Financial Accounting 6th Canadian Edition Solution Manual

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-1Chapter 1Financial Statements and Business DecisionsRevised:October 21, 2016ANSWERS TO QUESTIONS1.Accounting is a system that collects and processes (analyzes, measures, and records)financial information about an organization and reports that information to decisionmakers.2.Financial accounting involves preparation of the basic financial statements and relateddisclosures for external decision makers. Reporting is generally on a quarterly and annualbasis. 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. Theinternal users are the various managers of the entity, e.g. marketing, credit andpurchasing. The external groups include the owners, investors, creditors, governmentalagencies, 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 thecompany earns and/or selling their share of the company in the future at a higher pricethan they paid. Creditors lend money to a company for a specific length of time and hopeto gain by charging interest on the loan.5.An accounting entity is the organization for which financial data are to be collected. Typicalaccounting entities are a business, a church, a governmental unit, a university and othernonprofit organizations such as a hospital. A business is defined and treated as a separateentity because the owners, creditors, investors, and other interested parties need toevaluate its performance and its potential separately from other entities and from itsowners.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 measure7.(a)The purpose of the statement of earnings is to present information about therevenues, 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,Sterling1-2(b)The purpose of the statement of financial position is to report the financial positionof 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 flowof cash into the entity (sources), the flow of cash out of the entity (uses),and the netincrease or decrease in cash during the period.(d)The statement of changes in equity reports the way that net earnings, thedistribution of net earnings (dividends), and other changes to shareholders’ equityaffected the company’s financial position during the accounting period. The focus inthis chapter is on retained earnings. Net earnings for the year increases the balanceof retained earnings whereas the declaration of dividends to the shareholdersdecreases retained earnings.8.The statement of earnings and the statement of cash flows are dated “For the Year EndedDecember 31,2017,” because they report the inflows and outflows of resources during aperiod of time. In contrast, the statement of financial position is dated “As at December31,2017” because it represents the resources, obligations and shareholders’ equity as at aspecific date, December 31,2017.9.Assets are important to investors and creditors because assets provide a basis for judgingwhether sufficient resources are available to operate the company. Liabilities areimportant to creditors and investors because the company must be able to generatesufficient cash from operations or further borrowing to meet the payments required bydebt agreements. If a business does not pay its creditors, the law may give the creditorsthe 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 oftotal expenses over total revenues.11.The accounting equation for the statement of earnings is Revenues-Expenses = Netearnings. Revenues result from the sale of goods and services to customers, regardless ofthe timing of collection of cash from customers. Expenses represent the monetary value ofresources the entity used up, or consumed, to earn revenues during the period. Netearnings is simply the excess of revenues over expenses.

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-312.The accounting equation for the statement of financial position is:Assets = Liabilities + Shareholders’ EquityAssets are the probable (expected) future economic benefits owned by the entity as aresult of past transactions. They are the resources owned by the business at a given pointin 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 resultof past transactions which will be discharged with assets (usually, cash) or services in thefuture. They are the obligations of the entity such as trade payables, notes payable, andbonds payable. Shareholders’ equity is financing provided by owners of the business andby the net earnings generated from the operations of the business. It is the claim of theowners 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 representsassets minus liabilities.13.The accounting equation for the statement of cash flows is: Cash flows from operatingactivities +/–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 ordecrease in cash that occurred during the period. Cash flows from operating activities arecash flows directly related to earning income (normal business activity including interestpaid and income taxes paid). Cash flows from investing activities comprise cash flows thatare 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 thatare 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 EarningsThe equation begins with beginning-of-the-year Retained Earnings i.e., the prior year’sending retained earnings reported on the statement of financial position. The currentyear's net earningsreported on the statement of earnings are added to this amount andthe Dividends declared during the current year are subtracted from this amount. Theending Retained Earnings amount is reported on the end-of-period statement of financialposition.15.Credit managers use customers' financial statements to decide whether to extend themcredit for their purchases. Purchasing managers use potential suppliers' financialstatements to judge whether the suppliers have the resources necessary to meet currentand future demand. Human resource managers use financial statements as a basis forcontract 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,Sterling1-416.In Canada, provincial securities legislation created securities commissions, most notablytheOntario Securities Commission (OSC),to regulate Canadian capital markets and theflow of financial information provided by publicly traded companies whose shares trade onCanadian stock exchanges, such as the Toronto Stock Exchange. Similar to the SEC, the OSCplays an influential role in promoting sound accounting practices by publicly tradedcompanies. Since their establishment, these securities commissions have worked withorganizations of professional accountants to establish groups that are given the primaryresponsibilities to work out the detailed rules that Canadian entities must use. The name ofthe current Canadian group that has this responsibility is theAccounting Standards Board(AcSB). The AcSB is responsible for establishing standards of accounting and reporting byCanadian companies and not-for-profit organizations.17.The officers of the company, usually the CEO and the CFO, must personally sign acertification that they have designed or supervised the design, implementation andevaluation of effective, appropriate financial accounting and reporting processes. Theexecutives and officers of the company bear primary responsibility for informationprepared and reported in the financial statements and other information contained in theannual report. Top management also nominates members to the Board of Directors tooversee the integrity of the first two safeguards. Those owning shares of the firm vote toelect the Board of Directors which holds the officers of the company accountable to theshareholders for defects in the internal control and reporting system. It also appointsexternal, independent auditors who provide advice to companies on how to best complywith regulations on financial reporting.18.A sole proprietorship is an unincorporated business owned by one individual. A partnershipis an unincorporated association of two or more individuals to carry on a business. Acorporation is a business that is organized under federal or provincial laws, whereby acharter is granted and the entity is thus authorized to issue shares of stock as evidence ofownership by the owners (i.e., shareholders). Corporations are legal entities separate fromtheir 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 accordancewith the applicable accounting standards. Management advisory (consulting) servicesinclude providing expert business advice to management. Tax services involve providingtax-planning advice to clients (both individuals and businesses) and preparation of their taxreturns.

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-5Authors' Recommended Solution Time(Time in minutes)Mini-ExercisesExercisesProblemsAlternateProblemsCases andProjectsNo.TimeNo.TimeNo.TimeNo.TimeNo.Time15E120 M145 M145 M130 E25E225 M260 D260 D220 E35E320 M330 M330 M330 M420 M445 M460 M520 M520 M525 M625E625 M730 M725 M810 E8*920 M1010 EContinuing Case1130 M145ME = EasyM = ModerateD = Difficult* Due to the nature of these cases and projects, it is very difficult to estimate the amount oftime students will need to complete the assignment. As with any open-ended project, it ispossible for students to devote a large amount of time to these assignments. While studentsoften benefit from the extra effort, we find that some become frustrated by the perceiveddifficulty of the task. You can reduce student frustration and anxiety by making yourexpectations clear. For example, when our goal is to sharpen research skills, we devote classtime discussing research strategies. When we want the students to focus on a real accountingissue, we offer suggestions about possible companies or industries.

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-6MINI-EXERCISESM1–1ElementFinancial StatementB(1)ExpensesA. Statement of financial positionD(2)Cash flow from investing activitiesB. Statement of earningsA(3)AssetsC. Statement of shareholders’ equityC*(4)DividendsD. Statement of cash flowsB(5)RevenuesD(6)Cash flow from operating activitiesA(7)LiabilitiesD(8)Cash flow from financing activities*Dividends paid in cash are also subtracted in the Financing section of the Statement of CashFlowsM1–2SE(1)Retained earningsA(2)Accounts receivableR(3)Sales revenueA(4)Property, plant, and equipmentE(5)Cost ofsalesA(6)InventoriesE(7)Interest expenseL(8)Accounts payableA(9)LandM1–3AbbreviationFull Designation(1)AcSBAccounting Standards Board(2)IFRSInternational Financial Reporting Standards(3)CPAChartered ProfessionalAccountant(4)IASBInternationalAccounting Standards Board

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-7EXERCISESE1–1Req. 1Leon’s Furniture LimitedStatement of Financial PositionAs at December 31,2015(in millions of Canadian dollars)AssetsCash and cash equivalents$18Trade receivables112Inventories267Property, plant and equipment, net334Intangible assets and goodwill739Other assets93Total assets$1,563Liabilities and shareholders’ equityTrade and other payables$197Dividends payable7Income tax payable35Loans and borrowings315Otherliabilities460Total liabilities1,014Contributed capital31Retained earnings510Other components of equity8Total shareholders’ equity549Total liabilities and shareholders’ equity$1,563Req. 2Dividends payable represents the amount of dividends that has not been paid yet to thecompany’s shareholders. Retained earnings represent the amount of earnings that hasaccumulated over timebut hasnot been distributed to shareholders. Total assets reflecttherecorded value of the resources that are available to the company for use in generatingrevenue over time.

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-8E1–2Req. 1READ MORE STOREStatement of Financial PositionAs at December 31,2017ASSETSLIABILITIES ANDSHAREHOLDERS’ EQUITYLiabilitiesCash$ 48,900Accounts payable$7,000Accounts receivable25,000Note payable3,000Store and office equipment49,000Interest payable120Total liabilities10,120Shareholders’ EquityContributed capital100,000Retained earnings12,780Total shareholders’ equity112,780Total assets$122,900Total liabilities andshareholders' equity$122,900Req. 2This is the first year of operations and no dividends were declared. Therefore, the balance ofretained earnings, $12,780, at year-end consists entirely of the net earnings for the first year.E1–3Req. 1THE UNIVERSITY SHOPStatement of EarningsFor the Month of September2018Revenue from sales$120,000 (*)Expenses:Cost of sales$ 40,000Salaries, rent, supplies, and other expenses38,000Utilities600Total expenses78,600Net 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,Sterling1-9E1–3(continued)Req. 2This statement of earnings indicatesthat theUniversityShop is a profitable company. Althoughthe net earnings amount does not reflect the amount of cash available at the end of September2018, the cash transactions indicate that the cash available is sufficiently large to cover the costof the cash register.E1–4Revenues$812,272606,764 + 205, 508Cost of sales533,529Depreciation expense26,903Interest expense46,332Total expenses excluding income taxes606,764533,529 + 26,903 + 46,332Earnings before income tax205,508165,749 + 39,759Income tax expense39,759Net earnings for the year$165,749E1–5HOME REALTY, INCORPORATEDStatementof EarningsFor the Year Ended December 31,2017Revenue:Commissions earned ($150,000 + $16,000)$166,000Rental service fees15,000Total revenues$181,000Expenses:Salaries$ 62,000Commissions35,000Payroll taxes2,500Rent($2,200+ $200)2,400Utilities1,600Promotion and advertising8,000Miscellaneous500Total expenses, excluding income taxes112,000Earnings before income taxes69,000Income tax expense18,500Net earnings for the period$50,500

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-10E1–6ANet earnings = $91,700–$76,940 =$14,760;Shareholders’ Equity = $140,200–$69,000 =$71,200.BTotal Revenues = $74,240 + $14,740 =$88,980;Total Liabilities = $107,880–$79,010 =$28,870.CNet earnings (Loss) = $69,260–$76,430 =($7,170);Shareholders’ Equity = $97,850–$69,850 =$28,000.DTotal Expenses = $58,680–$21,770 =$36,910;Total Assets = $17,890 + $78,680 =$96,570.ENet 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’sliabilities are relatively much higher than those of Company B. Consequently, lending money toCompany C is riskier than lending money to Company B, which appears to have a bettercapacity to repay the loan over time.E1–7DUCHARME CORPORATIONSummary Statement of EarningsFor the Month of January2017Total revenues$299,000Less: Total expenses (excluding income taxes)189,000Earnings before income taxes110,000Less: Income tax expense34,500Net earnings$75,500DUCHARME CORPORATIONStatement of Financial PositionAs at January 31,2017AssetsCash$ 65,150Receivables from customers34,500Merchandise inventory96,600Total assets$196,250Liabilities and Shareholders’ EquityLiabilities:Payables to suppliers$ 26,450Income taxes payable34,500Total liabilities60,950Shareholders’ equity:Contributed capital (2,600 shares issued)59,800Retained earnings75,500Total liabilities and shareholders’ equity$196,250

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-11E1-8Retained earnings, January 1,2017$–Net earnings for201731,000Dividends for2017(14,200)Retained earnings, December 31,2017$16,800Retained earnings, January 1,2018$ 16,800Net earnings for201842,000Dividends for2018(18,700)Retained earnings, December 31,2018$40,100E1–91.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 inperforming the services sold.4.“Interest” is an expense because it represents the cost of borrowing. The company has anoutstanding loan (from another party); $8,000 is the amount of interest (owed, if notalready paid) on that debt for the year2017. The interest on the loan for the year2017isan expense of the year2017(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,revenuesrepresentamounts expected to be received for goods or services that have been deliveredto customers,whether or notcash has been receivedfor the goods or services. For PestAway Corporation, most of the revenues were made for cash and a small percentage ofrevenues were made on account.7.The statement of earnings does not report, or make it possible to determine, the endingcash balance. Cash is reported on the statement of financial position under assets and onthe statement of cash flows as the final amount reported.E1–10(O)(1)Cash paid to suppliers and employeesO(2)Cash received from customers(F)(3)Dividends paidF(4)Issuance of share capital(O)(5)Interest paidI(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,Sterling1-12E1–11NITSU MANUFACTURING CORPORATIONStatement of Cash FlowsFor the Year Ended December 31,2017Cash flow from operating activitiesCash collected from customers$270,000Cash paid for operating expenses(180,000)Net cash flow from operating activities$90,000Cash flow from investing activitiesCash received for sale of land15,000Cash paid for purchase of new machines(38,000)Net cash flow from (used in) investing activities(23,000)Cash flow from financing activitiesCash received from sale of the company’s shares30,000Cash 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 year63,000Cash at end of year$58,000

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-13PROBLEMS(Note to the instructor:Most students find the Problems in this chapter to be quite challenging.)P1–1Req. 1NUCLEAR COMPANYSummary Income StatementFor the Year Ended December 31,2017Total sales revenue (given)$140,000Total expenses, excluding income taxes (given)89,100Earnings before income taxes50,900Income tax expense ($50,900 x 30%)15,270Net earnings$35,630Req. 2NUCLEAR COMPANYStatement of Financial PositionAs at December 31,2017AssetsCash (given)$25,000Accounts receivable (given)12,000Merchandise inventory (given)90,000Equipment, net (given)45,000Total Assets$172,000Liabilities and Shareholders’ EquityLiabilities:Accounts payable (given)$47,370Salary payable (given)2,000Total Liabilities$ 49,370Shareholders' equity:Contributed capital (given)$87,000Retained earnings*35,630Total shareholders' equity122,630Total 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 iszero.

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-14P1–1 (continued)Req. 3A creditor will know that $12,000 will be received by this company within a few months butthat it must also pay suppliers $47,370, also within a few months. When making a lendingdecision a creditor would use this information to determine the likelihood thatthecompanycould repay a loan.P1–2Req. 1WILLIAM’S PLUMBING SERVICES INC.Statement of EarningsFor the Six Months Ended December 31,2017Service revenues ($64,000 + $6,000)$70,000Expenses:Wages for plumber’s assistant$17,000Payroll taxes750Oil, gas, and maintenance-truck2,400Rent ($2,500 + $500)3,000Supplies used17,100Utilities and telephone1,850Insurance700Miscellaneous expenses900Depreciation of truck and tools2,400Total expenses, excluding income taxes46,100Earnings before income taxes23,900Income tax expense ($23,900 x 30%)7,170Net earnings$16,730

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-15P1–2 (continued)Req. 2WILLIAM’S PLUMBING SERVICES INC.Statement of Financial PositionAs at December 31,2017AssetsCash1$23,800Accounts receivable6,000Equipment ($18,000 + $3,000)$21,000Less:Depreciation(2,400)18,600Total Assets$48,400LiabilitiesAccounts payable$500Income tax payable7,170Total liabilities7,670Shareholders’ EquityContributed capital (initial investment)$24,000Retained earnings16,73040,730Total Liabilities and Shareholders’ Equity$48,4001Cash = $24,000–18,000–3,000 + 64,000–(46,100–500–2,400) =$23,800Req. 3Because the above report reflects only revenues, expenses, and net earnings, it is reasonable toassume that William would have need for a statement of the sources and uses of cash duringthe period; that is, a statement of cash flows. This will show William whether cash increased ofdecreased during a given period, and the main reasons for the change.Req. 4The statement of earnings indicates toWilliamthat his business is profitable, and he canpossibly increase his net earnings if he wishes to expand his business. The statement offinancial positionsuggests that his financial situation is quite strong and the information thereincanbeusedto determine how much money he could borrow, if any.

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-16P1–3Req. 1Req. 2–ExplanationTransactionNet earningsCash(a)$+85,000$+70,000All services performed increase net earnings;cash received during the period was $85,000–$15,000.(b)–0–+25,000Cash borrowed is not earnings.(c)–0––8,000Purchase of the truck does not representan expense because the truck is an asset.(d)–36,000–30,000All of the wages incurred reduce net earnings,$36,000; cash paid during the quarter was$36,000 x 5/6 = $30,000.(e)–3,000–4,000Not all of the supplies were used; expense isthe amount used, $4,000–$1,000 = $3,000.(f)–31,000–15,500All expenses incurred reduce net earnings; cashpaid was $31,000 x ½ = $15,500.Based onlyon the above:-Net earnings$15,000-Cash inflow$37,500P1–4Req. 1The personal residences of the organizers are not resources of the business entity. Therefore,they should be excluded.Req. 2It is not indicated whether the $7,000 listed for service supplies and the $68,000 listed forservice trucks and equipment reflect their cost when acquired or the current market value onDecember 31, 2016. Furthermore, the amount listed for bills from customers may notrepresent the potentially collectable amount.

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-17P1–4 (continued)Req. 3The 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 forservice trucks and the $30,000 for service equipment are cost when acquired or currentmarket value on December 31, 2016.(2)Personal residences–as noted above, these items are not resources of the business entityand should be excluded. Usually they would not be subject to creditors' claims against thecorporation. Also, there is no indication whether the $190,000 is cost at acquisition orcurrent market value at December 31, 2016. Also, there is no indication as to any amountsthat 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-terminstallments may be required–these details are very important to the bank.(4)Loan from organizer–the expected payment date and interest rate are important issuesfor 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 bankshould request that the owners provide audited information about the entity's assets anddebts.Req. 4The amount of shareholders’ equity (i.e., assets minus liabilities) for West Company, assumingthe amounts provided by the owners are acceptable, would be:Assets ($322,000–$190,000)$132,000Liabilities102,000Shareholders’ equity$30,000

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-18P1-5Req. 1Cash ReceivedBalances Immediately After SaleCasefor AssetsAssets–Liabilities=Shareholders’ EquityA$90,000$90,000$50,000$40,000B80,00080,00050,00030,000 (note 1)C100,000100,00050,00050,000 (note 2)D35,00035,00050,000–15,000 (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 anegative shareholders’ equity of–$15,000.Req. 2CaseTo CreditorsTo ShareholdersTotalA$50,000$40,000$90,000B50,00030,00080,000C50,00050,000100,000D35,000-0-35,000Explanation:Legally, creditors' claims have a priority over shareholders’ claims. Therefore,cash necessary to satisfy all creditors' claims would be disbursed first. Any remaining cashwould 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 tothem.

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-19ALTERNATE PROBLEMSAP1–1Req. 1MCCLAREN CORPORATIONSummary Statement of EarningsFor the Fiscal Year Ended June 30,2018Total sales revenue (given)$90,000Total expenses, excluding income taxes (given)60,500Earnings before income taxes29,500Income tax expense ($29,500 x 30%)8,850Net earnings$20,650Req. 2MCCLAREN CORPORATIONStatement of Financial PositionAs at June 30,2018AssetsCash (given)$13,150Trade receivables (given)9,500Merchandise inventory (given)57,000Equipment, net (given)36,000Total Assets$115,650Liabilities and Shareholders’ EquityLiabilities:Trade payables (given)$31,500Salary payable (given)1,500Total Liabilities$ 33,000Shareholders' equity:Contributed capital$62,000Retained earnings*20,650Total shareholders' equity82,650Total 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. 3A creditor will know that $9,500 will be received by this company within a few months but thatit must also pay suppliers $31,500, also within a few months. When making a lending decision acreditor would use this information to determine the likelihood that the company could repay aloan.

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-20AP1–2Req. 1BRUNO'S LAWN SERVICEStatement of EarningsFor the Three Months Ended August 31,2017Service revenue ($25,200 + $1,250)$26,450Expenses:Gas, oil, and lubrication ($1,840 + $200)$2,040Repair of mowers150Wages for helpers9,500Payroll taxes400Pickup truck repairs410Preparation of payroll tax forms50Insurance240Telephone210Miscellaneous supplies used160Interest expense on note paid150Depreciation, equipment1,000Total expenses14,310Net earnings$12,140Req. 2BRUNO'S LAWN SERVICEStatement of Financial PositionAs at August 31,2017AssetsCash1$7,290Accounts receivable1,250Equipment4,800Less: Depreciation(1,000)3,800Total Assets$12,340Liabilities and Owner’s EquityAccounts payable$200Bruno Clarke, capital12,140Total Liabilities and Owner’s Equity$12,3401Cash = $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,Sterling1-21AP1–2 (continued)Req. 3Because the above report reflects only revenues, expenses, and net earnings, it is reasonable toassume that Bruno would need a statement of cash flows–that is, a statement of the inflowsand 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 thedifferences between cash from operations and net earnings.Because it is the first period of operations and the owner did not make any withdrawals, astatement of changes in equity is not necessary.Req. 4The statement of earnings indicates to Bruno that his business is profitable, and he can possiblyincrease his net earnings if he wishes to expand his business. The statement of financialposition suggests that his financial situation is quite strong and the information therein can beused to determine how much money he could borrow, if any.AP1–3Req. 1Req. 2–ExplanationTransactionNet earningsCash(a)$+66,000$+55,000All services performed increase net earnings;cash received during the period was,$66,000 x 5/6 = $55,000.(b)–0–+45,000Cash borrowed is not profit.(c)–0––1,900Purchase of the truck does not representan expense because the truck is an asset;cash outflow was $9,500 x 20% = $1,900.(d)–21,000–10,500All of the wages incurred reduce net earnings,$21,000; cash paid during the quarter was$21,000 x 1/2 = $10,500.(e)–3,040–3,800Not all of the supplies were used; expense isthe amount used, $3,800 x 4/5 = $3,040.(f)–36,000–30,000All expenses incurred reduce net earnings; cashpaid was $36,000 x 5/6 = $30,000.Based onlyon the above:-Net earnings$5,960-Cash inflow$ 53,800

Financial Accounting 6th Canadian Edition Solution Manual - Page 23 preview image

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-22CASES AND PROJECTSFINDING AND INTERPRETING ACCOUNTING INFORMATIONCP1–1Req. 1The fiscal year ends on the Saturday closest to December 31.Req. 2a.Statements of Financial Position–2 yearsb.Statements of Earnings–2 yearsc.Statements of Cash Flows–2 yearsReq. 3Yes. The financial statements are audited by the firm Deloitte LLP (from the auditors’ report).Req. 4The company’s total assets increased by $434.6from $14,553.2to $14,987.8(amounts inmillions)Req. 5The balance of merchandise inventories was $1,764,5million atJanuary 2, 2016.Req. 6Assets=Liabilities+Shareholders’ Equity$14,987.8=$9,198.1+$5,789.7(in millions)

Financial Accounting 6th Canadian Edition Solution Manual - Page 24 preview image

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-23CP1–2Req. 1Sears Canada reported a net loss of 67.9 millionfor the year endedJanuary 30, 2016, asdisclosed in theconsolidatedstatements of net loss and comprehensiveloss.Req. 2Revenue earned in the fiscal year endedJanuary 30, 2016was $3,145.7 million. This is alsodisclosed on the same statementsnoted above.Req. 3Inventory as atJanuary 30, 2016, amounted to $664.8 million. This information is disclosed onthe consolidated statementsof financial position.Req. 4Cash increased by $54.9 millionduring the fiscal year. This amount can be found at the bottomof theconsolidatedstatementsof cash flows as well as theconsolidatedstatementsof financialposition by computing the difference in the cash amounts at the end of the current andprevious years.Req. 5The auditor isDeloitte LLP. This information is found in the auditors’ report in the2015annualreport.CP1–3Req.1Total assets for Canadian Tire Corporation was higher at $14,987.8million compared to$1,633.2million forSears CanadaInc.Req. 2Canadian Tire Corporation also had higher sales at $12,279.6million compared to $3,145.7million forSears CanadaInc.Req. 3Sears Canadahad adecrease of $140.9 millionin total assets while Canadian Tire had anincrease in assets during the same period.Sears Canada’sdecreasein assets was7.94%[($1,633.2–$1,774.1)÷$1,774.1] compared toan increase of2.99% for Canadian Tire[($14,987.8–$14,553.2)÷$14,553.2].Canadian Tire had asmaller percentage decreasein net sales at1.47% [($12,279.6–$12,462.9)÷$12,462.9] compared toSears Canada’s rate of8.14% [($3,145.7–$3,424.5)÷$3,424.5].

Financial Accounting 6th Canadian Edition Solution Manual - Page 25 preview image

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-24FINANCIAL REPORTING AND ANALYSIS CASESCP1–4Req. 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, andshareholders’ 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 StatementsPERFORMANCE CORPORATIONStatement of EarningsFor the Year Ended December 31,2017Sales revenue ($175,000 + $52,000)$227,000Expenses:Cost of sales$ 90,000Selling expenses25,000Depreciation expense10,000Salaries and wages62,000Total expenses, excluding income taxes187,000Earnings before income taxes40,000Income tax expense (25% x $40,000)10,000Net earnings$30,000

Financial Accounting 6th Canadian Edition Solution Manual - Page 26 preview image

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-25CP1–4 (continued)Req. 2–Financial StatementsPERFORMANCE CORPORATIONStatement of Financial PositionAs at December 31,2017AssetsCash$ 32,000Trade receivables13,000Supplies inventory15,000Merchandise inventory42,000Service vehicles$ 50,000Less: Accumulated depreciation(10,000)40,000Total assets$142,000Liabilities and Shareholders’ EquityLiabilitiesTrade payables$22,000Note payable25,000Total liabilities47,000Shareholders' equityContributed capital (6,500 shares issued)$65,000Retained earnings30,000Total shareholders' equity95,000Total liabilities and shareholders' equity$142,000

Financial Accounting 6th Canadian Edition Solution Manual - Page 27 preview image

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-26CRITICAL THINKING CASESCP1–5Req. 1The personal items owned by Lucas should not be included in the financial statements of thecompany. The company is a separate entity for accounting purposes.The list of liabilities properly excluded the personal debts of Lucas because these are not debtsof the company.Req. 2Lucas’s response does not explain or excuse the presentation in the financial report.It appearsthat deception is involved because of the listing of personal assets and the exclusion of therelated liabilities. Such reporting is misleading and dishonest.The financial report is not correct even if it were clearly stated that the accounting entityrepresents the company and owner combined as one entity. If this assumption were used,which would be appropriate only if clearly specified, it would require thatallof the assets andallof the liabilities of both the company and Lucas be included. Preferably the business shouldbe reported as a separate entity. The personal assets and liabilities should be reported asanother separate entity.CP1–6Req. 1You should forcefully assert the need for an independent audit of the financial statements eachyear because this is the best way to assure credibility–conformance with IFRS, completenessand absence of bias.You should firmly reject Roger as the auditor because there is no evidence about hiscompetence as an accountant or auditor. Also, he is related to the partner who prepares thefinancial statements; there is a conflict of interest.Req. 2You should strongly recommend the selection of an independent, licensed professionalaccountant in public practice because the financial statements should be audited by acompetent and independent professional who must follow prescribed accounting and auditingstandards on a strictly independent basis. An audit by Roger would not meet any of theserequisites, particularly the most important one in this case–independence (and absence ofbias).

Financial Accounting 6th Canadian Edition Solution Manual - Page 28 preview image

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-27CP1–7The textbook does not explicitly cover the elements of independence. The case is designed topermit the students to develop their own values. We have found that it is useful to emphasizethe difference between independence in fact and in appearance during these discussions.Req. 1Most students feel that there is no problem with independence if the shares held areimmaterial in amount. When asked about a possible headline that might read “Auditor who wasshareholder 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 adirect financial interest. Any holding of shares is a problem.Req. 2This is an example of an indirect holding of shares. A materiality threshold is applied in thesesituations. There could be a question of independence if the auditor held a material interest inthe mutual fund (relative to her net worth) and the mutual fund held a material interest in thecompany that she audited.Req. 3Codes of Professional Conduct apply only to audit professionals who are members. Bob'semployers may want to assign him to a different company but there is no conflict in this case.Req. 4Clearly there is an ethics violation in this case because she would audit statements that covereda period of time where she was responsible for the accounting operations of the company. Thisis a problem both in appearance and in fact.Req. 5The 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 becareful whether the loan has the appearance of being made under normal credit terms or not.FINANCIAL REPORTING AND ANALYSIS TEAM PROJECTCP1–8The solution to this case will depend on the company and/or accounting period selected foranalysis.

Financial Accounting 6th Canadian Edition Solution Manual - Page 29 preview image

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-28CONTINUING CASECC1–1Req. 1Penny’s Pool Service & Supply Inc.Statement of EarningsFor the Year Ended December 31, 2016RevenuesSales revenue$60,000ExpensesCost of supplies used8,200Wage expense24,000Other administrativeexpense4,500Total expenses36,700Earnings before income taxes23,300Income tax expense4,000Net earnings$19,300Req. 2Penny’s Pool Service & SupplyInc.Statement of Shareholders' EquityFor the Year Ended December 31, 2016ContributedCapitalRetainedEarningsBalance,December 31, 2015$0$0Issuance ofshares40,000Netearningsfor 201619,300Dividends for 2016(10,000)Balance,December 31, 2016$40,000$ 9,300

Financial Accounting 6th Canadian Edition Solution Manual - Page 30 preview image

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling1-29CC1-1(continued)Req. 3Penny’s Pool Service & Supply, Inc.Statement of Financial PositionAt December 31, 2016Assets:Cash$2,900Accounts receivable2,300Inventories4,600Equipment48,000Total assets$57,800Liabilities and Shareholders' Equity:LiabilitiesAccounts payable$3,500Notes payable to banks5,000Total liabilities8,500Shareholders' equityContributed capital40,000Retained earnings9,300Total shareholders' equity49,300Total liabilities and shareholders' equity$57,800

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Financial Accounting, 6ce,Libby, Libby, Short, Kanaan,Sterling2-1Chapter 2Investing and Financing Decisions and theStatementof Financial PositionRevised:January 20, 2017ANSWERS TO QUESTIONS1.The primary objective of financial reporting for external users is to provide usefulfinancial information about a business to help external parties, primarily investors andcreditors, make sound financial decisions. These users are expected to have areasonable understanding of accounting concepts and procedures. Usually, they areinterested in information to assist them in projecting future cash inflows and outflowsof a business.2.(a)An asset is aneconomic resource controlled by an entity as a result of a pasttransaction 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 toproduce and sell the inventory.(c)A liability is a probable debt or obligation of the entity as a result of a pasttransaction, 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) orsatisfied by providing service within the coming year.(e)Contributed capital is cash (and sometimes other assets) provided to thebusiness by owners.(f)Retained earnings are the cumulative net earnings of a company that are notdistributed to the owners and are reinvested in the business.

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