Solution Manual for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, BurnleyFinancial Accounting, Seventh Canadian EditionSolutions Manual1-1Chapter 1CHAPTER 1THE PURPOSE AND USE OF FINANCIALSTATEMENTSLEARNING OBJECTIVES1.Identify the uses and users of accounting information.2.Describe the primary forms of business organization.3.Explain the three main types of business activity.4.Describe the purpose and content of each of the financial statements.SUMMARY OF QUESTIONS BY LEARNING OBJECTIVESAND BLOOM’S TAXONOMYItemLOBTItemLOBTItemLOBTItemLOBTItemLOBTQuestions1.1K6.2C11.3C16.4K21.4C2.1C7.2C12.3C17.4AP22.4C3.1K8.2C13.3C18.4C23.4K4.1C9.2C14.3C19.4K5.1C10.2K15.4K20.4CBrief Exercises1.1C3.3C5.4AP7.4K9.4C2.2K4.3C6.4AP8.4K10.4ANExercises1.1C4.3C7.4AN10.4AP13.4AP2.2C5.4K8.4AN11.4AP14.4AN3.3K6.4AP9.4AP12.4APProblems: Set A and B1.1C3.3C5.4AP7.4AP9.4AN2.2C4.4K6.4AN8.4AN10.4ANCases1.4AN3.4AN5.4AN7.1,2,3,4C2.4AN4.1,2C6.1E

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, BurnleyFinancial Accounting, Seventh Canadian EditionSolutions Manual1-2Chapter 1Legend:The following abbreviations will appear throughout the solutions manual file.LOLearning objectiveBTBloom's TaxonomyKKnowledgeCComprehensionAPApplicationANAnalysisSSynthesisEEvaluationDifficulty:Level of difficultySSimpleMModerateCComplexTime:Estimated time to prepare in minutesAACSBAssociation to Advance Collegiate Schools of BusinessCommunicationCommunicationEthicsEthicsAnalyticAnalyticTech.TechnologyDiversityDiversityReflec. ThinkingReflective ThinkingCPA CMCPA Canada Competencycpa-e001EthicsProfessional and Ethical Behaviourcpa-e002PS and DMProblem-Solving and Decision-Makingcpa-e003Comm.Communicationcpa-e004Self-Mgt.Self-Managementcpa-e005Team & LeadTeamwork and Leadershipcpa-t001ReportingFinancial Reportingcpa-t002Stat. & Gov.Strategy and Governancecpa-t003Mgt. AccountingManagement Accountingcpa-t004AuditAudit and Assurancecpa-t005FinanceFinancecpa-t006TaxTaxation

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, BurnleyFinancial Accounting, Seventh Canadian EditionSolutions Manual1-3Chapter 1ANSWERS TO QUESTIONS1.Accountingistheinformationsystemthatidentifiesandrecordstheeconomic events of an organization, and then communicates them to awide variety of interested users.LO 1 BT: K Difficulty: S TIME: 3 min. AACSB: None CPA: cpa-t001 CM: Reporting2.(a)Internal users of accounting information work for the company andincludefinancedirectors,marketingmanagers,humanresourcepersonnel, production supervisors, and company officers.(b)Some external users may be individuals who are employees of thecompany but are not directly involved in managing the company.External users of accounting information generally do not work forthe company. The primary external users are investors, lenders, andothercreditors.Otherexternalusersincludelabourunions,customers,theCanadaRevenueAgency (CRA),andsecuritiescommissions.LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting3.Internal users may want the following questions answered:Is there enough cash to purchase a new piece of equipment?What price should we sell our product for to cover costs and tomaximize net income?How many employees can we afford to hire this year?Which product line is the most profitable?How much of a pay raise can the company afford to give me?External users may want the following questions answered:Is the company earning enough to give me my required return oninvestment?Will the company be able to repay its debts as the debts come due?Will the company stay in business long enough to service the productsI buy from it?LO 1 BT: K Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, BurnleyFinancial Accounting, Seventh Canadian EditionSolutions Manual1-4Chapter 14.Primary users of accounting information include investors, lenders, andcreditors. These external users need to make decisions concerning theirongoing business relationship with the company. They need to be able toassess the company’s performance and financial health because theyintend to start, continue, or discontinue having transactions with thecompany. Other decision makers who have specific needs for certainfinancial information, such as the amount of taxes paid by the company,are not considered primary users.LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting5.Decision makers rely on financial statement information and expect theaccountinginformationtohavebeenpreparedethically.Withouttheexpectation of ethical behaviour, the information presented in the financialstatements would have no credibility for the users of the accountinginformation. Without credibility, financial statement information would beuseless to financial statement users.LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None Ethics CPA: cpa-t001 CM: Reporting and Ethics6.(a) Proprietorship: Proprietorships are easier to form (and dissolve) thanother types of business organizations. They are not taxed as separateentities;rather,theproprietorpayspersonalincometaxonthecompany’snet income. Depending on the circumstances, this may bean advantage or disadvantage.Disadvantagesofaproprietorshipincludeunlimitedliability(proprietors are personally liable for all debts of the business) anddifficultyinobtainingfinancingcomparedtootherformsoforganization. In addition, the life of the proprietorship is limited as it isdependentonthewillingnessandcapabilityoftheproprietortocontinue operations.(b) Partnership: Partnerships are easier to form (and dissolve) than acorporation, although not as easy as a proprietorship. Similar to aproprietorship,partnershipsarenottaxedasseparateentities.Instead,thepartners pay personalincometax ontheirshare ofincome. Depending on the circumstances this may be an advantageor disadvantage.Disadvantages of partnerships include unlimited liability (partners arejointly and severally liable for all debts of the business) and difficulty inobtaining financing compared to corporations. In addition, the life of apartnership can be limited depending on the terms of the partnershipagreement and actions of the other partners.

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, BurnleyFinancial Accounting, Seventh Canadian EditionSolutions Manual1-5Chapter 16.(continued)(c) Privatecorporation:Advantagesofaprivatecorporationincludelimited liability (shareholders not being personally liable for corporatedebts), indefinite life, and transferability of ownership. In many cases,depending on the size of the corporation, a creditor such as a bankwill ask for a personal guarantee which will void the limited liabilityadvantage. In addition, transferability of ownership may be limitedsince shares are not publicly traded.Disadvantages of a private corporation include increased governmentregulations and paperwork. The fact that corporations are taxed as aseparatelegalentitymaybeanadvantageoradisadvantage.Corporations often receive more favourable income tax treatment thanotherformsofbusinessorganizations.Asmentionedabove,depending on the size of the corporation, many of the advantages ofthe corporate form are not available to a small private corporation.(d) Public corporation: The advantages of a public corporation includelimited liability, indefinite life, and transferability of ownership. Thesefeaturesmakeiteasierforpubliclytradedcorporationstoraisefinancingcomparedtootherformsofbusinessorganizations.Corporations often receive more favourable income tax treatment thanother forms of business organizations.Disadvantagesincludeincreasedgovernmentregulationsandpaperwork. In addition, because the shares of public companies arelistedandtradedonCanadianorotherexchangessuchastheToronto Stock Exchange (TSX), these corporations are required todistribute their financial statements to investors, lenders, creditors andother interested parties, and the general public. This requirementinvolves greater costs to the corporation.LO 2 BT: C Difficulty: M TIME: 20 min. AACSB: None CPA: cpa-t001, cpa-t006 CM: Reporting and Tax7.While both public and private corporations enjoymany ofthe sameadvantagesanddisadvantages,onekeydifferenceisthatpubliccorporations list their shares for sale to the public on Canadian or otherstock exchanges. In contrast, while private corporations issue shares,they do not make them available to the general public or trade them onpublic stock exchanges.Private corporations may also not enjoy the advantages of limited liabilityand ease oftransfer of ownership that public corporations generallyexperience because of their size and distribution of shares.LO 2 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, BurnleyFinancial Accounting, Seventh Canadian EditionSolutions Manual1-6Chapter 18.(a)PubliccorporationsmustapplyInternationalFinancialReportingStandards (IFRS). Private corporations can apply either IFRS orAccounting Standards for Private Enterprises (ASPE).(b)The information needs of users of public corporations and privatecorporations are different. Users of financial information of publiccorporations require more extensive disclosure. They may also bebenefitfromtheenhancedcomparabilitytoglobalcompaniesprovided by international standards. Since private corporations tendto be smaller with easier access to company information, their usersdo not require as extensive reporting.LO 2 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting9.A private company that has plans to grow significantly in the near future,and that wishes to have access to large amounts of capital obtained fromexternalinvestorswillwanttogopublic.Inordertogopublic,thecompany wouldberequiredtohaveseveralyearsofpastfinancialstatements prepared using IFRS. In addition, some businesses choose tofollowIFRSinordertobeabletocomparetheirperformancewithbusinesses in the same industry that are public and whose financialinformation is readily available.LO 2 BT: C Difficulty: C TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting10.Thereportingentityconceptmeansthateconomicactivityofanybusiness organization or economic entity is kept separate and distinctfrom the activities of the owner and all other economic entities. In thecase of corporations such as The North West Company Inc., it alsomeans that economic activities of related corporations that are owned orcontrolled by one corporation are consolidated. The results of theseindividual companies are also reported separately as separate economicentities.LO 2 BT: K Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting11.(a)Assets are what the company owns such as cash and equipment.(b)A liability is an amount the company owes such as accounts payableand income tax payable.(c)Shareholders’ equity represents the residual interest (assets lessliabilities) of a company at a point in time and includes share capitaland retained earnings, in addition to other possible components.(d)Revenues are an increase in a company’s economic resources fromoperating activities such as the sale of a product.(e)Expenses are the cost of assets that are consumed or services thatare used in the process of generating revenues. Examples includecost of goods sold, rent expense, and salaries expense.

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, BurnleyFinancial Accounting, Seventh Canadian EditionSolutions Manual1-7Chapter 1LO 3 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting12.Operating activities are the activities that the organization undertakes toearn net income. They include the day-to-day activities that generaterevenuesandcauseexpenses tobeincurred.Inordertoearnnetincome, a company must first purchase resources they need to operate.Thepurchaseoftheseresources(assets)isconsideredtobeaninvesting activity. Finally, the company must have sufficient funds topurchase assets and to operate. While some of the necessary cash willbe generated from operations, often the company has to raise externalfunds by either issuing shares or borrowing money. Financing activitiesinvolve the activities undertaken by the company to raise cash externally.LO 3 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting13.(a)Two examples of operating activities are revenue generated fromproviding auto repair services (an inflow of cash) and the expensesrelated to paying employee salaries (an outflow of cash).(b)Two examples of investing activities are the purchase of property,plant, and equipment, such as a building (an outflow of cash), andthe sale of a long-term investment (an inflow of cash).(c)Two examples of financing activities for a corporation are borrowingmoney (debt), which is an inflow of cash, and declaring and payingdividends (equity), an outflow of cashLO 3 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting14.Local companies providing services and therefore generating servicerevenuewouldincludedoctors,dentists,architects,engineers,lawpractices, and accountants. The names of these businesses would likelyinclude the name of the practitioners or groups providing these services.Localcompaniesprovidingsalesrevenuewouldincludefarmsthatprovide produce or milk products and the retail stores selling the localproduce to customers.LO 3 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting15.A fiscal year is an accounting time period that is one year in length, butdoes not have to end on December 31. Corporations can select theirfiscal year end based on when their operations are low or when inventoryis low. Selecting a fiscal year end when operations are low provides moretime for accounting staff to complete the year-end reporting requirements.If inventories are low, this simplifies the inventory count and minimizesthe business disruption caused by counting the inventory.LO 4 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, BurnleyFinancial Accounting, Seventh Canadian EditionSolutions Manual1-8Chapter 116.Theinternalaccountingrecordsdouseexactfigures.However,forpresentation purposes, it is unlikely that the use of rounded figures wouldchange a decision made by the users of the financial statements. As well,presenting the information in this manner makes the statements easier toread and analyze thereby increasing their utility to the users. Roundingthe numbers to the nearest million does not have a material impact ondecision-making using the financial statements.LO 4 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting17.Assets = Liabilities +Shareholders’ Equity$793,795 = $436,183 + $357,612 (amounts are in thousands of dollars)LO 4 BT: AP Difficulty: M TIME: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting18.A statement of changes in equity explains the changes in the componentsof shareholders’ equity, such as share capital and retained earnings.Examples of items that increase the components are issue of shares(increases share capital) and net income (increases retained earnings).Examples of items that decrease the components are repurchases ofshares (decreases share capital) and payment of dividends (decreaseretained earnings).LO 4 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting19.(a)The primary purpose of the statement of cash flows is to providefinancial information aboutthe cash receipts(inflows) and cashpayments (outflows) of a company for a specific period of time.(b)The three categories of the statement of cash flows are operatingactivities,investingactivities,andfinancingactivities.Thesecategories represent the three principal types of business activities.LO 4 BT: K Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting20.The cash obtained from operating activities is not necessarily expected tobe positive inthe early years of a company’s life.If a business offerscredit to its customers and needs to hold a significant amount of inventoryto satisfy customer demands, a large amount of any cash obtained fromsellinggoodswillbetiedupinaccountsreceivableandinventory.Creditors on the other hand will have little leniency on a new businesswhen expecting to be paid. Consequently, the amount of cash fromoperating activities could very likely be negative. For investing activities, anegative cash outflow would also be expected as the business mustinvest in long-lived assets needed for operations.LO 4 BT: C Difficulty: C TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, BurnleyFinancial Accounting, Seventh Canadian EditionSolutions Manual1-9Chapter 121.The statement of financial position is preparedas at a specific pointintime because it shows what the business owns (its assets) and what itowes (its liabilities). These items are constantly changing. It is necessaryto select one point in time at which to present them. The other statements(income statement, statement of changes in equity, and statement ofcash flows) cover aperiodof time as they report activities and measureperformance that takes place over time.LO 4 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting22.(a)The income statement reports net income for the period. The netincome figure from the income statement is shown on the statementof changes in equity as an addition to beginning retained earnings. Ifthere is a loss it is deducted from beginning retained earnings.(b)The statement of changes in equity explains the change in thebalances of the components of shareholders’ equity (for example,common shares and retained earnings) from one period to the next.Theendingbalancesarereportedintheshareholders’equitysection of the statement of financial position.(c)Thestatementofcashflowsexplainsthechangeinthecashbalance from one period to the next. The ending balance of cashreported in the statement of cash flows agrees with the ending cashbalance reported in the current assets section on the statement offinancial position.LO 4 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting23.(a)Companies using IFRS must report an income statement, statementof changes in equity, statement of financial position, and statementof cash flows. In addition, companies using IFRS may also need toprepare a statement of comprehensive income.(b)CompaniesusingASPEmustreportanincomestatement,statement of retained earnings, balance sheet, and a statement ofcash flows.LO 4 BT: K Difficulty: S TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, BurnleyFinancial Accounting, Seventh Canadian EditionSolutions Manual1-10Chapter 1SOLUTIONS TO BRIEF EXERCISESBRIEF EXERCISE 1-1(a) Type of Evaluation(b) Type of UserInvestor5ExternalMarketing manager4InternalCreditor1ExternalChief financial officer6InternalCanada Revenue Agency2ExternalLabour union3ExternalLO 1 BT: C Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: ReportingBRIEF EXERCISE 1-2(a)1Proprietorship(b)4Private corporation(c)3Public corporation(d)2Partnership(e)4Private corporationLO 2 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: ReportingBRIEF EXERCISE 1-3(a)FInflow(b)OInflow(c)IInflow(d)FOutflow(e)FInflow(f)FOutflow(g)OOutflow(h)IOutflow(i)OOutflowNote to instructors:As we will learn later in Chapter 13, companies reportingunder IFRS have a choice in classifying dividends paid as an operating orfinancingactivity.We havechosentoclassify dividendspaidasfinancingactivities in this textbook.LO 3 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, BurnleyFinancial Accounting, Seventh Canadian EditionSolutions Manual1-11Chapter 1BRIEF EXERCISE 1-4(a)(b)1.ONE2.F+3.O-4.O+5.O-6.I-LO 3 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: ReportingBRIEF EXERCISE 1-5(a)Total assets=Total liabilities + Shareholders’ equity=$55,000 + $120,000=$175,000(Liabilities + Shareholders’ equity = Assets)(b)Total assets=Total liabilities + Shareholders’ equity(share capital + retained earnings)=$170,000 + ($100,000 + $90,000)=$360,000(Liabilities + Shareholders’ equity = Assets)(c)Total liabilities=Total assets–Shareholders’ equity(share capital + retained earnings)=$150,000–($50,000 + $25,000)=$75,000(Assets–Shareholders’ equity = Liabilities)(d)Shareholders’ equity=Total assets–Total liabilities=$500,000–($500,000 ÷ 2)=$250,000(Assets–Liabilities = Shareholders’ equity)LO 4 BT: AP Difficulty: M TIME: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, BurnleyFinancial Accounting, Seventh Canadian EditionSolutions Manual1-12Chapter 1BRIEF EXERCISE 1-6Beginning of Year:Assets = Liabilities + Shareholders’ equityBeginning of Year: $720,000 = $420,000 + Shareholders’ equityBeginning of Year:Shareholders’ equity = $300,000(a)($720,000 + $250,000) = ($420,000–$80,000)+ Shareholders’ equityShareholders’ equity= $630,000[(Assets ± Change in assets)–(Liabilities ± Change in liabilities) = Shareholders’equity](b)Assets = ($420,000–$100,000) + ($300,000 + $90,000 + $125,000)Assets = $835,000[(Liabilities ± Change in liabilities) + (Shareholders’ equity ± Change in shareholders’equity) = Assets](c)($720,000–$90,000) = Liabilities + ($300,000 + $120,000)Liabilities = $210,000[(Assets ± Change in assets)–(Shareholders’ equity ± Change in shareholders’equity)= Liabilities]LO 4 BT: AP Difficulty: C TIME: 10 min. AACSB: Analytic CPA: cpa-t001 CM: ReportingBRIEF EXERCISE 1-7(a)IS(b)SFP(c)SCE(d)SCF(e)SFP(f)SCF(g)IS(h)SCELO 4 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, BurnleyFinancial Accounting, Seventh Canadian EditionSolutions Manual1-13Chapter 1BRIEF EXERCISE 1-8(a)L(b)A(c)L(d)L(e)A(f)A(g)A(h)SE(i)L(j)SE(k)ALO 4 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: ReportingBRIEF EXERCISE 1-9ShareCapitalRetainedEarningsTotalShareholders'Equity(a)Net incomeNE++(b)Repayment of bank loanNENENE(c)Declared dividendsNE--(d)Issue of common shares+NE+(e)CashNENENE(f)Repurchaseofcommon shares-NE-(g)Net lossNE--(h)Issue of long-term debtNENENELO 4 BT: C Difficulty: C TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, BurnleyFinancial Accounting, Seventh Canadian EditionSolutions Manual1-14Chapter 1BRIEF EXERCISE 1-10(a)(1)(2)(3)CommonSharesRetainedEarningsTotalShareholders'EquityBeginning balance$100,000$475,000$575,000Issue additional shares50,00050,000Net income75,00075,000Dividends declared(15,000)(15,000)Ending balance$150,000$535,000$685,000(b)(1)(2)(3)CommonSharesRetainedEarningsTotalShareholders'EquityBeginning balance$100,000$475,000$575,000Issue additional shares50,00050,000Net loss(75,000)(75,000)Ending balance$150,000$400,000$550,000(Beginning equity ± Changes to equity = Ending equity)LO 4 BT: AN Difficulty: M TIME: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, BurnleyFinancial Accounting, Seventh Canadian EditionSolutions Manual1-15Chapter 1SOLUTIONS TO EXERCISESEXERCISE 1-1(a)Chief Financial Officer–Does Facebook generate enough cash to expandits operations and purchase other businesses?Human Resource Manager–What isFacebook’sannual salary expense?(b)Creditor–DoesFacebookhaveenoughcashavailabletomakeitsmonthly debt payments?Investor–How much did Facebook pay in dividends last year?Other examples are also possible.LO 1 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: ReportingEXERCISE 1-2ProprietorshipPartnershipPublicCorporationPrivateCorporation1.No personal liabilityFFTT2.Owner(s) pay(s) personalincome tax on companyincomeTTFF3.Generallyeasiestform oforganization to raise capitalFFTF4.Ownership indicated bysharesFFTT5.Required to issue quarterlyfinancial statementsFFTF6.Owned by one personTFFF7.Limited lifeTTFF8.Usually easiest form oforganization to set upTFFF9.Requiredtouse IFRS asits accounting standardsFFTF10.Shares are closely heldFFFTLO 2 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001, cpa-t006 CM: Reporting and Tax

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