)Retained Earnings,December 31, 2013$ 21,000

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-10M1-12(continued)STONE CULTURE CORPORTATIONStatement of Retained EarningsFor the Year Ended December 31, 2014Retained Earnings, January 1, 2014$ 21,000Add: Net Income45,000Subtract: Dividends(20,000)Retained Earnings, December 31, 2014$ 46,000M1-13Apple, Inc.Google, Inc.Intel Corp.Contributed Capital$11$18$17Dividends004Net Income(a) 14(d) 9(g) 11Retained Earnings, Beginning of Year232026Retained Earnings, End of Year(b) 37(e) 29(h) 33Total Assets(c) 75(f) 59(i) 63Total Expenses512033Total Liabilities271213Total Revenues652944Net income = Revenues–ExpensesRetained Earnings, End of Year = RetainedEarnings Beginning of Year + Net Income–DividendsTotal Assets = Total Liabilities and Shareholders’ EquityM1-14Amazin’Corp.Best Tech,Inc.ColossalCorp.Contributed Capital$5$15$100Dividends10550Net Income(a) 25(d) 20(g) 100Retained Earnings, Beginning of Year300200Retained Earnings, End of Year(b) 45(e) 15(h) 250Total Assets(c) 80(f) 60(i) 700Total Expenses7530200Total Liabilities3030350Total Revenues10050300

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-11M1-14(continued)Net income =Revenues–ExpensesRetained Earnings, End of Year = Retained Earnings Beginning of Year + Net Income–DividendsTotal Assets = Total Liabilities and Shareholders’ EquityM1-15(a) (300) (b) 70 (c) 3,900. Electronic Arts was not profitable because its expenses ($3,900)were greater than its revenues ($3,600), resulting in the net loss of $300 reported on theincome statement.The above amounts are determined using the various relationships that exist in the financialstatements. Because this exercise excludes two pieces of information from both the incomestatement and statement of retained earnings, students must first work backwards from thebalance sheet to the statement of retained earnings to the income statement. Although notrequired, the following statements show the given and missing information. The ?s in thebalance sheet are determined from A = L + SE.Electronic Arts, Inc.Income StatementFor the Year Ended xxxxRevenues$3,600Expenses(c)NetIncome (Loss)(a)Electronic Arts, Inc.Statement of Retained EarningsFor the Year Ended xxxxRE, beginning$370Net income (loss)(a)Dividends(0)RE, ending(b)Electronic Arts, Inc.Balance SheetAt xxxxTotal Assets$4,900Liabilities and Shareholders’ EquityTotal Liabilities$2,400Shareholders’ EquityContributed capital$2,430Retained earnings(b)Total SE?Total Liabilities & SE?

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-12M1-16Req. 1WESTJETAIRLINES,LTD.Income StatementFor the YearEnded December 31, 2014(Amounts in millions)RevenuesTicket Revenues$ 9,861Other Revenue336Total Revenue10,197ExpensesSalaries Expense3,213Aircraft Fuel Expense2,536Other Operating Expenses2,145Repairs and Maintenance Expense616Landing Fees Expense560Interest Expense69Income Tax Expense413Total Expenses9,552Net Income$645Req. 2WESTJETAIRLINES,LTD.Statement of Retained EarningsForthe Year Ended December 31, 2014(Amounts in millions)Retained Earnings, January 1, 2014$ 4,157Add: Net Income645Subtract: Dividends(14)Retained Earnings, December 31, 2014$ 4,788

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-13M1-16(continued)Req. 3WESTJETAIRLINES,LTD.Balance SheetAt December 31, 2014(Amounts in millions)AssetsCash$2,213Accounts Receivable845Supplies259Property and Equipment10,874Other Assets2,581Total Assets$16,772LiabilitiesAccounts Payable$1,731Notes Payable4,993Other Liabilities3,107Total Liabilities9,831Shareholders’EquityContributed Capital2,153Retained Earnings4,788TotalShareholders’Equity6,941Total Liabilities andShareholders’Equity$16,772Req. 4WestjetAirlines financed its assets primarily with liabilities ($9,831) as opposed toshareholders’equity ($6,941).

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-14ANSWERS TO EXERCISESE1-1a)Assets = Liabilities +Shareholders’Equity= $13,750 + $4,450= $18,200= Assetsreported on the balance sheetb)Net Income = Revenue–Expenses= $10,500-$9,200= $1,300= Net income reported on the income statementc)Beginning Retained Earnings (R/E) + Net Income–Dividends = Ending R/E$3,500 + $1,300-$500 = $4,300d)Beginning Cash + Cash Flows from Operating Activities + Cash Flows from InvestingActivities + Cash Flows from Financing Activities = Ending Cash$1,000 + $1,600 +($1,000) + ($900) = $700E1-2a)Assets = Liabilities +Shareholders’Equity= $18,500 + $61,000= $79,500= Assets reported on the balance sheetb)Net Income = Revenue–Expenses= $32,100–$18,950= $13,150= Net income reported on the income statementc)Beginning Retained Earnings (R/E) + Net Income–Dividends = Ending R/E$20,500 + $13,150–$4,900 = $28,750d)Beginning Cash + Cash Flows from Operating Activities + Cash Flows from InvestingActivities + Cash Flows from Financing Activities = Ending Cash$3,200 + $15,700 + ($7,200) + ($5,300) = $6,400

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-15E1-3Req. 1Designer Footwear Inc.Balance SheetAt November 1, 2014(in thousands)AssetsCash$ 45,570Accounts Receivable11,888Property, Plant, and Equipment233,631Other Assets494,294Total Assets$785,383LiabilitiesAccounts Payable$136,405Notes Payable99,044Other Liabilities79,148Total Liabilities314,597Shareholders’EquityContributed Capital291,248Retained Earnings179,538TotalShareholders’Equity470,786Total Liabilities andShareholders’Equity$785,383Req. 2Most of the financing as of November 1 came fromshareholders. Theshareholdershavefinanced $470,786 of the total assets and creditors have financed only $314,597 of the totalassets of the company.

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-16E1-4Req. 1READER DIRECTBalance SheetAt December 31, 2014AssetsLiabilitiesCash$47,500Accounts Payable$8,000Accounts Receivable26,900Note Payable2,850Property and Equipment48,000Total Liabilities10,850Shareholders’EquityContributed Capital98,000Retained Earnings13,550TotalShareholders’Equity111,550Total Assets$122,400Total Liabilities andShareholders’Equity$122,400Req. 2Beginning Retained Earnings (R/E) + Net Income–Dividends = Ending R/E, soNet Income= Ending R/E + Dividends-Beginning R/E= $13,550 + 0–0= $13,550Net income for the year was $13,550. This is the first year of operations and no dividendswere declared or paid toshareholders; therefore, retained earnings is $13,550 (whichrepresents income for one year).Req. 3Most of the financing as of December 31, 2014came fromshareholders. Theshareholdershave financed $111,550 of the total assets and creditors have financed only $10,850 of thetotal assets of the company.Req.4Beginning Retained Earnings (R/E) + Net Income–Dividends = Ending R/E, soEnding R/E = $13,550 + 3,000–2,000= $14,550Retained Earnings at December 31, 2015would be $14,550.

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-17E1-5Req. 1LabelReq. 2Typea.Coins, bullion,and currencyInventoryAb.Amounts Collectibles Canada owesto suppliersof coins, bullion and currencyAccounts PayableLc.Amounts Collectibles Canada can collect fromcustomersAccounts ReceivableAd.Amounts owed to bank for loan to buy buildingNotes PayableLe.Property on which buildings will bebuiltLandAf.Amountsdistributedfrom profits toshareholdersDividendsSEg.Earned by Collectibles Canada by sellingcoincollecting suppliesRevenueRh.Unused paper inCollectibles Canadahead officeSuppliesAi.Cost of paper used upduring monthSupplies ExpenseEj.Amounts contributed to Collectibles Canada byshareholdersContributed CapitalSEE1-6Req. 1CINEPLEX ENTERTAINMENTIncome StatementFor the Quarter Ended June 26, 2014(in thousands)RevenuesAdmissions Revenues$455,700Concessions Revenues188,900Other Revenues31,200Total Revenues675,800ExpensesFilm Rental Expenses247,000Rent Expense90,000General, Sellingand Administrative Expenses65,700Concessions Expenses25,500Other Expenses233,800Total Expenses662,000Net Income$ 13,800

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-18E1-6 (continued)The question marks in the exercise correspond toTotal Expenses of $662,000 and NetIncome of $13,800, as determined above.Req. 2Cineplex’s main source of revenue is admissions and its biggest expense is its film rentalexpenseand other expenses.E1-7HOME REALTY, INCORPORATEDIncomeStatementFor the Year Ended December 31, 2014Revenue:Sales Revenue$166,000Expenses:Selling Expenses97,000Promotion and Advertising Expenses9,025Interest Expense6,300Income Tax Expense18,500Total Expenses130,825Net Income$ 35,175Note that dividends declared are not an expense. As a distribution of the company’s priorprofits, they will bededucted from Retained Earnings.E1-8ANet Income = $100,000-$82,000 =$18,000Shareholders’Equity = $150,000-$70,000 =$80,000BTotal Revenues = $80,000 + $12,000 =$92,000Total Liabilities = $112,000-$60,000 =$52,000CNet Income (Loss) = $80,000-$86,000 =$(6,000)Shareholders’Equity = $104,000-$26,000 =$78,000DTotal Expenses = $50,000-$13,000 =$37,000Total Assets = $22,000 + $77,000 =$99,000ETotal Revenues = $81,000-$6,000 =$75,000Total Assets = $73,000 + $28,000 =$101,000

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-19E1-9Req. 1MONCTON CLAY CORPORATIONIncome StatementFor the Month Ended January 31, 2014Total Revenues$131,000Operating Expenses90,500Net Income$ 40,500MONCTON CLAYCORPORATIONBalance SheetAt January 31, 2014Assets:Cash$30,800Accounts Receivable25,300Supplies40,700Total Assets$96,800Liabilities:Accounts Payable$25,700Total Liabilities25,700Shareholders’Equity:Contributed Capital (2,600 shares)30,600Retained Earnings(from the income statement above)40,500TotalShareholders’Equity71,100Total Liabilities andShareholders’Equity$96,800Req. 2Moncton Clay Corporation should have no problem paying its liabilities since it has more totalassets than total liabilities. In fact, it has over three times as many total assets as liabilities($96,800/$25,700 = 3.77 times). This means that Moncton Clay Corporation could pay itsliabilities more than three times over if all assets on hand at January 31, 2014, were convertedto cash. Of course, not all assets will be converted into cash right away. Even so, looking onlyat the amount of cash at the end of January, we see that Moncton Clay has enough cash tocover all its liabilities. This is a very strong financial position.

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-20E1-10Req. 1Average monthly revenue, $216,00012 = $18,000Req. 2Average monthly salaries and wages expense, $33,00012 = $2,750Req. 3Advertising is an expense because it represents the cost of ads that were run during theperiod to generate revenue.Req. 4The dividends are not reported as an expense because they represent a distribution of priorprofits toshareholders.Consequently, they appear only on the statement of retained earnings,not the income statement.Req. 5Standing alone, the income statement does not report, or make it possible to determine, theending cash balance. Some revenues might not have been collected, and some expensesmight not have been paid by the end of the year. The amount of cash on December 31, 2014,would be reported on the balance sheet under assets and on the cash flow statement as thefinal amount shown.E1-11(O)1.Cash paid to suppliers and employeesO2.Cash received from customersF3.Cash received from borrowing long-term debtF4.Cash received from issuing shares(I)5.Cash paid to purchase equipment

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-21E1-12(I)1.Purchases of equipmentO2.Cash received from customersF3.Cash received from issuing shares(O)4.Cash paid to suppliers and employees(F)5.Cash paid on notes payableI6.Cash received from selling equipment

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-22ANSWERS TO COACHED PROBLEMSCP1-1Req. 1NUCLEARCOMPANYIncome StatementFor the Year Ended December 31, 2014Sales Revenue$ 88,000ExpensesOperating Expenses57,200Other Expenses8,850Total Expenses66,050Net Income$21,950Req.2NUCLEAR COMPANYStatement of Retained EarningsFor the Year Ended December 31, 2014Retained Earnings, January 1, 2014$0Add: Net Income21,950Subtract: Dividends(200)RetainedEarnings, December 31, 2014$ 21,750Req. 3NUCLEAR COMPANYBalance SheetAt December 31, 2014AssetsCash$12,000Accounts Receivable59,500Supplies8,000Equipment36,000Total Assets$115,500LiabilitiesAccounts Payable$ 30,297Notes Payable1,470Total Liabilities31,767Shareholders’EquityContributed Capital61,983Retained Earnings21,750TotalShareholders’Equity83,733Total Liabilities andShareholders’Equity$115,500

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-23CP1-2Req. 1Nuclear Company’s income statement reported net income of $21,950, suggesting that thecompany was profitable because revenues exceeded expenses.Req. 2Nuclear Company’s statement of retained earnings reported a retained earnings balance of$21,750, after dividends of $200 had been subtracted. This suggests the company could havesustained additional dividends of $21,750, if sufficient cash were available to pay them. As itturns out, the company’s balance sheet reports cash of $12,000, suggesting that only $12,000in additional dividends could be paid (without borrowing additional cash).Req. 3Nuclear Company’s balance sheet reports total liabilities of $31,767 andshareholders’equityof $83,733, indicating that the company is financed mainly byshareholders.Req. 4Nuclear Company was founded at the beginning of the year, so it began with no cash. Thebalance sheet reports a cash balance of $12,000 at the end of the year. The reasons for thisincrease of $12,000 would be shown in the statement of cash flows.CP1-3Req. 1FITNESS AND FUN, INC.Income StatementFor the NineMonths Ended September 30, 2014(in thousands)Gym Revenues$575,667ExpensesGym Operating Expenses350,835General, Sellingand Administrative Expense83,207Advertising and Marketing Expense23,608Interest and Other Expenses20,316Income Tax Expense38,895Total Expenses516,861Net Income$ 58,806

Financial Accounting 4th Canadian Edition Solution Manual - Page 25 preview image

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-24CP1-3 (continued)Req. 2FITNESS AND FUN, INC.Statement of Retained EarningsFor the Nine Months Ended September 30, 2014(in thousands)Retained Earnings, January 1, 2014$199,890Add: Net Income58,806Subtract: Dividends0Retained Earnings, September 30, 2014$258,696Req. 3FITNESS AND FUN, INC.Balance SheetAt September 30, 2014(in thousands)AssetsCash$7,119Accounts Receivable5,318Supplies14,739Property and Equipment1,451,641Other Assets117,108Total Assets$1,595,925LiabilitiesAccounts Payable$102,665Accrued Liabilities119,482Notes Payable647,120Other Liabilities86,234Total Liabilities955,501Shareholders’EquityContributed Capital381,728Retained Earnings258,696TotalShareholders’Equity640,424Total Liabilities andShareholders’Equity$1,595,925

Financial Accounting 4th Canadian Edition Solution Manual - Page 26 preview image

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-25CP1-3 (continued)Req. 4FITNESS AND FUN, INC.Statement of Cash FlowsFor the Nine Months Ended September 30, 2014(in thousands)Cash Flows from Operating Activities:Cash received from customers$574,824Cash paid to suppliers and employees(472,265)Cash Provided by Operating Activities102,559Cash Flows from Investing Activities:Cash paid to purchase equipment(354,255)Cash received from sale of long-term assets161,885Cash Used in Investing Activities(192,370)Cash Flows from Financing Activities:Cash received from issuing common shares9,061Repayments of borrowings(13,043)Cash received from borrowings95,558Cash Provided by Financing Activities91,576Change in Cash1,765Beginning Cash Balance, January 1, 20145,354Ending Cash Balance, September 30, 2014$7,119

Financial Accounting 4th Canadian Edition Solution Manual - Page 27 preview image

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-26ANSWERS TO GROUP A PROBLEMSPA1-1Req. 1HIGH POWER CORPORATIONIncome StatementFor the Year Ended December 31, 2014Sales Revenue$91,000ExpensesOperating Expenses58,700Other Expenses8,850Total Expenses67,550Net Income$23,450Req.2HIGH POWER CORPORATIONStatement of Retained EarningsFor the Year Ended December 31, 2014Retained Earnings, January 1, 2014$0Add: Net Income23,450Subtract: Dividends(1,950)Retained Earnings, December 31, 2014$ 21,500Req. 3HIGH POWER CORPORATIONBalance SheetAt December 31, 2014AssetsCash$13,300Accounts Receivable9,550Supplies5,000Equipment86,000Total Assets$113,850LiabilitiesAccounts Payable$32,087Notes Payable1,160Total Liabilities33,247Shareholders’EquityContributed Capital59,103Retained Earnings21,500TotalShareholders’Equity80,603Total Liabilities andShareholders’Equity$113,850

Financial Accounting 4th Canadian Edition Solution Manual - Page 28 preview image

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-27PA1-2Req. 1High Power Corporation’s income statement reported net income of $23,450, suggesting thatthe company was profitable because revenues exceeded expenses.Req. 2High Power Corporation’s statement of retained earningsreported a retained earnings balanceof $21,500, after dividends of $1,950 had been subtracted. This suggests the company couldhave sustained additional dividends of $21,500, if sufficient cash were available to pay them.As it turns out, the company’s balance sheet reports cash of $13,300, suggesting that only$13,300 in additional dividends could be paid (without borrowing additional cash).Req. 3High Power Corporation’s balance sheet reports total liabilities of $33,247 andshareholders’equity of $80,603, indicating that the company is financed mainly byshareholders.Req. 4High Power Corporation was founded at the beginning of the year, so it began with no cash.The balance sheet reports a cash balance of $13,300 at the end of the year. Thereasons forthis increase of $13,300 would be shown in the statement of cash flows.PA1-3Req. 1COLLEGE PARK VETERINARY CLINICIncome StatementFor the Year Ended June 30, 2014Sales Revenue$250,000ExpensesOperating Expenses185,700General, Sellingand Administrative Expenses53,400Advertising and Marketing Expenses27,800Interest Expense5,000Total Expenses271,900Net Loss($21,900)

Financial Accounting 4th Canadian Edition Solution Manual - Page 29 preview image

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-28PA1-3 (continued)Req.2COLLEGE PARK VETERINARY CLINICStatement of Retained EarningsFor the Year Ended June 30, 2014Retained Earnings, July 1, 2013$ 50,000Add: Net Loss(21,900)Subtract: Dividends(27,500)Retained Earnings, June 30, 2014$600Req. 3COLLEGE PARK VETERINARY CLINICBalance SheetAt June 30, 2014AssetsCash$5,000Accounts Receivable125,600Supplies25,000Property and Equipment242,500Other Assets13,500Total Assets$411,600LiabilitiesAccounts Payable$ 87,000Notes Payable150,000Other Liabilities37,000Total Liabilities274,000Shareholders’EquityContributed Capital137,000Retained Earnings600TotalShareholders’Equity137,600Total Liabilities and Shareholder’s Equity$411,600

Financial Accounting 4th Canadian Edition Solution Manual - Page 30 preview image

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-29PA1-4Req. 1College Park Veterinary Clinic’s income statement reported net loss of $21,900, suggestingthat the company was not profitable because expenses exceeded revenues.Req. 2College Park Veterinary Clinic’s statement of retained earnings reported a retained earningsbalance of $600, afterdividends of $27,500 had been subtracted. This suggests the companycould have sustained additional dividends of $600, if sufficient cash were available to paythem. As it turns out, the company’s balance sheet reports cash of $5,000, suggesting thatadditional dividends could be paid (without borrowing additional cash).Req. 3College Park Veterinary Clinic’s balance sheet reports total liabilities of $274,000 andshareholders’equity of $137,600, indicating that the company is financed mainly bydebt/creditors.Req. 4It is not possible to determine the amount of cash increase or decrease that would be shownin the statement of cash flows from the information presented. To determine this change, wewould either require the opening cash balance at July 1, 2014, or would require the necessaryinformation to calculate the cash from or cash used in the operating, investing and financingactivities for the current year. None of this information is available in the information currentlyprovided.

Financial Accounting 4th Canadian Edition Solution Manual - Page 31 preview image

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Chapter 01-Business Decisions and Financial AccountingPhillips et al.Fundamentals of Financial Accounting,4CeSolutions ManualPage1-30PA1-5Req. 1OSI RESTAURANT PARTNERS, INC.Income StatementFor the Year Ended December 31, 2014(in millions)Revenues:Restaurant Sales Revenue$3,920Other Revenues21Total Revenues3,941Expenses:Food and Supplies Expenses1,415Utilities and Other Expenses1,104Wages Expense1,087General, Sellingand Administrative Expenses235Total Expenses3,841Net Income$100

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