Solution Manual for Accounting, 10th Edition

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Solutions manualto accompanyAccounting10theditionbyHoggett, Medlin, Chalmers, Hellmann,Beattie and MaxfieldPrepared byKeryn Chalmers

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Chapter 1:Decision making and the role of accounting1.1Chapter 1: Decision making and therole of accountingQuestions and solutions which contain GST:•Exercise 1.3•Exercise 1.5Discussion questionsSuggested topics for discussions are provided for each question. Discussion need not beconfined to the topics indicated.1.You areconsidering buying an apartment. Outline the information you would like toassist you to make this decision. Identify how much of this information is accountinginformation?Considerations when buying an apartment include factors such as location, type (studio, onebedroom, two or three bedrooms), size (bigger rooms, additional bathroom, balcony), age ofthe apartment, and available funds. Information to assist the purchase decision includeswhether the apartment is for residential or investment purpose, personal taste (e.g. interiordesign, view), distance to workplace or train stations, funds to meet ongoing costs likerepairs and maintenance required after purchase, body corporate fees, council rates, andinsurance. Initial purchase considerations include whether the apartment is to be purchasedoutright or through a home loan taken with a financial institution, stamp duty to be paid, andthe eligibility of obtaining first-home buyer grant from the federal/state government.Purchase considerations and ongoing costs represent accounting information relevant to thedecision-making process.2.Accounting is described as the language of business, and everyone is affected by thebusiness world. Discuss if everyone should be required to studyaccounting.Suggested topics of discussion:•Adults are affected by business activity but not all adults carry on a business.•‘Accounting is the process of identifying, measuring, recording and communicatingeconomic information to permit informed judgements and decisions by users of theinformation.’ The ‘language of business’ is the communication of accountinginformation, not the identifying, measuring and recording of accounting information thatall adults may not necessarily deal with. Language includes the terminology (jargon) usedby accountants in accounting and business reports. Communicating accountinginformation consists of preparing of financial reports and other interpretative disclosuresnecessary to make the accounting data understandable. It is up to the accountant tocommunicate in a language that the client can understand.•Part of an accountant’s role is to communicate financial information to adults. It is notnecessary for everyone to study accounting as it is part of the duty of an accountant tocommunicate.

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Solutionsmanual to accompany Accounting 10e by Hoggett et al.1.23.Describe the differences between accounting information and other information.Accounting information comprises financial information summarised in the form of financialreports. Accounting information is used to provideinformation about the financial costs ofbusiness decisions. It differs from other information used in the business decision-makingprocess due to the financial nature of measuring economic resources used in businesstransactions. Other information which may be used in the decision making process includespersonal preferences, social factors like the effect on unemployment, environmental factors(like pollution and waste management) and government policy effects on decision making inbusiness entities. Should accountants also report social and environmental information, or isthis the task of others?4.‘Accounting is irrelevant in decision making because the information it providesrelates only to the past.’ Evaluate this remark.Accounting isrelevant to the decision-making process as it helps provide financialinformation as to the most efficient use of available economic resources. Althoughaccounting provides financial information based on past financial transactions, it is useful ingiving details on how efficiently an organisation has been using its available resources. Forexample, what profit has the accounting entity reported based on the assets used? A reportedprofit of $50 000 where an entity has total assets of $200 000, appears more favourable whencompared to an entity which has total assets of $1 000 000. Accounting information is usefulin providing decision makers with information about the outcomes of their past businessdecisions. Past performance also gives insight to the future trends for the entity. Accountinginformation is also used as part of the budgeting process of a business entity.

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Chapter 1:Decision making and the role of accounting1.35.Describe how you would identify if a financial statement is a special purposefinancial statement or a general purpose financial statement.Suggested topics of discussion:•The difference between a general purpose financial statement and a special purposefinancial statement lies in the ability of users of those reports to command the preparationof reports tailored to satisfy their needs for particular information.•General purpose financial statements are prepared by reporting entities for users who donot have access to special purpose financial statements. General purpose financialstatements contain information which, while general in nature, is relevant to many of theindividual decisions made by the many different types of users, e.g. a shareholder willdecide to sell or retain his/her shares based on the information in the general purposefinancial statements. Other users such as lenders suppliers and employees will makeindividual decisions based on these general purpose financial statements.•Regulators attempt to prescribe the disclosure requirements in the general purposefinancial statements to ensure that individual users have access to reliable information.•General purpose financial statements do not satisfy all of the needs of users forinformation. Users will also add their personal, social, political and environmentalpreferences to any decision. General purpose financial statements do not even provide allof the financial information that users may need. For example, budget information is notprovided.•Special purpose financial statements are specifically tailored to provide the specialinformation needs of users for decision-making purposes. Unlike general purposefinancial statement users, special purpose financial statements users have the power torequire/insist that the information generated is specifically suited to their needs. Forexample, a bank may require special information from an entity before it grants the entitya loan.

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Solutionsmanual to accompany Accounting 10e by Hoggett et al.1.46.Users of accounting information can be identified as internal and external users. Listexamples of users in each category and the type of information they require.Firstly,distinguish internal and external users.The following are examples of internal users and the type of information they require:•Section/line managers need to know the impact of increasing or decreasing selling priceon profitability.•Chief Executive Officers and directors need accounting information to make a decision ofwhether it would be beneficial for the company to acquire another company.•General managers of divisions need to know if their divisions should make new products.•Account managers require information about how much the company owes suppliers.•Production supervisors need to know the most efficient production process to beimplemented.External users are often classified as being resource providers, recipients of goods andservices, and reviewers and overseers. The following are examples of external users, whomainly receive general purpose financial statements which are commonly available to thegeneral public on an entity’s website, and the type of information they require:•Shareholders want to know the return on their investments.•Long-term lenders need to know if the company will be able to repay the money lent to it.•Potential investors want to know if they should invest in the company.•Suppliers require information to find out if the company will be able to pay outstandingbills.•Employees want to know if the company is still able to pay their wages.•Customers want to know if the company uses locally-grown products in their productionto support local economy.•Government e.g. for tax reasons needs to know if the company complies with taxregulations by paying the right amount of tax.What about other interest groups? e.g. RSPCA, Greenpeace, World Vision, Unions,Chambers of Commerce, Community interest groups, The AustralianSecurities Exchange(ASX). Are they entitled to receive financial reports?

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Chapter 1:Decision making and the role of accounting1.57.Distinguish between the work performed by public accountants and the workperformed by accountants in commerce and industry and in not-for-profitorganisations.Public accountingPublic accountants run businesses which offer their professional services to the public for afee. These vary from small businesses to very large international organisations. Members ofpublic accounting businesses tend to specialise in one of four general services: auditing andassurance services, taxation services, advisory services, and insolvency and administration.Auditing and assurance servicesAn audit is an independent examination of a business entity’s financial reports, supportingdocuments and records in order to form an opinion as to whether the financial reports complywith certain levels of quality, as specified in accounting standards, and present a true and fairview of the entity’s performance and financial position. It is essential that auditors areindependent observers in carrying out their duties.Assurance services are defined as ‘independent professional services that improve the qualityof information, or its context, for decision makers’. Emphasis is being placed on the detectionof fraud and assessing whether the entity is appropriately placed to remain as a goingconcern. The auditor is required to report on the ‘credibility’ of information.Examples of assurance services include:•assessment of risk•business performance measurement•information systems reliability•electronic commerce•health care and care of the elderly.Taxation servicesAccountants provide advice concerning the tax consequences of business decisions.Individuals and business entities have to collect or payvarious forms of taxes includingincome tax, capital gains tax, fringe benefits tax, goods and services tax, local governmentrates, and other taxes. Accountants are often engaged to help in tax planning to minimise thetax liability of the business, consistent with the rules and regulations established by taxingagencies. Accountants also are often called upon to prepare tax returns, including businessactivity statements (BASs), required by law.Advisory servicesAccountants provide advice on:•overcoming detected defects or problems in a client’s accounting system.•the installation and modification of computer systems,•budgeting, forecasting and general financial planning,•design or modification of superannuation plans•company mergers and takeovers,

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Solutionsmanual to accompany Accounting 10e by Hoggett et al.1.6•personal financial planning, and•managing deceased estates.Forensic accountingForensic accounting develops investigative techniques in order to generate information andopinions for use in the legal system, such as in court, and to provide opinions as an expertwitness if needed.The forensic accountant is often needed to resolve disputes in circumstances such asbankruptcy, embezzlement, fraud, employee irregularities, business partnership disputes,personal injury claims, road accidents, divorce proceedings, business losses, and claims forprofessional negligence.Visit the following website for further information:www.forensicaccountant.com.Insolvency and administrationPublic accountants help businesses administer their recovery from trading difficulties orinsolvency, if possible. However, if recovery is not possible, accountants then help in thewinding-up of the business’s affairs. In the case of the company form of businessorganisation, such a wind-up is referred to as liquidation.Accountants in commerce and industryAn entity’s chief financial officer (CFO) has overall responsibility for directing the activitiesof accounting personnel. In alarge company, the CFO may have several managementaccountants as part of the finance team. Overall responsibilities include:General accountingThe accountant in commerce and industry is required to oversee the recording of transactionsundertaken by the business entity and to prepare reports specially tailored for use bymanagement in their planning, control and decision-making activities.Cost accountingThe accountant deals with the collection, allocation and control of the costs of producingspecific products and services. Knowledge of the cost of each manufacturing process andeach service activity is important in making sound business decisions.Accounting information systemsAccountants are often heavily involved in designing both manual and computerisedaccounting information systems. Once systems have been designed and installed, theiroperation is constantly monitored for improvements and system maintenance. Integrity ofdata and privacy issues are of paramount importance.

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Chapter 1:Decision making and the role of accounting1.7BudgetingAccountants deal with the preparation of plans and forecasts of future operations. Budgetsalso serve as control devices when used in conjunction with performance reports, whichmeasure actual results for the period. Budgets also are used in assessing the efficiency ofoperations.Taxation accountingBusinesses are assessed for a variety of taxes all of which require the preparation of periodicreports to the various taxing agencies. The effects of tax must be considered in everyinvestment and financing decision made by management. Some businesses rely on publicaccountants for some tax-planning advice and tax-return preparation, but many largecompanies also maintain a tax accounting department to deal with tax issues and problems.Internal auditing andaudit committeesThe internal audit committee in a business conducts ongoing reviews to make certain thatestablished procedures and policies are being followed. Thus, any deficiencies can beidentified and corrected quickly.Not-for-profitaccountingGovernmentCity councils, shire councils, state governments and the federal government collect and spendlarge amounts of money annually. Many of the problems and decisions faced by governmentofficials are the same as those encountered in private industry, but accounting for not-for-profit entities may require a different approach in some respects because of the absence of aprofit motive. Government accounting is concerned with the efficient usage of its resources,consistent with the provisions of city, shire, state and federal laws.Other not-for-profit organisationsChurches, hospitals, charities, clubs, private educational institutions also have specialisedaccounting needs.

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Solutionsmanual to accompany Accounting 10e by Hoggett et al.1.88.List some of the fields (other than financialreporting) that have opened up toaccountants in recent years.Suggested topics for discussion:•In addition to the fields that accountants have long been involved in (refer to Q8 abovefor more details), there are some fields that have opened up to accountants in recent years:-Sustainability reporting:as the demand from stakeholders that organisationsproduce sustainability reports has increased, the need to have those reports auditedalso increases. Accountants can provide assistance toorganisations in assessingtheir compliance with sustainability reporting requirements.-Forensic accounting:as business structure and transactions become morecomplicated, organisational issues and disputes cannot be avoided. Forensicaccountants help to uncover the causes of those issues and settle disputes withinorganisation and in the legal system (such as court).-Accounting information systems:the rapid advancement of technology hasenabled organisations to improve the efficiency of their operations usingcomputerised accounting information systems. Some of strategic managementaccounting techniques, such as Just-In-Time (JIT) and Activity-Based Costing(ABC) rely heavily on good accounting information system to be able to operateeffectively. Accountants could be involved in designing, installing, monitoring,and maintaining those information systems.Ask students if they have other examples of accounting fields that have become more popularrecently.9.Regulators are concerned with external auditors providing advisory services to aclient at the same time as providing auditing services to that client. Explain why thisis a concern.Suggested topics for discussion:•If an external auditor is required to express an independent opinion on whether thefinancial reports present a true and fair view of the entity’s performance and financialposition, can the auditor successfully be involved in providing management services tothe client and maintain independence?•Note that as a result of certain significant corporate crashes in the early 2000s, theAustralian government introduced requirements (via CLERP no 9) for auditors to declaretheir independence and to ensure a rotation of auditors every 5 years, with a further two-year delay before a former auditor can become an officer of the former client.

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Chapter 1:Decision making and the role of accounting1.910.Discuss the actions taken by regulators in Australia, the United States and China toaddress auditor independence concerns.Australia:•Although audit firms in Australia are allowed to provide non-audit services to the sameaudit clients, the audit firms must disclose non-audit services provided to their clients.•The Corporations Act lists relevant employment and financial relationships that areprohibited between an audit firm and its clients to ensure audit independence (section324CH).•Only one former audit partner of an audit firm can be an officer of an audited client(section 324CK).•Individual auditors who play a significant role in the audit of a listed company must berotated after fivesuccessive years and not return for a further two years (section 324DA).•There is a two-year ‘cooling-off’ period for former partners of audit firms before theycould become officers/employees of an audited client. The ‘cooling-off’ period onlyapplies to a partner or director of an authorised audit firm who has been a professionalmember of the audit team.United States:•An audit firm is prohibited from providing both audit services and non-audit services toclient firms.•The Securities and Exchange Commission (SEC) imposes ban on certain relationshipsbetween an auditor or audit firm and an audit client, similar to those listed in theAustralian Corporations Act. However, the SEC applies the ‘covered person’ concept(rather than ‘all partner’ approach as adopted in Australia) in regards to restrictions inthose relationships.•The Sarbanes-Oxley Act (SOX) also contains provisions for a ‘cooling-off’ period of nolonger than two years before a former auditor could become an officer of audited client.The requirement of ‘cooling-off’ period in the U.S. is more extensive than in Australia asit applies to any person who participated in any capacity in the audit.•Lead auditors must rotate after five successive years and there is a five-year time-outperiod before the rotated auditors are allowed to resume involvement with the same auditclient.China:•Source: Lin, K. Z., and K. H. Chan. 2000. Auditing standards in China: Acomparative analysis with relevant international standards and guidelines.International Journal of Accounting 35 (4): 559–77.•Article 5 of the Chinese General Standard on Professional Ethics requires the auditorto remain independent in form and in substance. An accounting firm or a CPA mustnot accept the engagement for an audit or other attestation function if vested interestwith the client exists.•Chinese CPA Law requires that during the period of a professional engagement, theauditor should not: (1) buy or sell stocks or bonds of the client, (2) acceptcompensation other than the audit fee specified in the engagement letter, (3) act as aliability collector, (4) allow others to practice on his/her behalf, (5) work in two ormore CPA firms, (6) obtain clients by advertising, and (7) engage in other activitiesthat violate laws and regulations.

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Solutionsmanual to accompany Accounting 10e by Hoggett et al.1.10•However, there is no limitation on providing non-audit services, such as bookkeeping,preparation of the financial statements, taxation and management consulting, nor isthere any restriction on the percentage of total fee income deriving from one client.11.‘When one examines the distinctive and different functions of financial andmanagement accounting, it is obvious that to maximise the usefulness of theinformation derived, two systems of accounting are necessary. It does not matterhow large or small the entity is, it is just common sense that one system cannot dothe job.’ (An assertion made by a recent management graduate.) Evaluate thisassertion.Financial and management accounting systems have different objectives, direct reports todifferent users, and differ in the degree of regulation that can be imposed from outside theentity.Financial accounting is designed to produce reports for external users, e.g. shareholders,lenders, trade creditors. These reports are general purpose financial statements for entitieswhich are reporting entities, and as such must comply with accounting standards.Management accounting is designed to produce relevant information for internal users, e.g.all levels of management. The reports arespecific-purpose reports, designed to meet specificneeds of those using such reports.The frequency of reporting differs considerably. Whereas with financial accounting, reportscould be yearly and half-yearly, management accounting reports are usually requested on adaily, weekly, monthly basis, or on demand.The question of whether two separate systems are necessary depends, to a large extent, oncost factors.Both financial and accounting management systems are based on a framework of accounting,the majority of the elements of which are common. Therefore, the one accounting system canbe used to serve the needs of both forms of accounting.

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Chapter 1:Decision making and the role of accounting1.1112.Describe what it means to behave ethically.Ethics can be defined as ‘moral principles that govern a person’s behaviour or the conductingof an activity (Oxford Dictionary). Therefore, to behave ethically means to make decisions orto act based on what is morally right, for instance being honest, complying with rules, and‘doing the right thing’.Ethical conduct can be considered essential to a business’ long-term survival because:(a)It attracts a regular and stable client base;(b)The legal implications of unethical conduct may prove to be costly;(c)It may attract shareholders and/or consumers in that they trust you to manage their moneysuccessfully and/or provide a quality service; and(d)Unethical conduct can lead to government intervention and even closure of the business.Discuss with students the ethical dilemmas they may face in the workplace and identify whoare the stakeholders, the ethical issues faced, what they may do in the situation.

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Solutionsmanual to accompany Accounting 10e by Hoggett et al.1.1213.‘Accounting is all about numbers.’Evaluate.Although it is a common perception that accounting is all about numbers, the field ofaccounting encompasses broaderissues than merely numbers. Accounting is defined as theprocess of identifying, measuring, recording and communicating economic information toassist users of the information in making informed economic decisions.Based on the definition above, there are four elements of accounting associated withproviding information that is useful for decision-making. Identification involves selectingeconomic events that are relevant to a particular entity. Even though the economic eventseventually need to be expressed in measuring unit (numbers), the identification process itselfrequires knowledge about the entity and its operations rather than just looking at the numbers.After the identification of the transaction, accounting information must be expressed in acommon denominator so that the effects of transactions can be combined. This is wheremeasurement takes place. It is true that measuring economic events mostly involvesnumbers;however it also requires knowledge of various measurement techniques, relies on judgmentsand assumptions, and involves knowledge of relevant accounting standards.Economic events or transactions that have been identified and measured are then maintainedsystematically through recording process. In order to be useful in making decisions, recordeddata must be classified and summarised.Finally, classified and summarised accounting data need to be communicated to the potentialusers of the information. The communication process consists of placing accountinginformation into financial reports and preparing interpretive disclosures necessary to makethe date understandable. For accountants to be able to help users of the reports to makeeconomic decisions effectively, the accountants who prepare the reports must have a fullappreciation of who the users are and their needs for accounting information.In conclusion, it is a misunderstanding that accounting is all about numbers. Many peoplewith limited knowledge of accounting tend to view accounting as limited to recordingnumbers and do not comprehend the whole processes involved in accounting as describedabove, which requires extensive training, business experience and professional judgmentrather than merely calculating numbers.

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Chapter 1:Decision making and the role of accounting1.13ExercisesExercise 1.1Information fordecisionsIan Boardman has been appointed as the loans officer for the local community bank.One day, a person walks into the bank looking for a loan to buy a new car. List six itemsabout that individual that Ian should find out before deciding whether to approve theloan. Classify these items as ‘economic’ or other (specify). Which type of information ismore important for the purposes of good decision making?(LO2)Ian Boardman, as the loans officer, should obtain personal and financial information aboutthe loan applicant to ascertain whether or not the person will be able to repay a bank loan. Indeciding to approve the loan, the following would be required:1.Name of applicant2.Address of applicant3.Previous address4.Employmentdetails5.Marriage status6.Years at current or previous address7.Years in current or previous employment8.Salary and wage details *9.Total assets and estimates of values *10.Total liabilities (total commitments) *11.Ifmarried/de facto, spouse/partner details for items 6-10 *12.Credit history *13.Banking details of applicant*14.Ability to repay the loan for the period of the loan *15.Any guarantor to the loan*indicates economic informationincluded.

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Solutionsmanual to accompany Accounting 10e by Hoggett et al.1.14Exercise 1.2Information for decisionsTran Qu’s family lives in Beijing, China. She has been accepted into a university coursein Sydney, and has to find accommodation in the city within walking distance of theuniversity, or at least beclose to public transport. She searches the Internet to findsuitable accommodation and comes across the following apartment:Required(a)Discuss how this information may help Tran make a decision.(b)List additional information Tran would need before deciding whether to rent thisapartment.(LO6)(a)The information provided partly helps Tran’s decision-making process. It gives financialinformation as to the location of the apartment, cost of the rental per week, number ofbedroom, and the amount ofdeposit required as bond. Tran is only able to identify this unit asone of the selections for further investigation based on the location identified, at a weeklycost she can afford and for meeting one of her criteria of being close to public transport. Sheshould highlight this advertisement for further investigation.(b)Other information Tran may require includes:•The exact location of the apartment in CBD (is it on a main road/close to shops ortransport?).•Whether the location is safe (will she beable to arrive home safely after night lectures?);•How far the apartment is to the train station.•Details for transport close to the apartment (does the train run past the university?If not,is there a suitable bus service?).•Personal taste (does she like the building, the apartment, or the neighbours?).•Whether she could afford paying the weekly rental or whether it is financially moreaffordable for her to rent a two-bedroom apartment andshare the rental with a friend).•Whether it is practical and easy to furnish her own apartment or whether she should belooking for a furnishedapartment instead.•Other alternative options available to Tran (e.g. stay in a student accommodationprovided by the university or live with relatives in Sydney).Tran needs to consider what she is trying to achieve, assess what information she requires,consider what her alternatives are and decide what will be her final choice.

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Chapter 1:Decision making and the role of accounting1.15Exercise 1.3Information for decisionsRenee Carter has decided to study medicine at auniversity in Melbourne. She hasarranged to stay with a family on the north side of the city. In order to get to and fromthe university, she decides she will need to buy a car, costing a maximum of $10000.She searches the Internet and comes across the following at Car City:Required(a)Evaluate how useful this information is in arriving at a decision.(b)List extra information that Renee should ascertain before deciding whether to buythis car.(c)Assume that Renee does purchase the car, andsubsequently finds that the car hasmechanical problems that will require $2000 to fix. Discuss what she should do,given that she does not have enough money to pay for the repairs.(d)Hypothesise as to how ethical the community regards used car salespeople.(LO6)(a) Renee needs to buy a small car costing a maximum of $10000. The information providedin the advertisement is not very useful for Renee in making a decision, as it mostly describesthe physical appearance of the car and does not mention the price of the car. Subsequently,Renee needs to find out the price of the car first before she looks further into other features ofthe car, as the most important requirement for her in buying the car is that the price does notexceed $10000 (i.e. she will not buy the car if the price is above $10000 even though shelikes other features of the car). There also needs to be clarification as to whether themaximum cost of $10000 is inclusive of GST.(b) In her decision-making process (assuming the price of the car does not exceed $10000),Renee needs to consider other features beyond personal taste or preference, such as:•GST.•The age and previous mileage of the vehicle (the age is unknown at this stage, but onceshe finds out she needs to consider if the mileage shown on the odometer is reasonable fora car built in that year).•Whether the vehicle is mechanically sound or whether certain parts of the car need to berepaired.•Whether the car still has a warranty (although it would be unlikely for a car withsuch ahigh mileage to have a warranty).•The total expected ongoing costs including petrol and oil, maintenance, registration andinsurance.•Additional features included in the car, e.g. tinted windows, power steering, A/C, CDplayer, and so on.•Other alternative vehicles available within the same price range (e.g. different brand,model, colour, automatic instead of manual, etc.).

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Solutionsmanual to accompany Accounting 10e by Hoggett et al.1.16She should highlight the advertisement for further investigation and compare it with otheravailable vehicles advertised in the internet or elsewhere.(c) If Renee buys the second-hand car and subsequently discovers that it will require furtherexpenditure of $2000 to fix, she must pay it herself. Does the $2000 include GST? Is there awarranty attached to a second-hand vehicle? If so, will this cost be passed on to the cardealer? If she has insufficient funds to meet the unexpected expense, she will have to borrowthe money (loan from the family or borrow using a credit card) in order to fix the car.(d) InAustralia, the community generally perceives used-car salespeople as being unethicaland deceitful in doing business. That is, people commonly have a negative perception ofused-car salespeople based on the view that they use high pressure and manipulation to sellvehicles, especially to potential buyers who may not have sufficient knowledge about cars(usually female buyers). It is widely-known that used-car salespeople often do not reveal thetruth about real condition of the car, and the unfortunate buyers would only find out about itafter they buy the cars. Because of this stigma, many people feel reluctant to deal with used-car salespeople, even though undoubtedly there are a lot of used-car salespeople who do theirjob with high level of professionalism and integrity.Ask students from other countries whether they have the same perception about used-carsalespeople in their home countries.Ask if there are students whose family members or relatives or friends are used-carsalespeople. Ask them if their perception about used-car salespeople has changed knowingthat their close family or friends work in this area.

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Chapter 1:Decision making and the role of accounting1.17Exercise 1.4Choosing a university majorYou have just enrolled in a course in business at the Western University. There areseveral specialty areas, one of which you must choose—accounting, business law,economics, finance, management, marketing, information systems. The choice you makeis important as it will affect your future; hence, you must give careful thought to thisdecision.Required(a)Identify two possible specialty areas inabusiness that interests you.(b)Set down your goals and personal preferences in selecting a business major. Identifythe factors which will help you make this decision, and specify the factors which aremost important to you.(c)Establish a set of criteria which must be met before making a decision about yourappropriate specialty area.(d)Determine the sources of information you will need to make such a decision.(LO6)Students may answer this question in the context of their own choices made upon enteringuniversity.(a)Identify your own personal preferences and strengths and weaknesses with respect to achoice of major in Business. For example, consider your strengths and weaknesses inconsidering whether to choose between an accounting or marketing major.(b)Possible goals include desired area of employment after graduation, postgraduate startingsalaries, postgraduate study options and desired membership into professional societies. Inchoosing a major, you may identify subjects which you enjoyed taking or in which youachieved good grades. Discuss personal goals and ambitions after your degree is completed.(c)Criteria for selecting a major:•Postgraduate employment opportunities•Postgraduate starting salaries•Recruiting and training opportunities•Work experience•Professional society membership•Personal choice•Personal interest and work preferences(d)Identify areas of interest and talk with career advisers, lecturers, members of professionalsocieties or become a student member of a professional society to gain access to information.Also speak with more senior students about their experiences with their studies and don’tforget to read the University Handbook and relevant unit outlines. Consult newspapers andbusiness press, prepare a resume and apply for a job. Seek work experience in your desiredarea of interest.

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Solutionsmanual to accompany Accounting 10e by Hoggett et al.1.18Exercise 1.5Making an economic decisionYou have decided that now is the time to buy a new laptop. List the factors that areimportant in choosing a new laptop and gather relevant information from varioussources about different models on the market. Given that you have a maximum of $1600to spend, identify which model you will buy and discuss the reasons for your choice.Present your answer so as to illustrate the steps required in the decision-making processas discussed in this chapter. (LO2)1.What are you trying to achieve?—Establish goals.•Discuss your personal preference for a laptop including brand, make andmodel.•What laptop do you think you need (e.g. RAM, CPU, hard disk, screen size, weight)?•How will you use the laptop? Is it for your own personal use, or will you be sharing itwith others?2.What information do you need?—Gather available information on alternatives.•Investigate pricing, taking GST into consideration.•What are the available models in the desired price range?•Identify features available for each model.•Compare warranty and after-sales service.•Consider all possiblealternatives.3.What are the consequences of different choices?—Determine consequences ofalternatives.•Identify all the alternative options in your price range and identify your preferred choice.•Discuss the features which best appeal to you.•Discuss the likelihood that laptops will become technologically obsolete in the nearfuture.•What is the worst case and best case scenario?4.Which course of action will you choose?—Choose a course of action.•Identify your choice and discuss whyand how this particular model appealed to you.•Discuss why you think this particular model is the best optioncompared to otheralternatives.

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Chapter 1:Decision making and the role of accounting1.19Exercise 1.6Factors in making a business decisionConsult the business section of a local newspaper, orThe Australian Financial Review,or a business journal, and find an appropriate article detailing an important businessdecision that has been made in the last month. Based on the article, determine thefactors that were taken into account in arriving at thedecision. Discuss the effects thatsuch a decision will have on various interested parties or stakeholders. (LO2 and LO3)Factors to be taken into account in arriving at a business decision include:1.Nature of the business entity.2.Goals of thebusiness entity.3.Resources available to the entity.4.Parties involved in the decision-making process.5.The management level required for the decision to be made.6.Possible gains or losses anticipated to be experienced by the business entity.7.Possible alternatives which could be employed by the business entity.8.The best or worst case scenario for the entity in adopting a certain businessdecision.9.Identifying all possible groups both internal and external to the business entitywho may be affected.10.Identifying the stakeholders (i.e. parties for whom or on whom the decisionwill have a positive or negative impact).

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Solutionsmanual to accompany Accounting 10e by Hoggett et al.1.20Exercise 1.7Factors in making a government decisionConsult a local newspaper,The Australian Financial Reviewor a business journal, andfind an appropriate article detailing an important federal government decision in thelast month. Based on the article, determine the factors that were taken into account inarriving at the decision. Discuss the effects that such a decision will have on variousinterested parties or stakeholders. (LO2 and LO3)Factors to be taken into account in arriving at a government decision include:1.The nature of thegovernment decision.2.The government policy dictating the decision.3.The political impact of the decision.4.Identifying all parties affected by the government decision.5.Identifying all the stakeholders (i.e. parties to which the decision will have apositive or negative impact).6.Identifying any particular lobby or special interest groups involved with theissue.7.Identifying the available funding or resources available for the governmentdecision.8.How is the governmentinitiative to be funded?9.Identifying the cost of the initiative.10.Was the decision made in a consultative manner?11.Was there much political debate or commentary?12.Possible gains or losses anticipated to be experienced by the community.13.Possible alternatives which could have been employed by the government.14.Was the resultant decision considered to be the most efficient use ofcommunity resources?

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Chapter 1:Decision making and the role of accounting1.21Exercise 1.8Economic decisions made by managementAccounting provides muchinformation to help managers make economic decisions intheir various workplaces.Required(a)List examples of economic decisions that the following people would need to makewith the use of accounting information:i.a marketing managerii.a productionmanageriii.the Chief Executive Officer of a national football leagueiv.the manager of a second-hand clothing charity.(LO3)i.Marketing manager: decisions about which marketing tools (e.g. radio, TV, billboards,brochures, sponsorships etc.) are most effective in promoting the company’sproducts/services; the best times to put advertising (e.g. which times on TV or radio); howmuch to spend on advertising; whether it is beneficial to conducts surveys for customersabout the products/services.ii.Production manager: decisions about appropriate production staff levels; appropriate plantand machinery capacity to meet customer’s demands; costs of raw materials, labour andoverhead, such as electricity, in order to make the appropriate goods; where to get the bestsuppliers of materials with reasonable price; costs of occupational health and safety; how toimprove the efficiency of the production process (e.g. acquiring new machinery).iii.Chief Executive Officer of a national football league: decisions about the venue selectionand costs for football matches; ticket pricing for football matches in different venues and forspecial events (such as grand final); possible breaches of the salary cap imposed on footballclubs; possible implementation of new rules or abolition of certain existing rules; annualmembership fees; sponsorship enticements and entitlements; selection of new players for thenational draft; addition of new football clubs within the league.iv.Manager of second-hand clothing charity: decisions about the pricing of second-handclothing; appropriate locations and display equipment for clothing stores; the cost ofcollection systems to receive donated clothing; the cost of mending any suitable clothingitems; the cost of disposing of any unsuitable items; overheads such as electricity, insurance;the costs of full-time employment and the management of volunteers.

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Solutionsmanual to accompany Accounting 10e by Hoggett et al.1.22Exercise 1.9Choosing an accounting careerAfter reading the chapter, discuss the areas in whichaccountants work, and indicatewhich area(s) you find most interesting and/or familiar. If you intend to pursue a careerin any one of these areas of accounting, discuss the types of decisions and advice thatyou believe you will be involved in making and giving. (LO10)Refer to the chapter text about public accounting versus commercial accounting. Students canthen contribute to class discussion re their intentions, familiarities and interests.•Are students studying accounting because they have a genuine interest in participating asan accountant in business? Or in government? Or in not-for-profit organisations?•Do students see themselves as experts in tax? Or in assurance services? Or in running asmall business? Or…?•Are any students merely studying accounting because their parents/family have insistedthat they do so?•Do any students have parents/relatives who are accountants?•Are they studying accounting merely as a subject they have to take as part of the courserequirements of another degree?What do they expect to get out of the accounting course,if anything?Students can then contribute to the class in the types of decisions that they believe they willbe involved in making.

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Chapter 1:Decision making and the role of accounting1.23Exercise 1.10Setting up a businessLuigi and GinaCicello have decided to lease some newly built premises for the purposeof opening a seafood outlet. They intend to provide a wide range of different products,including a variety of seafood for sale and take-away fish and chips.Required(a)Discuss thetypes of economic decisions that they will be required to make, and theinformation that they will need to make those decisions. Distinguishing non-economic and economic information, identify non-economic decisions that they willalso be required to make. Discuss why Luigi and Gina may require the services of anaccountant. (LO2 and LO6)Examples of economicdecisions they will need to make include:•The cost of leasing suitable premises (long-term or short-term).•The cost of purchasing suitablequantities of different types of seafood from local andoverseas suppliers.•Import and quarantine costs for exotic items.•Minimisation ofwastageand disposal costs.•Storage costs, including coldstorage and freezers.•Transport facilities to bring merchandise from the markets to the store (e.g. cooling van)and thecost of transport (e.g. petrol).•Staffwages and training.•Cost of display equipment, refrigerators, cooking equipment, electricity, and cashregisters.•Selection and development of a suitable accounting system.•Tax implications, including income tax, GST, import duties.•Assessment of actual financial performance, in relation to budgeted performance.Examples of non-economic decisions they will also be required to make include:•Location of the seafood outlet.•The range of seafood demanded by their local resident.•Where to get best suppliers for freshproducts with reasonable price.•Import and quarantine policy (e.g. whether there are certain types of seafood that cannotbe imported).•Whereto hire experienced staff.•Determination of hours open for business (do they also open on weekends or publicholidays?).•Whether to have ‘specials’ on certain days to attract more customers.Based on the above list or any appropriate additionalitems suggested by students, considerthe information needed to make such decisions and then discuss in class whether/whereaccounting may be expected to provide such information.Of the economic decisions that Luigi and Gina need to make as listed above, there might anumber of factors that Luigi and Gina have not considered, particularly those related todevelopment of accounting systems, tax issues, and financial performance assessments.

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Solutionsmanual to accompany Accounting 10e by Hoggett et al.1.24Therefore, Luigi and Gina may require the services of an accountant to assist them indecision-making by providing relevant information related to certain issues.Exercise 1.11Becoming an accountantRead the article‘New pathways to business success’fromInTheBlackand answer thefollowing questions.Required(a)Compare the entry requirements to become a full member of CPA Australia,Chartered Accountants Australia and New Zealand (CAANZ) and the Institute ofPublic Accountants (IPA). Identify the commonalities and differences.(b)Discuss why the professional accounting bodies would have different entryrequirements.(c)Identify what qualifications are required to:i.be a company auditor;ii.be a public accountant;iii.be a financial advisor; andiv.prepare tax returns.(LO9)(a)The entry requirements to become a fullmember of CPA Australia, CAANZ, and IPA:CPA AustraliaCAANZIPAAcademicrequirements foraccounting degreeA degree or postgraduateawards in accountingrecognised by CPAAustralia.Australian accountingbachelor or masters degree oran overseas accountingdegree recognised byCAANZ.Advanced diplomaor a bachelor degreein accounting.Academicrequirements fornon-accountingdegreeA degree or postgraduateawards in any disciplinerecognised by CPAAustralia.Any Australian non-accounting degree andcompletion of CANNZ-accredited conversion course.Non-accountingdegree is not eligibleto enrol in IPAprogram.‘Core knowledge’requirementsSuccessfully cover thecore knowledge requiredthat is obtained eitherthrough accounting degreestudy or CPA’s foundationlevel program.Successfully cover the coreknowledge required that isobtained either throughaccounting degree study,CAANZ-accreditedconversion course, orCAANZ program entranceexam.Successfully coverthe core knowledgerequired that isobtained eitherthrough accountingdegree study.Member admissionprogramCPA ProgramprofessionallevelCA ProgramIPA ProgramWorking experiencePractical experiencerequirement within sixyear of starting CPAProgram.Mentored PracticalExperience.MentoredExperience Program.

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Chapter 1:Decision making and the role of accounting1.25In general the three professional accounting bodieshave similar entry requirements tobecome full members of their associations. Candidates aiming to be admitted as full membersmust have a university degree, either in accounting or non-accounting, with the exception ofIPA who accepts candidates with advanced diplomas in accounting. All associations havetheir own program of study that includes material at the post-degree level. In order to becomea full member, candidates must have covered the core knowledge required by the professionalbodies, either through their accounting degree or by completing programs conducted by theprofessional bodies. Before being admitted as full members, candidates must also completefurther studies and a mentored working experience program.The differences in the entry requirements is reflected in the programs that the professionalbodies offer. The CPA professional level program offers 6 segments consisting of 4compulsory segments and 2 electives.The CA Program consists of 5 modules and uponsuccessful completion of theprogramcandidates are awarded a Graduate Diploma.The IPAProgram offers 4 subjects consisting of 1 core subject and 3 electives. Upon completion ofthe program candidates will receive a Graduate Certificate in Professional Accounting.(b)Different professional accounting bodies may have different entry requirements as a wayto set themselves apart from other professional bodies and attract a different member cohort.To attract members, the associations have generally become more flexible with their entryrequirements by providing a pathway to full membership for a person without an accountingqualification.(c)Qualifications required to:i.be a company auditor (as prescribed by ASIC):•Candidates must have the prescribed academic qualifications and have completed aprescribed course in auditing, OR have other qualifications and experience that ASICconsiders equivalent to both of these requirements.•Candidates must satisfy all the components of an ASIC-approved competency standard,OR have the prescribed level of practical experience or experience that ASIC considersequivalent.•Candidates must be capable of performing the duties of an auditor, AND be a fit andproper person to be registered as an auditor.ii.become a public accountant (as prescribed by IPA):•Must be a member of IPA.•Candidates must hold a Public Accountant Practice Certificate.iii.be a financial advisor (as prescribed by ASIC):•Candidates must have an AFS (Australian Financial Services) license which can beapplied throughASIC.iv.prepare tax returns (as prescribed by the Tax Practitioners Board):•Must be a registered as a tax agent with the Tax Practitioners Board.-http://www.tpb.gov.au/TPB/Register/0322_Registering_as_an_individual_tax_agent.aspx

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Solutionsmanual to accompany Accounting 10e by Hoggett et al.1.26Exercise 1.12Conduct inbusinessRead the prelude to NIKE’s Code of Ethics by the President of NIKE, Inc. and discussthe points that follow.Required(a)Check if there is a code of ethics to guide your behaviour as a student at youruniversity.(b)Identify if theuniversity that you are attending has a course on ethics in accountingor in business. Also find out whether this ethics course (if it exists) is compulsory inyour degree.(c)If such a course exists, find out the types of issues discussed in the course.(d)Referring to ‘Inside the Lines’, NIKE, Inc.’s code of ethics governing the conduct ofall employees, identify the values employees should operate by as part of the NIKEteam.(e)Assume that you are employed by NIKE Inc. Referring to the company’s code ofethics, discuss how the code would guide your behaviour in the following situations:i.A retailer offers you anall-expensespaid holiday if he can have a specialprice on a runner soon to be released.ii.You are aware that NIKE is shortly to announce a profit increase for themost recent reporting period and think that it would be a good time to sellsome of your NIKE shares.(LO11)(a),(b)and(c): answers here must come from the student’s own research.(d)Some of the values employees should operate by as partof the Nike team:•Treat others the way they would expect to be treated as professional adults, respectful ofthe diverse workforce NIKE enjoys.•Uphold business integrity (i.e. not doing anything prohibited by NIKE policy.•Refrain from disclosing NIKE’s confidential information to anyone without prior writtenconsent from NIKE.•Maintain accurate records and reports, including financial and accounting records thataccurately and completely reflect all transactions and assets.•Safeguard NIKE’s assets andrecords against waste and abuse.•Use NIKE’s computing and information assets in accordance with NIKE’s businessobjectives and policy.•Respect privacy of other people’s personal information.•Refrain from committing fraud and theft.•Avoid conflict of interest (i.e. using his/her position at NIKE for personal gain).•Maintain high level of honesty and integrity when dealing with gifts and hospitalityreceived or offered.•Refrain from using material non-public information about NIKE for personal financialbenefits (insider trading).•Comply with antitrust and competition laws.

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Chapter 1:Decision making and the role of accounting1.27(e)How NIKE’s code of ethics would guide your behaviour in the following situations:(i) Aretailer offers you anall-expensespaid holiday if he can have a special price on a runnersoon to be released:•In essence, the retailer is offering you gift and hospitality in exchange for obtainingimproper business advantage in the form of a special price of NIKE’s products. Thiscould be considered an illegal bribe, which is in breach of the anti-bribery laws. AsNIKE’s code of ethics prohibits its employees from offering, giving, receiving orpromising any gift or hospitality for the purpose of obtaining improper businessadvantage, you must not accept the retailer’s offer.(ii) You are aware that NIKE is shortly to announce a profit increase for the most recentreporting period and think that it would be a good time to sell some of your NIKE shares:•Since NIKE has not yetannounced the profit increase news, that material information isstill non-public information. Selling some of your NIKE shares based on such materialnon-public information is considered as insider trading, which is against NIKE policy andagainst the law. You must not sell your shares before the information become public, asthe law imposes severe criminal and civil penalties for those who violate this law.

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Solutionsmanual to accompany Accounting 10e by Hoggett et al.1.28Exercise 1.13The power of intentional trust in professional servicesRead the following article ‘International trust’ fromChartered Accountantsand answerthe question that follows.Required(a)Discuss the significance of intentional trust to the success of a professional servicesfirm. (LO10)(a)The articlehighlights the importance of intentional trust to the success of a professionalservices firm. Drawing on research it notes:•When trust exists, things get done better, quicker and more profitably.•With trust there is more openness and sharing ofinformation.•With trust people tend to be more engaged in their work, find meaning from that work,and are happier in the workplace.•When trust is high, clients more readily seek advice, are more willing to pay for thatadvice because they trust in the value they’re receiving, and are more likely to becomfortable and confident to refer more business.•When trust is high, employee stress goes down, mistakes go down, rework is reduced,absenteeism is reduced and excuses and blame are reduced.If trust results in such outcomes then these are beneficial for a professional services firm.The last sentence of the article is most pertinent being “Your intentions impact every area ofyour personal and professional life, and every area of your personal and professional life isimpacted by trust. Clarity of intention builds trust. Without clarity of intention, trust is atrisk… and when trust is at risk, everything is at risk.”The pillars of trust described are: 1) intentional promises 2) intentional actions and 3)intentional results.Students should be encouraged to work through a practical exercise to apply the model.Rather than position themselves in a professional service firm, the model could be applied totheir university studies. Students could:•Make a list of all their stakeholders interested in their successful completion of theirdegree.•Next to each stakeholder group, complete this statement: “My intention for my (name thestakeholder group) is…”ensuring that students ensure that the statement does not reflectin any way what they want from this stakeholder, but what the student wants for them.

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Chapter 1:Decision making and the role of accounting1.29Case studiesDecision analysisChoosing an accountant for a small businessAfter reading theextract of a company profile of Explore Engage, winner of the BestServices Start-up in the 2012 Best StartupSmart Awards for a service company, list thefactors that would be important for someone like the owners of Explore Engage inmaking a decision about which accounting firm to employ. Also list the services that abusiness such as Explore Engage is likely to require of its accountant.Factors that would be important in deciding which accounting firm to employ include:•Past experience with theindustry the business is in.•Experience in advising small businesses, particularly in strategy analysis as ExploreEngage is preparing to take its business to international market.•Ability to think for the small business owner and to pre-empt potential difficulties.•Having worked with clients in the past who knew little or nothing about accounting andbeing able to communicate with them without using accounting jargon.•Reasonably convenient.•Prepared to drop in on the business regularly to see howthings are going rather thanwaiting for the client to come to them with problems.•Ability to think for the client on financial and accounting issues.•Good at tracking cash flow and foreseeing any problems in this area as this is proved tobe the most challenging part of starting the business for Explore Engage, and is oftenwhat leads to small business failure.•Ability to organise the financial structure of the business to achieve the best outcomes forthe owner in terms of limited legal liability and in minimising tax.•Experience in dealing with financial institutions on behalf of clients.•Having listed the things that Explore Engage requires of its accountant, the owners ofExplore Engage need to have an interview with a potential accounting firm and to askthem to provide examples of how they have achieved the things they require of them withother clients in the past.Services that a business such as Explore Engage are likely to require of its accountantinclude:•Taxation services including business activity statements and the GST.•Completing statutory returns for government agencies.•Management consulting services.•Possibly advising on computer hardware and software needs for tracking work andinvoicing Customers and maintaining accounting records.•Setting up benchmarks and KPIs to measure business performance.•Assessment of risk.•Monitoring cash flow needs and budgeting services.•Possibly negotiating with financial institutions.

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