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Financial Accounting: A User Perspective , 6th Canadian Edition Solution Manual

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 1 Chapter 1 CHAPTER 1 Overview of Corporate Financial Reporting ASSESSING YOUR RECALL SOLUTIONS 1 - 1 Accounting, as an information system, provides economic information to users to allow them to determine whether the entity is operating effectively and efficiently. In addition, accounting facilitates the making of important decisions in the management of the entity, such as whether new assets should be purchased or leased or whether equity financing should be used as opposed to debt financing. 1 - 2 A private corporation is one whose ownership shares are held by a small number of individuals. This makes the transfer of ownership more difficult , as the shares do not trade on a public stock exchange. A public corporation has shares held by a larger number of individuals or entities , and these shares are bought and sold on a public stock exchange (such as the Toronto Stock Exchange).

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 2 Chapter 1 1 - 3 Shareholders – These users are interested in the performance of their investment in the company. They will use the financial statements to evaluate how well management is handling their investment. Financial Institutions – These users are interested in evaluating the company to decide whether to lend money to it. They will use the statements to evaluate the risk that will be taken in making the loan. Taxing Authorities – These users establish the rules for how taxable income will be measured. They are interested in the fair measurement of the financial position of the company so that the appropriate tax will be paid. Note, however, that income taxes are not paid based on the net earnings reported in the financial statements; rather, income taxes are based on taxable income. In preparing the tax return, the financial statements ’ net income is the starting point and is then adjusted to arrive at taxable income. Financial Analysts – These users provide investment advice to their customers. They are interested in evaluating the investment potential of various companies. They will want to evaluate not only individual companies, but also make cross - company comparisons. Credit Rating Agencies – These agencies evaluate companies as to their credit risks. These ratings are then supplied to investors who want to make investments in these companies, either through their common shares or through their debt. (Note: there are other users discussed in the chapter that would be equally acceptable answers to this question.)

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 3 Chapter 1 1 - 4 Financial accounting is governed by a set of accounting guidelines. These guidelines are referred to as Generally Accepted Accounting Principles (GAAP) or Financial Reporting Standards . The Accounting Standards Board (AcSB) of the Canadian Institute of Chartered Accountants (CICA) sets accounting and reporting standards for private companies following accounting standards for private enterprises . The International Accounting Standards Board (IASB) sets the International Financial Reporting Standards (IFRS) for public companies, These guidelines have the force of law because they are recognized in both federal and provincial statutes that govern companies. 1 - 5 The main role of the International Accounting Standards Board (IASB) is to promote the harmonization of international accounting standards around the world. To that effect, the IASB has developed relationships with standard - setting bodies in many countries, including the Accounting Standards Board of the Canadian Institute of Chartered Accountants in Canada and the Financial Accounting Standards Board in the United States, in trying to encourage them to change their accounting standards to international standards. In Canada, effective January 1, 2011, IFRS must be implemented as the financial reporting standard for public companies.

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 4 Chapter 1 1 - 6 The major qualitative characteristics that accounting information should possess are: Understandability – The information must be understandable to a reasonably well - informed user. Relevance – The information must be relevant for the decision under consideration. Relevance consists of several sub - characteristics: Predictive Value – The information is useful in predicting future results, such as income or cash flow, and therefore should be helpful to users who make decisions that depend on predictions of future events . Confirmatory Value – T he information must provide the user with the ability to evaluate the outcomes of previous decisions, giving them feedback on their past decisions . Reliability – The information must be reliable to be of use to a decision maker. Reliability has five sub - characteristics: Representational Faithfulness – The information must represent what it purports to represent. Substance Over Form – Accountants need to convey the underlying substance of the transaction rather than just record and repeat transactions according to required transactions. They need to look beyond the accounting standards and ensure that the information conveys economic reality. Neutrality – The information must not be produced in a biased way relative to the effects it has on the entity being measured. Prudence – Accountants and users must use caution when making judgements since accounting transactions and measurements are not always exact and often include uncertainties. Completeness – Preparers need to ensure that the financial statements contain all of the information that users need in order to make informed decisions . Comparability – Information produced by different companies must be understood by users so that they can make comparisons across companies. Companies are not required to use the same accounting methods. Therefore, users must

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 5 Chapter 1 understand the impact of the various methods allowed under Canadian private enterprise GAAP and IFRS . 1 - 7 The three major types of activities in which all companies engage are financing, investing, and operating activities. Financing refers to the activity of obtaining funds for the company to operate. Two primary sources of funds are owners and creditors. Some typical financing activities are: short - and long - term borrowing, repayment of debt, dividend payments, and new issuance of shares. Investing refers to the activity of using funds generated by financing activities to acquire assets that will generate profits in the future. Investments include the purchase of property, plant, and equipment and the purchase and sale of investments in other companies. Operating activities are associated with developing, producing, marketing, and selling the products and/or services of the company. They are mainly concerned with the day - to - day activities of the company. 1 - 8 The three major categories of items that appear in a typical statement of financial position (balance sheet) are assets, liabilities, and shareholders’ equity. Assets are those things that a company owns or has the right to use and which have probable future value. The company is able to perform its activities and thereby generate profits with the help of its assets, which means that they are income earning. Assets may be current or non - current. Current assets will be converted into cash within the next year or operating cycle. Examples include cash, inventory, and accounts receivable. Non - current assets are those assets whose benefits may be realized over a period longer than one year or operating cycle. Examples include property, plant, and equipment, patents, trademarks, etc. Liabilities are the amounts that the company owes to others and which require a probable future sacrifice of resources. Liabilities may be classified as current and non - current. Current

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 6 Chapter 1 liabilities include notes payable due within one year, accounts payable, accrued expenses, and dividends payable. Non - current liabilities include long - term debt, long - term warranties payable, and pension liabilities. Shareholders’ Equity represents the wealth or the ownership interest of the owners. Shareholders’ equity may also be defined as the difference between the assets and liabilities of a company: Shareholders’ Equity = Assets – Liabilities There are two major shareholders’ equity accounts: share capital and retained earnings. Share capital represents the amount that investors originally paid for the shares that the company issued. Retained earnings consist of the earnings of the company less the dividends paid. 1 - 9 The statement of earnings describes the results of the operating activities from the beginning of the period to the end of the current period. Net earnings is defined as income less expenses. Income is money or resources that flow into the company from operating activities. Expenses are money or resources that flow out of the company from operating activities. The investing and financing activities are typically depicted on the statement of financial position. 1 - 10 The three main financial statements contained in all annual reports are the statement of earnings , the statement of financial position ( balance sheet ) , and the cash flow statement. Statement of Earnings : The income statement records the inflow of revenues and the outflow of expenses over the year. As such, it measures the increase (or decrease) in the shareholders’ wealth during the period. The statement helps investors evaluate the performance of the company during the period and it is useful in forecasting the future results of the company. Statement of Financial Position (Balance Sheet) : The statement of financial position gives the financial status of the company at a particular point in time. Since it divulges the details of assets, liabilities, and shareholders’ equity, it gives

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 7 Chapter 1 users a fair idea of the riskiness of the mix of assets and liabilities of the company. Cash Flow Statement : This statement measures the inflow and outflow of cash during a specific period of time. It is very useful in measuring the performance of the company as well as predicting future cash flows since it gives details about the inflow and outflow of cash broken down into operating, investing, and financing activities. It explains the change in cash between the beginning and the end of the period. 1 - 11 The notes to the financial statements provide more detail about items in the financial statements and are cross - referenced. The first or second note to the financial statements often discusses the Summary of Accounting Policies, which describes the choices made by management from among the possible choices and judgments acceptable under Canadian GAAP for private enterprises or IFRS . 1 - 12 The Management Discussion and Analysis (MD&A) section of the annual report provides an overview of the previous year, a discussion of the risks facing the company, and some information about future plans. Many companies use this part of the report to make more extensive, detailed comments on the company and its operating results. Often the information is presented from the company's perspective.

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 8 Chapter 1 1 - 13 The objective of an auditor in his/her report to the shareholders is to inform them whether the information given by the company is presented fairly and whether the company has adhered to IFRS/ GAAP in preparing its financial statements. An auditor may render different types of opinions, depending on the situation. The different types of opinions are: 1. Unqualified or “Clean” Opinion – IFRS/ GAAP has been followed and the information reported is fair. 2. Qualified Opinion – With the exception of certain noted items, the information is fair. 3. Adverse Opinion – IFRS/ GAAP has not been followed and the information reported does not reflect the true state of affairs of the company. 1 - 14 The introduction and increased power of computer systems allows accountants to capture a variety of financial information and rapidly summarize it into financial statements and reports. Computers also enable managers to access financial information quickly and as often they wish. Financial statements can be updated in real time and are always current.

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 9 Chapter 1 APPLYING YOUR KNOWLEDGE SOLUTIONS 1 - 15 a . The "principle of caution", according to Nils Vinge, ensures that the company maintains a strong financial position by choosing non - aggressive business practices. For instance, in order to ensure that the company is not burdened by high levels of debt which pose business risks, the company has a practise of always paying for business expens e s wi th their own funds. In that manner, the company is using their own money to grow, rather than using the money of lender or investors to fund growth with the risk of not meeting future repayment obligations . b . Mr. Vinge learned that using its accounting information to monitor the company's financial health can lead to future success and growth. By keeping the accounting information up to date, they can monitor inventory levels, determine the need for price increases or markdowns, and to manage earnings by monitoring revenues and controlling costs . 1 - 16 a . While historical cost is a much more reliable measure, it measures only one attribute about the land — its purchase price. While this cost would be relevant to establish the amount of profit if the company were to sell the land, it would not be very relevant for much else. The current market value would be quite relevant if the company were trying to decide whether to sell the land. The selling price for a comparable site would therefore be relevant, but may not be a reliable measure of the fair value of the company’s land. While the site that sold was “comparable,” there will always be differences between various sites of land that may make them non - comparable. If the company intends to sell the land, then the market value may be the most relevant value to report on the statement of financial position (balance sheet) . On the other hand, if the company intends to use the land to build a plant, then the current market value of the land would not be that relevant. Prudence would suggest that users must use caution when making judgements since the fair value of the land is subjective and will often include uncertainties

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 10 Chapter 1 b . The fair value would likely be most relevant to a banker because if the company defaults on the loan, the land would serve as collateral and the bank would be able to recover the principal of its loan from its sale. The historical cost would have little or no relevance. c . Investors would also be interested in the fair value of the land . This would provide a better indication of the value of the company’s assets allowing investors to better assess the risk and return associated with investing in the company. 1 - 17 One of the fundamental characteristics of reliability is prudence . Prudence may result in the exclusion of information that a user may find relevant. For example, a user may find it relevant to know that the asset land, which is recorded on the statement of financial position ( balance sheet ) at historical cost, is now worth twice as much as the amount the company paid for it. This increase in this asset’s value may have a significant impact on the financial results of the company – showing that the company is in better shape than if only historical costs were used. Prudence , however, does not permit increasing the value of the land (although it calls for reducing the value of assets when necessary). Thus, this piece of information, although relevant, would not be recorded on the balance sheet. Because of the potential to overstate assets and thereby influence user’s decision - making through the introduction of bias (a non - neutral estimate of an asset’s value), conservatism is often considered the over - riding characteristic. 1 - 18 This information would suggest that Matrix Technologies might face reduced sales revenues and net earnings in the future. Also, the collectability of any amount owing to Matrix from the customer may be in doubt. Readers of the quarterly report would likely find such information relevant, as it would help in predicting reduced levels of future earnings and cash flow. Providing the information now about an expected future decline in sales provides more timely information to users of the quarterly repor t, and thus, enables them to make earlier and better - informed investment decisions. Neutrality would dictate that the information regarding the financial difficulties of a major

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 11 Chapter 1 customer should be made transparent to the user and not hidden or biased. Prudence would be used to realize that the amount of the impact of the customers' financial difficulties can only be estimated on Matrix's financial statements. 1 - 19 Two possible reasons that users have difficulty understanding and evaluating financial information are general lack of accounting knowledge and the increasing complexity of business transactions. Standards setters attempt to address the knowledge factor implied in accounting but stating that it is expected that users have a basic understanding of accounting principles before they attempt t o read and use financial statements. The financial statements and related notes will not themselves provide you with the tools to understand the financial statements . You must have that base knowledge before using the financial statements. With the increasing complexity of business transactions, standards setters try to stress substance over form and representational faithfulness to ensure that the economic reality of the transaction is given priority over the legal form of the transaction so a to not "mask" the position of the company or results of its operations . 1 - 20 Examples of Canadian Tire’s financing transactions: 1. Share issuance to raise capital for purchasing property, plant & equipment 2. Issuance of long - term debt to raise capital Examples of Canadian T ire’s investing transactions: 1. Purchase of buildings to house their retail stores 2. Purchase of shelving racks and other displays Examples of Canadian Tire’s operating transactions: 1. Purchase of inventory from suppliers 2. Sale of goods and services

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 12 Chapter 1 1 - 21 Examples of Hudson Bay Company ’s financing transactions: 1. Issuance of shares to investors to raise capital for the purchasing of property, plant and equipment 2. Issuance of long - term debt to raise necessary capital to build new stores or invest in new retail technologies (such as online shopping) Examples of Hudson Bay Company ’s investing transactions: 1. Purchase of buildings and equipment for retail operations 2. Purchase of building and vehicles for a distribution network to move inventory between warehouses and retail stores Examples of Hudson Bay Company ’s operating transactions: 1. Sale of retail inventory to customers 2. Payment of salaries and wages to employees 1 - 22 Examples of Scotiabank’s financing transactions: 1. Issuance of shares to investors to raise capital to meet regulatory requirements 2. Issuance of long - term debt to raise necessary capital to have funds available to lend money (provide mortgages and loans) to customers Examples of Scotiabank's investing transactions: 1. Purchase of buildings and equipment for in branch operations 2. Purchase of information technology equipment and software to maintain the banking transactions and provide online access for customers Examples of Scotiabank's operating transactions: 1. Sale of services and banking supplies (cheques, deposit books, etc.) to customers 2. Payment of salaries and wages to employees

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 13 Chapter 1 1 - 23 A statement of earnings presents the results of the operating activities of a company for a period of time. A cash flow statement reports the net cash flows of a company for a period of time. A statement of earnings presents mainly the results of the operating activities while a cash flow statement reports cash flows relating to operating, investing, and financing activities. A statement of earnings gives the net earnings ( net income /profits) of a company whereas a cash flow statement explains the inflows and outflows of cash for the period. The statement of earnings includes items that are not related to cash, such as depreciation . The cash flow statement includes items related only to cash. 1 - 24 Sales revenue would be found on the statement of earnings and represents the amounts charged to customers for the sale of goods and services. Accounts receivable appears on the balance sheet and represents claims to cash for the sale of goods and services that have not yet been paid for by the customer. Accounts receivable represents an asset of the company. The connection between these two accounts is that accounts receivable are created from sales that have been made on credit. 1 - 25 Wages payable would be found on the balance sheet and represents the amount that the company owes to the employees for time worked but not yet paid to the employees. Wages expense would be found on the on the statement of earnings and represents the amount of salaries incurred (earned by the employees) during the period. Wages payable represents a liability of the company and wages expense represents a use of the resources of the company. The connection between these two accounts is that wages payable are created from wages expense for time that has been worked by the employees that they have not been paid for yet.

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 14 Chapter 1 1 - 26 a . CL b . IS c . IS d . NCA e . CA f . IS g . SCF h. SC i . CA j . NCL 1 - 27 a . CL b . CA c . IS d . NCL e . CA f . IS and RE g . SCF h . SCF i. IS j . IS 1 - 28 a . NCA b . IS c . SCF d . IS e . RE f . IS g . RE h . SCF and NCL i . IS j . NCA

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 15 Chapter 1 1 - 29 a . OA b . OA c . FA d . IA e . FA f . IA g . IA , gain or loss would affect OA in the indirect method h . FA 1 - 30 a . IA b . OA c . OA d . FA e . OA f . OA g . FA 1 - 31 a . BS b . BS c . BS d . SE e . SE f . N g . SE h . N i . N j . BS

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 16 Chapter 1 1 - 32 a . BS b. SE c. BS d. BS e. SE f. SE g. N (shown on statement of cash flows) h. BS i. N (liability has been discharged) j. BS 1 - 33 There were no items that appeared on both the balance sheet and the income statement. This is to be expected because revenues (expenses) represent increases (decreases) in economic resources and only appear on an income statement whereas assets (liabilities) represent economic resources owned (obligations owed) by the company and only appear on a balance sheet. 1 - 34 A B C D Current Assets $570,000 $600,000 $180,000 $990,000 Non - current Assets 780,000 735,000 390,000 660,000 Total Assets 1,350,000 1,335,000 570,000 1,650,000 Current Liabilities 375,000 345,000 135,000 390,000 Non - current Liabilities 337,000 330,000 105,000 225,000 Shareholders’ Equity 638,000 660,000 330,000 1,035,000 Total Liabilities and Shareholders’ Equity 1,350,000 1,335,000 570,000 1,650,000

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 17 Chapter 1 1 - 35 A B C D Current Assets $ 650,000 $420,000 $150,000 $ 320,000 Non - current Assets 1,150,000 380,000 210,000 760,000 Total Assets 1 ,800,000 800,000 36 0 ,000 1,080,000 Current Liabilities 750,000 170,000 50,000 410,000 Non - current Liab. 500,000 205,000 120,000 270,000 Shareholders’ Equity 550,000 425,000 190,000 400,000 Total Liabilities and Shareholders’ Equity 1,800,000 800,000 360,000 1,080,000 1 - 36 A B C D Retained Earnings Dec. 31, Year 1 $100,000 $ 420 ,000 $1,475,000 $ 930 ,000 Net Earnings 40,000 160 ,000 550,000 290 ,000 Dividends declared and paid 10,000 50 ,000 225,000 140 ,000 Retained Earnings Dec. 31, Year 2 130,000 530 ,000 1,800,000 1,080 ,000

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 18 Chapter 1 1 - 37 a. A Slice of Life Statement of Earnings For the month of November , 2xxx Sales $23,870 Cost of ingredients used $7,130 Employee wages 5,120 Rent 1,200 Electricity 670 Water 420 Telephone 220 Total Expenses 14,760 Net Earnings $ 9,110 b. Other costs that Jason might have incurred in November not listed above include: 1. Depreciation of kitchen facilities and equipment 2. Income taxes 3. Depreciation of pizza delivery vehicles 4. Other employee benefit costs such as employer portion of CPP and EI

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 19 Chapter 1 1 - 38 a . Scents Unlimited Statement of Earnings For the month of May, 2xxx Sales $24,730 Cost of goods sold $10,733 Employee wages 7,000 Telephone 160 Electricity and Water 370 Rent 1,500 Gas and Repairs 329 Total Expenses 20,092 Net Earnings $ 4,638 b. Other costs that Lydia might have incurred in May not listed above include: 1. Depreciation of vehicles and equipment 2. Income taxes 3. Cost of any certifications, licences or association memberships 4. Other employee benefit costs such as employer portion of CPP and EI

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 20 Chapter 1 1 - 39 a . Call Of The Wild Ltd. Statement of Earnings For the month of July, 2xxx Revenue from excursions $ 171,430 Employee Wages $ 49,860 Advertising 14,610 Supplies Expense 25,629 Gas & R epairs Expense 3,460 Telephone & Electricity 1,532 Total expenses 95,091 Net income $ 76,339 b . Other costs Michelle might have incurred in July that were not listed above include: 1. Depreciation of tents and rafting equipment 2. Income taxes 3. Interest paid on any outstanding loans 4. Other employee benefit costs such as employer portion of CPP and EI 1 - 40 a . Item Classification Supply of ingredients Asset Wages owed Liability Bank loan owed to the bank Liability Cash held in chequing account Asset Cost of ovens & refrigerators Asset Prepaid rent for December Asset Common shares Shareholders’ equity Retained Earnings Shareholders’ equity

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 21 Chapter 1 1 - 40 (continued) b . A Slice of Life Balance Sheet July 31, 2xxx Cash $ 3,490 Wages owed $ 1,460 Ingredients 670 Bank loan 11,000 Prepaid rent 1,200 Common Shares 5,000 Equipment 14,300 Retained Earnings 2,200 Total Assets $ 19,660 Total Liabilities and Shareholders’ Equity $19,660 c . It is unlikely that Jason will have an account called ‘accounts receivable’ since most of his sales will be on a cash basis. If customers purchased pizza and other food items on credit, then Jason would have an accounts receivable section on his balance sheet that would represent the amount that he is owed from his customers. However, pizza parlours sell products that are relatively inexpensive, therefore most customers, if not all, will have enough funds to pay for their purchase in their wallet, which is why it is unlikely that Jason will have an account called “ accounts receivable ”. It may be necessary for him to have an accounts receivable account if he has customers that purchase frequently and/or in large quantities, such as a school. In that case, it would be appropriate to ship a large order of pizzas along with an invoice. Until the invoice is paid (by the school for example), the amount owing would be an “accounts receivable”.

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 22 Chapter 1 1 - 41 a . Item Classification Inventory Asset Wages owed to employees Liability Bank loan owed to the bank Liability Cash held in chequing account Asset Cost of refrigerator Asset Prepaid rent for June Asset Common shares Shareholders’ equity Retained Earnings Shareholders’ equity b . Scents Unlimited Balance Sheet May 31, 2xxx Cash $ 8,361 Wages owed $ 950 Inventory 1,100 Bank loan 8,000 Prepaid rent 1,500 Common Shares 18,000 Refrigerator 18,695 Retained Earnings 2,706 Total Assets $ 29,656 Total Liabilities and Shareholders’ Equity $29,656

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 23 Chapter 1 1 - 41 (continued) c . It is unlikely that Lydia will have an account called ‘accounts receivable’ since most of her sales will be on a cash basis. If customers purchased flowers and other items on credit, then Lydia would have an accounts receivable section on her balance sheet that would represent the amount that she is owed from her customers. However, florist shops sell products that are relatively inexpensive, therefore most customers, if not all, will have enough funds to pay for their purchase in their wallet, which is why it is unlikely that Lydia will have an account called “accounts receivable”. It may be necessary for her to have an accounts receivable account if she has customers that purchase frequently and/or in large quantities, such as a event planner. In that case, it would be appropriate to ship a large order of flowers along with an invoice. Until the invoice is paid (by the event planner for example), the amount owing would be an “accounts receivable”.

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 24 Chapter 1 1 - 42 a . Item Classification Bank loan owed to bank Liability Supplies on hand Asset Cash in bank accounts Asset Common shares Shareholders’ equity Cost of tents and rafts Asset Retained earnings Shareholders’ equity Amount prepaid by customers for August trips Liability Vehicles Asset b . Call Of The Wild Ltd. Balance Sheet As at July 31, 2xxx Cash $33,670 Amounts paid for Supplies on hand 13,420 trips in August $19,140 Vehicles 38,400 Bank loan 24,000 Cost of tents/rafts 34,100 Common shares 20,000 Retained Earnings 56,450 $ 119,590 $ 119,590 c . Inventory refers to products that have been purchased for resale to customers. Michelle’s business does not have any products, but instead it provides a service, rafting excursions . Thus, the real product is not inventory but a service. d . M ichelle’s business does not produce a product for which customers would be extended credit. Michelle would want her customers to pay in advance. Unlike a car dealership where the company can repossess the car if the customer does not pay, it would not be possible for Michelle to repossess a rafting excursion once it is complete. And like the pizza parlour , the cost for the service is not that large so customers will be able to afford to pay right away. Thus, Michelle’s business is not likely to have an accounts receivable account.

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 25 Chapter 1 1 - 43 Bombard i er Inc. Assets - Inventory of Aircraft - Inventory of Rail vehicles Liabilities - Long - term debt Sobeys Inc. Assets - Inventory (groceries , p harmaceutical products ) - Shelving - Equipment Liabilities - Wages payable McCain Foods Limited Assets - Processing and Packaging Equipment - Inventory of ingredients and finished food products Liabilities - Accounts payable Royal Bank Assets - Receivables - Cash Liabilities - Deposits from Customers Suncor Energy Inc. Assets - Cash - Oil and gas properties and drilling and extraction equipment Liabilities - Bonds payable

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 26 Chapter 1 1 - 43 (continued) Westjet Airlines Assets - Airplanes - Airport terminal licensing contracts and agreements (intangible asset) Liabilities - Deposits from customers for future flights (unearned revenue) Danier Leather Inc. Assets - Inventory for sale - Raw materials and supplies to manufacture clothing Liabilities - Wages payable 1 - 44 Bombardier Inc. Statement of Earnings - Manufacturing Labour - Income tax expense Sobeys Inc. Statement of Earnings - Cost of goods sold (grocery items) - General & administrative expenses McCain Foods Limited Statement of Earnings - Sales revenue - Cost of goods sold ( processed and packaged food )

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 27 Chapter 1 1 - 44 (continued) Royal Bank Statement of Earnings - Interest revenue (from customer loans) - Interest expense (on customer deposits) Suncor Energy Inc. Statement of Earnings - Sales revenue - Research and exploration expenses Westjet Airlines Statement of Earnings - Sales revenue - Fuel expense Danier Leather Inc. Statement of Earnings - Sales revenue - Cost of goods sold 1 - 45 Bombardier Inc. Statement of Cash Flows - Increase/decrease in inventory - Purchase of manufacturing equipment Sobeys Inc. Statement of Cash Flows - Increase in inventory - Issuance of common shares McCain Foods Limited Statement of Cash Flows - Debt issuance - Purchase of raw foods and packaging supplies

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 28 Chapter 1 1 - 45 (continued) Royal Bank Statement of Cash Flows - Purchase of securities - Increase/decrease in customer deposits Suncor Energy Inc. Statement of Cash Flows - Cash proceeds from the sale of unsuccessful properties explored (dry wells) - Research costs Westjet Airlines Statement of Cash Flows - Issuing bonds - Paying down long - term debt Danier Leather Inc. Statement of Cash Flows - Product sales - Increase in inventory

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 29 Chapter 1 USER PERSPECTIVE SOLUTIONS 1 - 46 - acquisition financing strategy (rent or buy); - forecast of cash flows; - availability and dependability of grocery suppliers to be used; - proximity of other grocery stores as competitors; - number of customers living in the local area; - taxes and zoning by - laws or restrictions that might apply; - management and junior staff needed; - suitability of store (size, type, space; age of building, parking lots for customers); - equipment and furniture needed . 1 - 47 Discussion points can be raised regarding the points listed in 1 - 4 6 above. 1 - 48 Accounting for inventory at its current market price rather than at its historical cost would be more relevant for users in that it would help them to better predict the future cash flows generated from the sale of that inventory (predictive value). At the same time, accounting for inventory at its current market price would be less reliable, because market value tends to fluctuate, and is thus less verifiable than historical cost. Due to the potential uncertainty in determining market value, the principle of conservatism also applies, suggesting the use of historical cost.

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    Financial Accounting: A User Perspective , Sixth Canadian Edition Hoskin, Fizzell, Cherry Solutions Manual 1 - 30 Chapter 1 1 - 49 Similar to question 1 - 4 8 : Accounting for equipment at its current market price rather than at its historical cost would be more relevant for users in that it would help them to better predict the future cash flows in two ways: the cash flows generated from the sale of the equipment and the cash flows required to replace the equipment (predictive value). At the same time, accounting for equipment at its current market price would be less reliable, because market value tends to fluctuate, and is thus less verifiable than depreciated historical cost. Due to the potential uncertainty in determining market value, the principle of conservatism also applies, suggesting the use of depreciated historical cost. 1 - 50 The classified balance sheet assists users in predicting the company’s cash flows by differentiating between those assets and liabilities that will become due within the next operating cycle, and those that will not. Current assets represent assets that will be used up within the next operating cycle. Current liabilities represent liabilities that must be paid within the next operating cycle. By identifying these separately from long - term assets and liabilities, the company is reporting the expected future cash inflows and outflows for the next period. The classification should be neutral and non - biased such that it presents the actual substance of the transaction, rather than presenting it to make management look good. This information is relevant to users for its predictive value.

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