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Financial Accounting 6th Canadian Edition Solution Manual

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 1 Chapter 1 Financial Statements and Business Decisions Revised : October 21, 2016 ANSWERS TO QUESTIONS 1. Accounting is a system that collects and processes (analyzes, measures, and records) financial information about an organization and reports that information to decision makers. 2. Financial accounting involves preparation of the basic financial statements and related disclosures for external decision makers. Reporting is generally on a quarterly and annual basis. Managerial accounting involves the preparation of detailed plans, budgets, forecasts, and performance reports for internal decision makers. Reporting is on an ongoing basis. 3. Financial reports are used by both internal and external groups and individuals. The internal users are the various managers of the entity, e.g. marketing, credit and purchasing. The external groups include the owners, investors, creditors, governmental agencies, other interested parties, and the public at large. 4. Investors purchase all or part of a business and hope to gain by receiving part of what the company earns and/or selling their share of the company in the future at a higher price than they paid. Creditors lend money to a company for a specific length of time and hope to gain by charging interest on the loan. 5. An accounting entity is the organization for which financial data are to be collected. Typical accounting entities are a business, a church, a governmental unit, a university and other nonprofit organizations such as a hospital. A business is defined and treated as a separate entity because the owners, creditors, investors, and other interested parties need to evaluate its performance and its potential separately from other entities and from its owners. 6. The heading of each of the four required financial statements should include the following: (a) Name of the entity (b) Title of the statement (c) Specific date or period of the statement, or the period of time it covers (d) Unit of measure 7. (a) The purpose of the statement of earnings is to present information about the revenues, expenses, and the net earnings of the entity for a specified period of time, in order to help assess its financial performance during that period.

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 2 (b) The purpose of the statement of financial position is to report the financial position of an entity at a given date, that is, to report information about the assets, obligations and shareholders’ equity of the entity as of a specific date. (c) The purpose of the statement of cash flows is to present information about the flow of cash into the entity (sources), the flow of cash out of the entity (uses), and the net increase or decrease in cash during the period. (d) The statement of changes in equity reports the way that net earnings, the distribution of net earnings (dividends), and other changes to shareholders’ equity affected the company’s financial position during the accounting period. The focus in this chapter is on retained earnings. Net earnings for the year increases the balance of retained earnings whereas the declaration of dividends to the shareholders decreases retained earnings. 8. The statement of earnings and the statement of cash flows are dated “For the Year Ended December 31, 2017 ,” because they report the inflows and outflows of resources during a period of time. In contrast, the statement of financial position is dated “As at December 31, 2017 ” because it represents the resources, obligations and shareholders’ equity as at a specific date, December 31, 2017 . 9. Assets are important to investors and creditors because assets provide a basis for judging whether sufficient resources are available to operate the company. Liabilities are important to creditors and investors because the company must be able to generate sufficient cash from operations or further borrowing to meet the payments required by debt agreements. If a business does not pay its creditors, the law may give the creditors the right to force the sale of assets sufficient to meet their claims. 10. Net earnings is the excess of total revenues over total expenses. Net loss is the excess of total expenses over total revenues. 11. The accounting equation for the statement of earnings is Revenues - Expenses = Net earnings. Revenues result from the sale of goods and services to customers, regardless of the timing of collection of cash from customers. Expenses represent the monetary value of resources the entity used up, or consumed, to earn revenues during the period. Net earnings is simply the excess of revenues over expenses.

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 3 12. The accounting equation for the statement of financial position is: Assets = Liabilities + Shareholders’ Equity Assets are the probable (expected) future economic benefits owned by the entity as a result of past transactions. They are the resources owned by the business at a given point in time such as cash, trade receivables, merchandise inventory, machinery, buildings, land, and patents. Liabilities are probable (expected) debts or obligations of the entity as a result of past transactions which will be discharged with assets (usually, cash) or services in the future. They are the obligations of the entity such as trade payables, notes payable, and bonds payable. Shareholders’ equity is financing provided by owners of the business and by the net earnings generated from the operations of the business. It is the claim of the owners to the assets of the business after the creditor claims have been satisfied. Shareholders’ equity may be thought of as the residual interest because it represents assets minus liabilities. 13. The accounting equation for the statement of cash flows is: Cash flows from operating activities +/ – Cash flows from investing activities +/ – Cash flows from financing activities = Change in cash for the period. The net cash flows for the period represent the increase or decrease in cash that occurred during the period. Cash flows from operating activities are cash flows directly related to earning income (normal business activity including interest paid and income taxes paid). Cash flows from investing activities comprise cash flows that are directly related to the acquisition or sale of productive assets used by the company, such as plant and equipment. Cash flows from financing activities consist of cash flows that are directly related to the financing of the enterprise, such as issuing shares to investors. 14. The accounting equation for retained earnings is: Beginning Retained Earnings + Net earnings – Dividends = Ending Retained Earnings The equation begins with beginning - of - the - year Retained Earnings i.e., the prior year’s ending retained earnings reported on the statement of financial position. The current year's net earnings reported on the statement of earnings are added to this amount and the Dividends declared during the current year are subtracted from this amount. The ending Retained Earnings amount is reported on the end - of - period statement of financial position. 15. Credit managers use customers' financial statements to decide whether to extend them credit for their purchases. Purchasing managers use potential suppliers' financial statements to judge whether the suppliers have the resources necessary to meet current and future demand. Human resource managers use financial statements as a basis for contract negotiations to determine, for example, what pay rates the company can afford. The net earnings figure can also serve as a basis to pay bonuses not only to management, but to other employees through profit sharing plans.

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 4 16. In Canada, provincial securities legislation created securities commissions, most notably the Ontario Securities Commission (OSC) , to regulate Canadian capital markets and the flow of financial information provided by publicly traded companies whose shares trade on Canadian stock exchanges, such as the Toronto Stock Exchange. Similar to the SEC, the OSC plays an influential role in promoting sound accounting practices by publicly traded companies. Since their establishment, these securities commissions have worked with organizations of professional accountants to establish groups that are given the primary responsibilities to work out the detailed rules that Canadian entities must use. The name of the current Canadian group that has this responsibility is the Accounting Standards Board (AcSB) . The AcSB is responsible for establishing standards of accounting and reporting by Canadian companies and not - for - profit organizations. 17. The officers of the company, usually the CEO and the CFO, must personally sign a certification that they have designed or supervised the design, implementation and evaluation of effective, appropriate financial accounting and reporting processes. The executives and officers of the company bear primary responsibility for information prepared and reported in the financial statements and other information contained in the annual report. Top management also nominates members to the Board of Directors to oversee the integrity of the first two safeguards. Those owning shares of the firm vote to elect the Board of Directors which holds the officers of the company accountable to the shareholders for defects in the internal control and reporting system. It also appoints external, independent auditors who provide advice to companies on how to best comply with regulations on financial reporting. 18. A sole proprietorship is an unincorporated business owned by one individual. A partnership is an unincorporated association of two or more individuals to carry on a business. A corporation is a business that is organized under federal or provincial laws, whereby a charter is granted and the entity is thus authorized to issue shares of stock as evidence of ownership by the owners (i.e., shareholders). Corporations are legal entities separate from their owners, but sole proprietorships and partnerships are not. 19. Public practice accounting firms normally render three types of service: assurance services, management advisory services, and tax services. Assurance services, including auditing, involves examination of the records and financial statements to determine whether they “fairly present” the financial position and results of operations of the entity in accordance with the applicable accounting standards. Management advisory (consulting) services include providing expert business advice to management. Tax services involve providing tax - planning advice to clients (both individuals and businesses) and preparation of their tax returns.

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 5 Authors' Recommended Solution Time (Time in minutes) Mini - Exercises Exercises Problems Alternate Problems Cases and Projects No. Time No. Time No. Time No. Time No. Time 1 5 E 1 20 M 1 45 M 1 45 M 1 30 E 2 5 E 2 25 M 2 60 D 2 60 D 2 20 E 3 5 E 3 20 M 3 30 M 3 30 M 3 30 M 4 20 M 4 45 M 4 60 M 5 20 M 5 20 M 5 25 M 6 2 5 E 6 25 M 7 30 M 7 25 M 8 10 E 8 * 9 20 M 10 10 E Continuing Case 11 30 M 1 45 M E = Easy M = Moderate D = Difficult * Due to the nature of these cases and projects, it is very difficult to estimate the amount of time students will need to complete the assignment. As with any open - ended project, it is possible for students to devote a large 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 reduce student frustration and anxiety by making your expectations clear. For example, when our goal is to sharpen research skills, we devote class time discussing research strategies. When we want the students to focus on a real accounting issue, we offer suggestions about possible companies or industries.

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 6 MINI - EXERCISES M1 – 1 Element Financial Statement B (1) Expenses A. Statement of financial position D (2) Cash flow from investing activities B. Statement of earnings A (3) Assets C. Statement of shareholders’ equity C* (4) Dividends D. Statement of cash flows B (5) Revenues D (6) Cash flow from operating activities A (7) Liabilities D (8) Cash flow from financing activities *Dividends paid in cash are also subtracted in the Financing section of the Statement of Cash Flows M1 – 2 SE (1) Retained earnings A (2) Accounts receivable R (3) Sales revenue A (4) Property, plant, and equipment E (5) Cost of sales A (6) Inventories E (7) Interest expense L (8) Accounts payable A (9) Land M1 – 3 Abbreviation Full Designation (1) AcSB Accounting Standards Board (2) IFRS International Financial Reporting Standard s (3) CPA C hartered Professional Accountant (4) I ASB International Accounting Standards Board

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 7 EXERCISES E1 – 1 Req. 1 Leon’s Furniture Limited Statement of Financial Position As at December 31, 2015 (in millions of Canadian dollars) Assets Cash and cash equivalents $ 18 Trade receivables 112 Inventories 267 Property, plant and equipment, net 334 Intangible assets and goodwill 739 Other assets 93 Total assets $ 1,563 Liabilities and shareholders’ equity Trade and other payables $ 197 Dividends payable 7 Income tax payable 35 Loans and borrowings 315 Other liabilities 460 Total liabilities 1,01 4 Contributed capital 31 Retained earnings 510 Other components of equity 8 Total shareholders’ equity 549 Total liabilities and shareholders’ equity $ 1,563 Req. 2 Dividends payable represents the amount of dividends that has not been paid yet to the company’s shareholders. Retained earnings represent the amount of earnings that has accumulated over time but has not been distributed to shareholders. Total assets ref lect the recorded value of the resources that are available to the company for use in generating revenue over time.

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 8 E1 – 2 Req. 1 READ MORE STORE Statement of Financial Position As at December 31, 2017 ASSETS LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities Cash $ 48,900 Accounts payable $ 7,000 Accounts receivable 25,000 Note payable 3,000 Store and office equipment 49,000 Interest payable 120 Total liabilities 10,120 Shareholders’ Equity Contributed capital 100,000 Retained earnings 12,780 Total shareholders’ equity 112,780 Total assets $122,900 Total liabilities and shareholders' equity $122,900 Req. 2 This is the first year of operations and no dividends were declared. Therefore, the balance of retained earnings, $12,780, at year - end consists entirely of the net earnings for the first year. E1 – 3 Req. 1 THE UNIVERSITY SHOP Statement of Earnings For the Month of September 2018 Revenue from sales $120,000 (*) Expenses: Cost of sales $ 40,000 Salaries, rent, supplies, and other expenses 38,000 Utilities 600 Total expenses 78,600 Net earnings for the period $ 41,400 (*) $119,000 + $1,000 = $120,000. (Note: income taxes were ignored in this problem.)

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 9 E1 – 3 (continued) Req. 2 This statement of e arnings indicates that the University Shop is a profitable company. Although the net earnings amount does not reflect the amount of cash available at the end of September 2018 , the cash transactions indicate that the cash available is sufficiently large to cover the cost of the cash register. E1 – 4 Revenues $ 812,272 606,764 + 205, 508 Cost of sales 533,529 Depreciation expense 26,903 Interest expense 46,332 Total expenses excluding income taxes 606,764 533,529 + 26,903 + 46,332 Earnings before income tax 205,508 165,749 + 39,759 Income tax expense 39,759 Net earnings for the year $ 165,749 E1 – 5 HOME REALTY, INCORPORATED Statement of Earnings For the Year Ended December 31, 2017 Revenue: Commissions earned ($150,000 + $16,000) $166,000 Rental service fees 15,000 Total revenues $181,000 Expenses: Salaries $ 62,000 Commissions 35,000 Payroll taxes 2,500 Rent ($2,200 + $200) 2,400 Utilities 1,600 Promotion and advertising 8,000 Miscellaneous 500 Total expenses, excluding income taxes 112,000 Earnings before income taxes 69,000 Income tax expense 18,500 Net earnings for the period $ 50,500

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 10 E1 – 6 A Net earnings = $91,700 – $76,940 = $14,760 ; Shareholders’ Equity = $140,200 – $69,000 = $71,200 . B Total Revenues = $74,240 + $14,740 = $88,980 ; Total Liabilities = $107,880 – $79,010 = $28,870 . C Net earnings (Loss) = $69,260 – $76,430 = ($7,170) ; Shareholders’ Equity = $97,850 – $69,850 = $28,000 . D Total Expenses = $58,680 – $21,770 = $36,910 ; Total Assets = $17,890 + $78,680 = $96,570 . E Net earnings = $84,840 – $78,720 = $6,120 ; Total Assets = $25,520 + $79,580 = $105,100 . Company B is a profitable company whereas Company C is not. In addition, Company C’s liabilities are relatively much higher than those of Company B. Consequently, lending money to Company C is riskier than lending money to Company B, which appears to have a better capacity to repay the loan over time. E1 – 7 DUCHARME CORPORATION Summary Statement of Earnings For the Month of January 2017 Total revenues $299,000 Less: Total expenses (excluding income taxes) 189,000 Earnings before income taxes 110,000 Less: Income tax expense 34,500 Net earnings $ 75,500 DUCHARME CORPORATION Statement of Financial Position As at January 31, 2017 Assets Cash $ 65,150 Receivables from customers 34,500 Merchandise inventory 96,600 Total assets $ 196,250 Liabilities and Shareholders’ Equity Liabilities: Payables to suppliers $ 26,450 Income taxes payable 34,500 Total liabilities 60,950 Shareholders’ equity: Contributed capital (2,600 shares issued) 59,800 Retained earnings 75,500 Total liabilities and shareholders’ equity $ 196,250

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 11 E1 - 8 Retained earnings, January 1, 2017 $ – Net earnings for 2017 31,000 Dividends for 2017 (14,200 ) Retained earnings, December 31, 2017 $ 16,800 Retained earnings, January 1, 2018 $ 16,800 Net earnings for 2018 42,000 Dividends for 2018 (18,700) Retained earnings, December 31, 2018 $ 40,100 E1 – 9 1. Average amount of monthly revenue, $216,000  12 = $18,000. 2. Amount of monthly rent, $21,000  12 = $1,750. 3. “Supplies, $25,000” is an expense because it represents the cost of supplies used in performing the services sold. 4. “Interest” is an expense because it represents the cost of borrowing. The company has an outstanding loan (from another party); $8,000 is the amount of interest (owed, if not already paid) on that debt for the year 2017 . The interest on the loan for the year 2017 is an expense of the year 2017 (whether or not paid by December 31, 2017 ). 5. Average income tax rate, $21,000  $60,000 = 35%. 6. For an external decision maker as well as any user of financial statements , r evenues represent amounts expected to be received for goods or services that have been delivered to customer s , whether or not cash has been received for the goods or services . For Pest Away Corporation, most of the revenues were made for cash and a small percentage of revenues were made on account. 7 . The statement of earnings does not report, or make it possible to determine, the ending cash balance. Cash is reported on the statement of financial position under assets and on the statement of cash flows as the final amount reported. E1 – 10 (O) (1) Cash paid to suppliers and employees O (2) Cash received from customers (F) (3) Dividends paid F (4) Issuance of share capital (O) (5) Interest paid I (6) Proceeds from disposal of investment (I) (7) Purchases of property, plant, and equipment (F) (8) Repurchase of share capital

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 12 E1 – 11 NITSU MANUFACTURING CORPORATION Statement of Cash Flows For the Year Ended December 31, 2017 Cash flow from operating activities Cash collected from customers $270,000 Cash paid for operating expenses ( 180,000) Net cash flow from operating activities $90,000 Cash flow from investing activities Cash received for sale of land 15,000 Cash paid for purchase of new machines (38,000) Net cash flow from (used in) investing activities (23,000) Cash flow from financing activities Cash received from sale of the company’s shares 30,000 Cash paid on long - term notes (80,000) Cash paid for dividends (22,000) Net cash flow from (used in) financing activities (72,000) Net decrease in cash during the year (5,000) Cash at beginning of year 63,000 Cash at end of year $ 58,000

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 13 PROBLEMS ( Note to the instructor : Most students find the Problems in this chapter to be quite challenging.) P1 – 1 Req. 1 NUCLEAR COMPANY Summary Income Statement For the Year Ended December 31, 2017 Total sales revenue (given) $140,000 Total expenses, excluding income taxes (given) 89,100 Earnings before income taxes 50,900 Income tax expense ($50,900 x 30%) 15,270 Net earnings $ 35,630 Req. 2 NUCLEAR COMPANY Statement of Financial Position As at December 31, 2017 Assets Cash (given) $ 25,000 Accounts receivable (given) 12,000 Merchandise inventory (given) 90,000 Equipment, net (given) 45,000 Total Assets $172,000 Liabilities and Shareholders’ Equity Liabilities: Accounts payable (given) $47,370 Salary payable (given) 2,000 Total Liabilities $ 49,370 Shareholders' equity: Contributed capital (given) $87,000 Retained earnings* 35,630 Total shareholders' equity 122,630 Total liabilities and shareholders' equity $172,000 * Ending RE = Beginning RE + Net earnings – Dividends = $ 0 + $35,630 - $ 0 = $35,630. Because this is the first year of operations the beginning balance of retained earnings is zero.

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 14 P1 – 1 (continued) Req. 3 A creditor will know that $12,000 will be received by this company within a few months but that it must also pay suppliers $47,370, also within a few months. When making a lending decision a creditor would use this information to determine the likel i hood that the company could repay a loan. P1 – 2 Req. 1 WILLIAM’S PLUMBING SERVICES INC. Statement of Earnings For the Six Months Ended December 31, 2017 Service revenues ($64,000 + $6,000) $70,000 Expenses: Wages for plumber’s assistant $17,000 Payroll taxes 750 Oil, gas, and maintenance - truck 2,400 Rent ($2,500 + $500) 3,000 Supplies used 17,100 Utilities and telephone 1,850 Insurance 700 Miscellaneous expenses 900 Depreciation of truck and tools 2,400 Total expenses, excluding income taxes 46,100 Earnings before income taxes 23,900 Income tax expense ($23,900 x 30%) 7,170 Net earnings $ 16,730

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 15 P1 – 2 (continued) Req. 2 WILLIAM’S PLUMBING SERVICES INC. Statement of Financial Position As at December 31, 2017 Assets Cash 1 $23,800 Accounts receivable 6,000 Equipment ($18,000 + $3,000) $21,000 Less: Depreciation (2,400 ) 18,600 Total Assets $ 48,400 Liabilities Accounts payable $ 500 Income tax payable 7,170 Total liabilities 7,670 Shareholders’ Equity Contributed capital (initial investment) $24,000 Retained earnings 16,730 40,730 Total Liabilities and Shareholders’ Equity $ 48,400 1 Cash = $24,000 – 18,000 – 3,000 + 64,000 – (46,100 – 500 – 2,400) = $ 23,800 Req. 3 Because the above report reflects only revenues, expenses, and net earnings, it is reasonable to assume that William would have need for a statement of the sources and uses of cash during the period; that is, a statement of cash flows. This will show William whether cash increased of decreased during a given period, and the main reasons for the change. Req. 4 The statement of earnings indicates to Wi l liam that his business is profitable, and he c an possibly increase his net earnings if he wishes to expand his business. The statement of financial position suggests that his financial situation is quite strong and the information therein can be use d to determine how much mo n ey he could borrow, if any.

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 16 P1 – 3 Req. 1 Req. 2 – Explanation Transaction Net earnings Cash (a) $+85,000 $+70,000 All services performed increase net earnings; cash received during the period was $85,000 – $15,000. (b) – 0 – +25,000 Cash borrowed is not earnings. (c) – 0 – – 8,000 Purchase of the truck does not represent an expense because the truck is an asset. (d) – 36,000 – 30,000 All of the wages incurred reduce net earnings, $36,000; cash paid during the quarter was $36,000 x 5/6 = $30,000. (e) – 3,000 – 4,000 Not all of the supplies were used; expense is the amount used, $4,000 – $1,000 = $3,000. (f) – 31,000 – 15,500 All expenses incurred reduce net earnings; cash paid was $31,000 x ½ = $15,500. Based only on the above: - Net earnings $15,000 - Cash inflow $37,500 P1 – 4 Req. 1 The personal residences of the organizers are not resources of the business entity. Therefore, they should be excluded. Req. 2 It is not indicated whether the $7,000 listed for service supplies and the $68,000 listed for service trucks and equipment reflect their cost when acquired or the current market value on December 31, 2016. Furthermore, the amount listed for bills from customers may not represent the potentially collectable amount.

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 17 P1 – 4 (continued) Req. 3 The list of company resources (i.e., assets) suggests the following areas of concern: Company resources: (1) Service trucks and equipment – as noted above, it is not indicated whether the $68,000 for service trucks and the $30,000 for service equipment are cost when acquired or current market value on December 31, 2016. (2) Personal residences – as noted above, these items are not resources of the business entity and should be excluded. Usually they would not be subject to creditors' claims against the corporation. Also, there is no indication whether the $190,000 is cost at acquisition or current market value at December 31, 2016. Also, there is no indication as to any amounts that might be owed on the residences. Company obligations: (1) Unpaid wages of $19,000, which are now due, pose a serious problem because only $12,000 cash currently is available. (2) Unpaid taxes and accounts payable to suppliers – it is not clear when these payments of $8,000 and $10,000, respectively, are due (cash needed to pay them is a problem). (3) The $50,000 owed on the service trucks probably is long term; however, short - term installments may be required – these details are very important to the bank. (4) Loan from organizer – the expected payment date and interest rate are important issues for which details are not provided. This is a major cash demand. In general, the bank should request more details about the specific resources and debts. The personal residences are not a part of the resources of the business entity. The bank should request that the owners provide audited information about the entity's assets and debts. Req. 4 The amount of shareholders’ equity (i.e., assets minus liabilities) for West Company, assuming the amounts provided by the owners are acceptable, would be: Assets ($322,000 – $190,000) $132,000 Liabilities 102,000 Shareholders’ equity $ 30,000

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 18 P1 - 5 Req. 1 Cash Received Balances Immediately After Sale Case for Assets Assets – Liabilities = Shareholders’ Equity A $90,000 $90,000 $50,000 $40,000 B 80,000 80,000 50,000 30,000 (note 1) C 100,000 100,000 50,000 50,000 (note 2) D 35,000 35,000 50,000 – 15,000 (note 3) Note 1: Includes $10,000 loss on sale of assets, i.e., $80,000 minus $90,000. Note 2: Includes $10,000 gain on sale of assets, i.e., $100,000 minus $90,000. Note 3: Includes $55,000 loss on sale of assets, i.e., $35,000 minus $90,000, which results in a negative shareholders’ equity of – $15,000. Req. 2 Case To Creditors To Shareholders Total A $50,000 $40,000 $90,000 B 50,000 30,000 80,000 C 50,000 50,000 100,000 D 35,000 - 0 - 35,000 Explanation: Legally, creditors' claims have a priority over shareholders’ claims. Therefore, cash necessary to satisfy all creditors' claims would be disbursed first. Any remaining cash would be distributed to the owners in proportion to their ownership interests. In case D, creditors do not get all of the money owed to them and shareholders do not get any cash, because the total amount of cash is not sufficient to pay the creditors the total amount due to them.

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 19 ALTERNATE PROBLEMS AP1 – 1 Req. 1 MCCLAREN CORPORATION Summary Statement of Earnings For the Fiscal Year Ended June 30, 2018 Total sales revenue (given) $90,000 Total expenses, excluding income taxes (given) 60,500 Earnings before income taxes 29,500 Income tax expense ($29,500 x 30%) 8,850 Net earnings $20,650 Req. 2 MCCLAREN CORPORATION Statement of Financial Position As at June 30, 2018 Assets Cash (given) $ 13,150 Trade receivables (given) 9,500 Merchandise inventory (given) 57,000 Equipment, net (given) 36,000 Total Assets $115,650 Liabilities and Shareholders’ Equity Liabilities: Trade payables (given) $31,500 Salary payable (given) 1,500 Total Liabilities $ 33,000 Shareholders' equity: Contributed capital $62,000 Retained earnings* 20,650 Total shareholders' equity 82,650 Total liabilities and shareholders' equity $115,650 * Ending RE = Beginning RE + Net earnings – Dividends = $ 0 + $20,650 – $ 0 = $20,650. Because this is the first year of operations the beginning balance of retained earnings is zero. Req. 3 A creditor will know that $9,500 will be received by this company within a few months but that it must also pay suppliers $31,500, also within a few months. When making a lending decision a creditor would use this information to determine the likel i hood that the company could repay a loan.

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 20 AP1 – 2 Req. 1 BRUNO'S LAWN SERVICE Statement of Earnings For the Three Months Ended August 31, 2017 Service revenue ($25,200 + $1,250) $26,450 Expenses: Gas, oil, and lubrication ($1,840 + $200) $2,040 Repair of mowers 150 Wages for helpers 9,500 Payroll taxes 400 Pickup truck repairs 410 Preparation of payroll tax forms 50 Insurance 240 Telephone 210 Miscellaneous supplies used 160 Interest expense on note paid 150 Depreciation, equipment 1,000 Total expenses 14,310 Net earnings $12,140 Req. 2 BRUNO'S LAWN SERVICE Statement of Financial Position As at August 31, 2017 Assets Cash 1 $ 7,290 Accounts receivable 1,250 Equipment 4,800 Less: Depreciation (1,000 ) 3,800 Total Assets $12,340 Liabilities and Owner’s Equity Accounts payable $ 200 Bruno Clarke, capital 12,140 Total Liabilities and Owner’s Equity $12,340 1 Cash = $25,200 + 5,000 – 3,000 – 1,800 – (1,840 + 150 + 9,500 + 400 + 410 + 50 + 240 + 210 + 160 + 150) – 5,000 = $7,290

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 21 AP1 – 2 (continued) Req. 3 Because the above report reflects only revenues, expenses, and net earnings, it is reasonable to assume that Bruno would need a statement of cash flows – that is, a statement of the inflows and outflows of cash during the period in three categories: operations, investing, and financing. This will explain to Bruno the reason for the increase in cash during the period and the differences between cash from operations and net earnings. Because it is the first period of operations and the owner did not make any withdrawals, a statement of changes in equity is not necessary. Req. 4 The statement of earnings indicates to Bruno that his business is profitable, and he can possibly increase his net earnings if he wishes to expand his business. The statement of financial position suggests that his financial situation is quite strong and the information therein can be used to determine how much mo n ey he could borrow, if any. AP1 – 3 Req. 1 Req. 2 – Explanation Transaction Net earnings Cash (a) $+66,000 $+55,000 All services performed increase net earnings; cash received during the period was, $66,000 x 5/6 = $55,000. (b) – 0 – +45,000 Cash borrowed is not profit. (c) – 0 – – 1,900 Purchase of the truck does not represent an expense because the truck is an asset; cash outflow was $9,500 x 20% = $1,900. (d) – 21,000 – 10,500 All of the wages incurred reduce net earnings, $21,000; cash paid during the quarter was $21,000 x 1/2 = $10,500. (e) – 3,040 – 3,800 Not all of the supplies were used; expense is the amount used, $3,800 x 4/5 = $3,040. (f) – 36,000 – 30,000 All expenses incurred reduce net earnings; cash paid was $36,000 x 5/6 = $30,000. Based only on the above: - Net earnings $5,960 - Cash inflow $ 53,800

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 22 CASES AND PROJECTS FINDING AND INTERPRETING ACCOUNTING INFORMATION CP1 – 1 Req. 1 The fiscal year ends on the Saturday closest to December 31. Req. 2 a. Statements of Financial Position – 2 years b. Statements of Earnings – 2 years c. Statements of Cash Flows – 2 years Req. 3 Yes. The financial statements are audited by the firm Deloitte LLP (from the auditors’ report). Req. 4 The company’s total assets increased by $ 434.6 from $ 14,553.2 to $ 14,987.8 (amounts in millions) Req. 5 The balance of merchandise inventories was $ 1,764,5 million at January 2, 2016 . Req. 6 Assets = Liabilities + Shareholders’ Equity $ 14,987.8 = $ 9 ,198.1 + $ 5,789.7 (in millions)

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 23 CP1 – 2 Req. 1 Sears Canada reported a net loss of 67.9 million for the year ended January 30, 2016 , as disclosed in the c onsolidated statements of net loss and c omprehensive loss . Req. 2 Revenue earned in the fiscal year ended January 30, 2016 was $ 3,145.7 million . This is also disclosed on the same statement s noted above. Req. 3 Inventory as at January 30, 2016 , amounted to $ 664.8 million . This information is disclosed on the consolidated statement s of financial position. Req. 4 Cash increased by $ 54.9 million during the fiscal year. This amount can be found at the bottom of the consolidated statement s of cash flows as well as the consolidated statement s of financial position by computing the difference in the cash amounts at the end of the current and previous years. Req. 5 The auditor is Deloitte LLP . This information is found in the auditors’ report in the 2015 annual report. CP1 – 3 Req.1 Total assets for Canadian Tire Corporation was higher at $ 14,987.8 million compared to $ 1,633.2 million for Sears Canada Inc. Req. 2 Canadian Tire Corporation also had higher sales at $ 12,279.6 million compared to $ 3,145.7 million for Sears Canada Inc. Req. 3 Sears Canada had a decrease of $140.9 million in total assets while Canadian Tire had a n increase in assets during the same period. Sears Canada ’s decrease in assets was 7.94 % [($ 1,633.2 – $ 1,774.1 ) ÷ $ 1,774.1 ] compared to an increase of 2.99 % for Canadian Tire [($ 14,987.8 – $ 14,553.2 ) ÷ $ 14,553.2 ]. Canadian Tire had a smaller percentage decrease in net sales at 1.47 % [($ 12,279.6 – $ 12,462.9 ) ÷ $ 12,462.9 ] compared to Sears Canada ’s rate of 8.14 % [($ 3,145.7 – $ 3,424.5 ) ÷ $ 3,424.5 ].

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 24 FINANCIAL REPORTING AND ANALYSIS CASES CP1 – 4 Req. 1 – Deficiencies include: (1) Heading: titles of the reports are missing and dates are not in proper form. (2) Statement of earnings should show revenues and expenses separately. (3) Statement of financial position should separately report assets, liabilities, and shareholders’ equity. (4) Retained earnings, $30,000, should be reported under shareholders’ equity. (5) Due from customers, $13,000, should be reported under assets, i.e., Trade receivables. (6) Supplies on hand, $15,000, should be reported under assets. (7) Accumulated depreciation, $10,000, should be subtracted from service vehicles. Req. 2 – Financial Statements PERFORMANCE CORPORATION Statement of Earnings For the Year Ended December 31, 2017 Sales revenue ($175,000 + $52,000) $227,000 Expenses: Cost of sales $ 90,000 Selling expenses 25,000 Depreciation expense 10,000 Salaries and wages 62,000 Total expenses, excluding income taxes 187,000 Earnings before income taxes 40,000 Income tax expense (25% x $40,000) 10,000 Net earnings $30,000

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 25 CP1 – 4 (continued) Req. 2 – Financial Statements PERFORMANCE CORPORATION Statement of Financial Position As at December 31, 2017 Assets Cash $ 32,000 Trade receivables 13,000 Supplies inventory 15 , 000 Merchandise inventory 42,000 Service vehicles $ 50,000 Less: Accumulated depreciation (10,000 ) 40,000 Total assets $ 142,000 Liabilities and Shareholders’ Equity Liabilities Trade payables $ 22,000 Note payable 25,000 Total liabilities 47,000 Shareholders' equity Contributed capital (6,500 shares issued) $65,000 Retained earnings 30,000 Total shareholders' equity 95,000 Total liabilities and shareholders' equity $142,000

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 26 CRITICAL THINKING CASES CP1 – 5 Req. 1 The personal items owned by Lucas should not be included in the financial statements of the company. The company is a separate entity for accounting purposes. The list of liabilities properly excluded the personal debts of Lucas because these are not debts of the company. Req. 2 Lucas’s response does not explain or excuse the presentation in the financial report. It appears that deception is involved because of the listing of personal assets and the exclusion of the related liabilities. Such reporting is misleading and dishonest. The financial report is not correct even if it were clearly stated that the accounting entity represents the company and owner combined as one entity. If this assumption were used, which would be appropriate only if clearly specified, it would require that all of the assets and all of the liabilities of both the company and Lucas be included. Preferably the business should be reported as a separate entity. The personal assets and liabilities should be reported as another separate entity. CP1 – 6 Req. 1 You should forcefully assert the need for an independent audit of the financial statements each year because this is the best way to assure credibility – conformance with IFRS, completeness and absence of bias. You should firmly reject Roger as the auditor because there is no evidence about his competence as an accountant or auditor. Also, he is related to the partner who prepares the financial statements; there is a conflict of interest. Req. 2 You should strongly recommend the selection of an independent, licensed professional accountant in public practice because the financial statements should be audited by a competent and independent professional who must follow prescribed accounting and auditing standards on a strictly independent basis. An audit by Roger would not meet any of these requisites, particularly the most important one in this case – independence (and absence of bias).

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 27 CP1 – 7 The textbook does not explicitly cover the elements of independence. The case is designed to permit the students to develop their own values. We have found that it is useful to emphasize the difference between independence in fact and in appearance during these discussions . Req. 1 Most students feel that there is no problem with independence if the shares held are immaterial in amount. When asked about a possible headline that might read “Auditor who was shareholder is accused of fraud,” most students see a problem with the appearance. In fact, professional accounting organizations do not apply a materiality threshold where there is a direct financial interest. Any holding of shares is a problem. Req. 2 This is an example of an indirect holding of shares. A materiality threshold is applied in these situations. There could be a question of independence if the auditor held a material interest in the mutual fund (relative to her net worth) and the mutual fund held a material interest in the company that she audited. Req. 3 Codes of Professional Conduct apply only to audit professionals who are members. Bob's employers may want to assign him to a different company but there is no conflict in this case. Req. 4 Clearly there is an ethics violation in this case because she would audit statements that covered a period of time where she was responsible for the accounting operations of the company. This is a problem both in appearance and in fact. Req. 5 The loan from the bank was made under normal lending procedures, terms, and requirements. Therefore, it may not be a source of impairment of independence. However, one has to be careful whether the loan has the appearance of being made under normal credit terms or not. FINANCIAL REPORTING AND ANALYSIS TEAM PROJECT CP1 – 8 The solution to this case will depend on the company and/or accounting period selected for analysis.

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 28 CONTINUING CASE CC1 – 1 Req. 1 Penny’s Pool Service & Supply Inc. Statement of Earnings For the Year Ended December 31, 2016 Revenues Sales revenue $60,000 Expenses Cost of supplies used 8,200 Wage expense 24,000 Other administrative expense 4,500 Total expenses 36,700 Earnings before income taxes 23,300 Income tax expense 4,000 Net earnings $19,300 Req. 2 Penny’s Pool Service & Supply Inc . Statement of S hareholder s' Equity For the Year Ended December 31, 201 6 Co ntributed Capital Retained Earnings Balance , December 31, 201 5 $ 0 $ 0 Issu ance of shares 4 0,000 Net earnings for 201 6 19,300 Dividends for 201 6 ( 10,000) Balance , December 31, 201 6 $ 4 0,000 $ 9,300

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterl ing 1 - 29 CC 1 - 1 (continued) Req. 3 Penny’s Pool Service & Supply , Inc. Statement of Financial Position At December 31, 201 6 Assets: Cash $ 2,900 Accounts receivable 2,300 Inventories 4,600 Equipment 4 8,000 Total assets $5 7,800 Liabilities and S hare holders' Equity: Liabilities Accounts payable $ 3,500 Notes payable to banks 5,000 Total liabilities 8,500 S hare holders' equity Co ntributed capital 4 0,000 Retained earnings 9,300 Total s hare holders' equity 4 9,300 Total liabilities and s hare holders' equity $ 5 7,800

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    Financial Accounting, 6ce, Libby, Libby, Short, Kanaan, Sterling 2 - 1 Chapter 2 Investing and Financing Decisions and the Statement of Financial Position Revised : January 20, 2017 ANSWERS TO QUESTIONS 1. The primary objective of financial reporting for external users is to provide useful financial information about a business to help external parties, primarily investors and creditors, make sound financial decisions. These users are expected to have a reasonable understanding of accounting concepts and procedures. Usually, they are interested in information to assist them in projecting future cash inflows and outflows of a business. 2. (a) An asset is an economic resource controlled by an entity as a result of a past transaction or event and from which future economic benefits may be obtained. (b) A current asset is an asset that will be used or turned into cash within one year; inventory is always considered a current asset regardless of how long it takes to produce and sell the inventory. (c) A liability is a probable debt or obligation of the entity as a result of a past transaction, which will be paid with assets or services. (d) A current liability is a liability that will be paid in cash (or other current assets) or satisfied by providing service within the coming year. (e) Contributed capital is cash (and sometimes other assets) provided to the business by owners. (f) Retained earnings are the cumulative net earnings of a company that are not distributed to the owners and are reinvested in the business.

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