TEST BANK FOR Financial Accounting Tools for Business Decision-Making 6th Canadian Edition 6e Kimmel by welldoneassistant

CHAPTER 1 THE PURPOSE AND USE OF FINANCIAL STATEMENTS SUMMARY OF QUESTION TYPES BY STUDY OBJECTIVE AND LEVEL OF DIFFICULTY Item

SO LOD

Item

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

1 1 1 1 1 1 1 1 1 1

E E E E E E E E E E

11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59.

1 1 1 1 1 1 1 1 1 1 2 2 2

E E M M E E E E E E M M M

60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72.

111. 112. 113. 114. 115.

3 3 4 4 4

M M H M E

116. 117. 118. 119. 120.

133.

1–4 E,M

134. 135.

1 E 1,2 M

136. 137.

E = Easy

M = Medium

Note:

SO LOD Item SO LOD Item True-False Statements 2 E 21. 3 M 31. 2 E 22. 3 E 32. 2 E 23. 3 E 33. 2 E 24. 3 M 34. 2 E 25. 3 E 35. 3 E 26. 4 M 36. 3 E 27. 4 E 37. 3 M 28. 4 M 38. 3 M 29. 4 M 39. 3 E 30. 4 E 40. Multiple Choice Questions 2 E 73. 3 E 86. 2 E 74. 3 E 87. 2 E 75. 3 E 88. 2 E 76. 3 E 89. 2 M 77. 3 E 90. 2 E 78. 3 E 91. 2 M 79. 3 E 92. 3 E 80. 3 E 93. 3 E 81. 3 E 94. 3 E 82. 4 M 95. 3 E 83. 4 M 96. 3 E 84. 4 E 97. 3 M 85. 4 E 98. Exercises 4 M 121. 4 E 126. 4 E 122. 4 H 127. 4 E 123. 4 E 128. 4 M 124. 4 E 129. 4 H 125. 4 E 130. Matching

2 4

M M

Short-Answer Essay 138. 4 E 140. 139. 4 M 141. H = Hard

SO LOD

Item

SO LOD

4 4 4 4 4 4 4 4 4 4

E E E E E E E E E M

41. 42. 43. 44. 45. 46.

4 4 4 4 4 4

E M E E M E

4 4 4 4 4 4 4 4 4 4 4 4 4

M H E M E E E E H M M M M

99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110.

4 4 4 4 4 4 4 4 4 4 4 4

M M E M M M E E E E E H

4 4 4 4 4

E E E M E

131. 132.

4 4

M H

4 4

E M

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item Type Item Type Item Type Item Type Item Type Study Objective 1 1. TF 5. TF 9. TF 49. MC 53. MC 2. TF 6. TF 10. TF 50. MC 54. MC 3. TF 7. TF 47. MC 51. MC 55. MC 4. TF 8. TF 48. MC 52. MC 56. MC Study Objective 2 11. TF 14. TF 58. MC 61. MC 64. MC 12. TF 15. TF 59. MC 62. MC 65. MC 13. TF 57. MC 60. MC 63. MC 66. MC Study Objective 3 16. TF 21. TF 67. MC 72. MC 77. MC 17. TF 22. TF 68. MC 73. MC 78. MC 18. TF 23. TF 69. MC 74. MC 79. MC 19. TF 24. TF 70. MC 75. MC 80. MC 20. TF 25. TF 71. MC 76. MC 81. MC Study Objective 4 26. TF 37. TF 83. MC 94. MC 105. MC 27. TF 38. TF 84. MC 95. MC 106. MC 28. TF 39. TF 85. MC 96. MC 107. MC 29. TF 40. TF 86. MC 97. MC 108. MC 30. TF 41. TF 87. MC 98. MC 109. MC 31. TF 42. TF 88. MC 99. MC 110. MC 32. TF 43. TF 89. MC 100. MC 113. Ex 33. TF 44. TF 90. MC 101. MC 114. Ex 34. TF 45. TF 91. MC 102. MC 115. Ex 35. TF 46. TF 92. MC 103. MC 116. Ex 36. TF 82. MC 93. MC 104. MC 117. Ex Note:

TF = True-False MC = Multiple Choice

Ma = Matching Ex = Exercise

Item

Type

Item

Type

133-1. 134. 135.

Ma SAE SAE

133-2. 133-3. 135.

Ma Ma SAE

136.

SAE

111. 112. 133-4. 133-5. 133-6.

Ex Ex Ma Ma Ma

133-7. 133-8.

Ma Ma

118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128.

Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex

129. 130. 131. 132. 133-9. 133-10. 137. 138. 139. 140. 141.

Ex Ex Ex Ex Ma Ma SAE SAE SAE SAE SAE

SAE = Short-Answer Essay

The Purpose and Use of Financial Statements

CHAPTER STUDY OBJECTIVES 1.

Identify the users and uses of accounting. The purpose of accounting is to provide useful information for decision-making. There are two types of user groups who use accounting information: internal and external users. Internal users work for the business and need accounting information to plan, organize, and run operations. The primary external users are investors, lenders and other creditors. Investors (existing and potential shareholders) use accounting information to help decide whether to buy, hold, or sell shares. Lenders (such as bankers) and other creditors (such as suppliers) use accounting information to evaluate the risk of granting credit or lending money to a business. In order for financial information to have value to its users, both internal and external, it must be prepared by individuals with high standards of ethical behaviour.

Describe the primary forms of business organizations. There are three types of organizations that use accounting information: proprietorships, partnerships, and corporations. A proprietorship is a business owned by one person. A partnership is a business owned by two or more people. A corporation is a separate legal entity whose shares provide evidence of ownership. Corporations can be public or private, which means their shares are closely held. Generally accepted accounting principles are a common set of guidelines, which can differ depending on the form of business organization, that are used to record and report economic events. Public corporations follow International Financial Reporting Standards (IFRS) and private corporations have the choice of using IFRS or Accounting Standards for Private Enterprises (ASPE). Proprietorships and partnerships generally follow ASPE.

Explain the three main types of business activity. Financing activities involve raising the necessary funds (through debt or equity) to support the business. Investing activities involve acquiring the resources (such as property, plant, and equipment) that are needed to run the business. Operating activities involve putting the resources of the business into action to generate a profit.

Describe the purpose and content of each of the financial statements. The income statement presents the revenues and expenses of a company for a specific period of time. The statement of changes in equity summarizes the changes in shareholders’ equity that have occurred for a specific period of time. The statement of financial position reports the assets, liabilities, and shareholders’ equity of a business at a specific date. The statement of cash flows summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time. Notes to the financial statements add explanatory detail where required. The financial statements are included in an annual report, along with nonfinancial and other financial information.

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

TRUE-FALSE STATEMENTS 1. Accounting identifies and records economic events of a business.

2. High standards of ethics are not required for preparers of financial information.

3. Accounting information is not important to marketing managers.

4. Shareholders and creditors are the only people who need accounting information.

5. The Canada Revenue Agency is the major external user of information.

6. External users of accounting information include the managers who plan, organize, and run a business.

7. The information needs and questions of external users vary considerably.

8. Authorities, such as the Canada Revenue Agency, want to know whether a business complies with the tax laws.

9. Accounting communicates financial information about a business to both internal and external users.

10. Two internal users of accounting information are investors and managers.

11. A partnership is a business organized as a separate legal entity.

12. A proprietor has unlimited liability.

13. The liability of corporate shareholders is limited to the amount of their investment.

14. A private corporation is one whose shares are traded on an organized stock exchange, like the Toronto Stock Exchange.

15. A proprietorship is usually operated by the owner.

The Purpose and Use of Financial Statements

16. Expenses are the cost of assets consumed or services used in the process of generating revenue.

17. Financing activities for corporations include borrowing money and selling shares.

18. Investing activities involve collecting the necessary funds to operate the business.

19. The purchase of equipment is an example of a financing activity.

20. Assets are resources owned by a business that provide current services or benefits to the business. 21. Economic resources that are owned by a business are called shareholders’ equity.

22. Payments to shareholders are called dividends. 23. Revenues are increases in economic resources that result from a business’s operating activities.

24. Expenses are identified by the type of liability associated with them.

25. Depreciation is the cost of certain long-lived assets allocated to expense for each period.

26. Profit for the period is determined by subtracting total expenses and dividends from revenues.

27. Profit is another term for revenue.

28. The issue of shares and distribution of dividends are used in determining profit.

29. Financial statement users are interested in profit because it may be a predictor of future profit.

30. Shareholders’ equity is always equal to the cash on hand at any given date.

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

31. The primary purpose of the statement of cash flows is to provide information about the cash receipts and cash payments of a business for a specific period of time.

32. The statement of financial position reports assets and claims to those assets at a specific point in time.

33. The statement of changes in equity covers a different time period than that covered by the income statement.

34. Creditors use the statement of financial position as another source of information to determine the likelihood they will be repaid.

35. The basic accounting equation subdivides liabilities into two categories: claims of creditors and claims of the Canada Revenue Agency.

36. The statement of cash flows shows how cash was used during the period. 37. The accounting equation can be expressed as: Assets – Shareholders’ Equity = Liabilities. 38. The accounting equation can be expressed as: Assets + Liabilities = Shareholders’ Equity. 39. If the assets owned by a business total $100,000 and liabilities total $52,000, shareholders’ equity totals $48,000.

40. Claims of creditors and shareholders on the assets of a business are called liabilities. 41. Shareholder’s equity consists of at least two parts: share capital and retained earnings.

42. Any deficiency in cash from operating activities must be made up by issuing shares.

43. The statement of changes in equity is not dependent on the results from the income statement.

44. The statement of financial position is always the first statement prepared and presented.

45. The reasons for a decrease in cash can be determined by examining the income statement.

The Purpose and Use of Financial Statements

46. A negative balance in retained earnings is called a deficit.

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

ANSWERS TO TRUE-FALSE STATEMENTS Item 1. 2. 3. 4. 5. 6. 7. 8.

Ans. T F F F F F T T

Item 9. 10. 11. 12. 13. 14. 15. 16.

Ans. T F F T T F T T

Item 17. 18. 19. 20. 21. 22. 23. 24.

Ans. T F F F F T T F

Item 25. 26. 27. 28. 29. 30. 31. 32.

Ans. T F F F T F T T

Item 33. 34. 35. 36. 37. 38. 39. 40.

Ans. F T F T T F T F

Item 41. 42. 43. 44. 45. 46.

Ans. T F F F F T

The Purpose and Use of Financial Statements

MULTIPLE CHOICE QUESTIONS 47. The world’s economic systems depend on financial reporting that is (a) highly transparent. (b) accurate. (c) reliable. (d) all of the above.

48. Which of the following is the most appropriate definition of accounting? (a) The information system that identifies, records, and communicates the economic events of an organization to interested users. (b) a means of collecting information (c) The interconnected network of subsystems necessary to operate a business. (d) electronic collection, organization, and communication of vast amounts of information

49. Which of the following would not be considered an internal user of accounting data for XYZ Inc.? (a) the company president (b) production manager (c) merchandise inventory clerk (d) receptionist of the employees’ labour union

50. Which of the following groups uses accounting information primarily to ensure the company is operating within prescribed rules? (a) taxing authorities (b) regulatory agencies (c) labour unions (d) management

51. Which of the following uses accounting information to determine whether a company can pay its obligations? (a) shareholders (b) marketing managers (c) creditors (d) Canada Revenue Agency 52. Which of the following uses accounting information to determine whether a company’s profit will result in a share price increase? (a) shareholders (b) marketing managers (c) creditors (d) Chief Financial Officer

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

53. Which of the following uses accounting information to determine whether a marketing proposal will be cost effective? (a) shareholders (b) marketing managers (c) creditors (d) Human Resource managers

54. Which of the following would not be considered an external user of accounting data? (a) Canada Revenue Agency (b) management (c) creditors (d) customers

55. Which of the following would not be considered an internal user of accounting data? (a) the president of a company (b) the controller of a company (c) a creditor of a company (d) a salesperson of a company

56. External users want answers to all of the following questions except (a) Is the company earning satisfactory income? (b) Will the company be able to pay its debts as they come due? (c) Will the company be able to afford employee pay raises this year? (d) How does the company compare in profitability with competitors?

57. The proprietorship form of business organization (a) in most provinces, must have at least two owners. (b) is often chosen for small owner operated businesses. (c) is difficult to set up. (d) is classified as a separate legal entity.

58. A business organized as a corporation (a) is not a separate legal entity in most provinces. (b) requires that shareholders be personally liable for the debts of the business. (c) is owned by its shareholders. (d) has income tax disadvantages over a proprietorship or partnership.

59. The partnership form of business organization (a) is a separate legal entity. (b) is a common form of organization for service-type businesses. (c) enjoys an unlimited life. (d) has limited liability.

60. Which form of business would have its shares listed on a stock exchange?

The Purpose and Use of Financial Statements

(a) proprietorship (b) partnership (c) private corporation (d) public corporation

61. A business organized as a separate legal entity is a (a) corporation. (b) proprietorship. (c) government unit. (d) partnership.

62. The concept that economic activity which can be identified with a particular company must be kept separate and distinct from the owner(s) and from all other economic entities is known as (a) the separation concept. (b) the reporting entity concept. (c) the economic concept. (d) the business organization concept.

63. An advantage of the corporate form of business is that (a) it has limited life. (b) its shareholders’ personal resources are at stake. (c) its ownership is easily transferable via the sale of shares. (d) it is simple to establish.

64. A corporation has which of the following set of characteristics? (a) shareholder control, income tax disadvantages, increased skills and resources (b) simple to set up and maintains control with founder (c) harder to raise funds and gives shareholders control (d) Easier to transfer ownership and raise funds, no personal liability

65. A small neighbourhood barber shop that is operated by its owner would likely be organized as a (a) public corporation. (b) partnership. (c) private corporation. (d) proprietorship.

66. Which of the following statements is not true? (a) Public corporations must use international financial reporting standards. (b) Private corporations can choose to use either international financial reporting standards (IFRS) or accounting standards for private enterprises (ASPE). (c) Both public and private corporations issue shares. (d) All private corporations are small.

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

67. The liability created by a business when it purchases coffee beans and coffee cups on credit from suppliers is called a(n) (a) account payable. (b) account receivable. (c) revenue. (d) expense.

68. The right to receive money in the future is called a(n) (a) account payable. (b) account receivable. (c) liability. (d) revenue.

69. Which of the following is not a principal type of business activity? (a) operating (b) investing (c) financing (d) marketing

70. Which of the following activities involves raising the necessary funds to support the business? (a) operating (b) investing (c) financing (d) marketing

71. Buying assets needed to operate a business is an example of a(n) (a) purchasing activity. (b) financing activity. (c) investing activity. (d) operating activity.

72. Cost of goods sold is a(n) (a) liability. (b) financing activity. (c) asset. (d) expense.

73. Allocating the cost of using long-term assets over their useful lives is called (a) allocation expense. (b) depreciation expense. (c) a general expense. (d) asset use expense.

The Purpose and Use of Financial Statements

74. Buying and selling products are examples of (a) operating activities. (b) investing activities. (c) financing activities. (d) manufacturing activities.

75. The common characteristic possessed by all assets is (a) long life. (b) great monetary value. (c) tangible nature. (d) future economic benefit.

76. Expenses are incurred (a) only on rare occasions. (b) to produce assets. (c) to produce liabilities. (d) to generate revenues.

77. The cost of assets consumed or services used is also known as a(n) (a) revenue. (b) expense. (c) liability. (d) asset.

78. Resources owned by a corporation are referred to as (a) shareholders’ equity. (b) liabilities. (c) assets. (d) revenues.

79. Debt and obligations of a business are referred to as (a) assets. (b) equities. (c) liabilities. (d) expenses.

80. Liabilities: (a) are future economic benefits. (b) are debts and obligations. (c) possess service potential. (d) are things of value owned by a business.

81. Liabilities of a company are owed to (a) debtors.

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

(b) owners. (c) creditors. (d) shareholders.

82. Dividends are reported on (a) the income statement. (b) the statement of changes in equity. (c) the statement of financial position. (d) both the income statement and statement of financial position.

83. Dividends (a) increase assets. (b) increase expenses. (c) decrease revenues. (d) decrease retained earnings.

84. The financial statement that summarizes the changes in common shares and retained earnings for a specific period of time is the (a) statement of financial position. (b) income statement. (c) statement of cash flows. (d) statement of changes in equity.

85. Profit results when (a) Assets > Liabilities. (b) Assets < Liabilities. (c) Revenues > Expenses. (d) Revenues < Expenses.

86. Retained earnings at the end of the period is equal to (a) retained earnings at the beginning of the period plus profit minus liabilities. (b) retained earnings at the beginning of the period plus profit minus dividends. (c) profit for the period. (d) assets plus liabilities. 87. A company’s policy toward dividends and growth could best be determined by examining the (a) statement of financial position. (b) income statement. (c) statement of changes in equity. (d) statement of cash flows.

88. An income statement (a) summarizes the changes in retained earnings for a specific period of time.

The Purpose and Use of Financial Statements

(b) reports the changes in assets, liabilities, and shareholders’ equity over a period of time. (c) reports the assets, liabilities, and shareholders’ equity at a specific date. (d) reports the revenues and expenses for a specific period of time.

89. If the retained earnings account increases from the beginning of the year to the end of the year, then (a) profit is greater than dividends. (b) a loss is less than dividends. (c) additional investments are less than reported losses. (d) dividends were received.

90. The statement of changes in equity would not show (a) the beginning retained earnings balance. (b) revenues and expenses. (c) dividends. (d) the ending retained earnings balance.

91. Which financial statement is prepared first? (a) Statement of financial position (b) Income statement (c) Statement of changes in equity (d) Statement of cash flows

92. A statement of financial position shows (a) revenues, liabilities, and shareholders’ equity. (b) expenses, dividends, and shareholders’ equity. (c) revenues, expenses, and dividends. (d) assets, liabilities, and shareholders’ equity.

93. The accounting equation may be expressed as (a) Assets = Shareholders’ Equity – Liabilities. (b) Assets = Liabilities + Shareholders’ Equity. (c) Assets + Liabilities = Shareholders’ Equity. (d) Assets + Shareholders’ Equity = Liabilities.

Use the following information for questions 94–95. Kareem’s Rental Ltd. started the year with total assets of $70,000 and total liabilities of $40,000. During the year, the business recorded $100,000 in car repair revenues, $65,000 in expenses, and paid dividends of $5,000. 94. Shareholders’ equity at the end of the year was (a) $60,000. (b) $65,000.

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

95. The profit reported for the year was (a) $30,000. (b) $35,000. (c) $20,000. (d) $100,000. 96. If total liabilities increased by $15,000 and shareholders’ equity increased by $15,000 during a period of time, then total assets must change by what amount and direction (increase or decrease) during that same period? (a) $15,000 decrease (b) $15,000 increase (c) $30,000 decrease (d) $30,000 increase 97. If total liabilities decreased by $45,000 during a period of time and shareholders’ equity increased by $27,000 during the same period, then the amount and direction (increase or decrease) of the period’s change in total assets is a(n) (a) $45,000 increase. (b) $27,000 increase. (c) $18,000 decrease. (d) $18,000 increase.

98. The statement of financial position (a) summarizes the changes in shareholders’ equity for a specific period of time. (b) reports the changes in assets, liabilities, and shareholders’ equity over a period of time. (c) reports the assets, liabilities, and shareholders’ equity at a specific date. (d) presents the revenues and expenses for a specific period of time.

99. Which of the following financial statements is concerned with the company at a point in time? (a) Statement of financial position (b) Income statement (c) Statement of changes in equity (d) Statement of cash flows 100. Shareholders’ equity can be described as claims of (a) creditors on total assets. (b) owners on total assets. (c) customers on total assets. (d) debtors on total assets.

The Purpose and Use of Financial Statements

101. Payments to shareholders are called (a) expenses. (b) liabilities. (c) dividends. (d) shares.

102. Common shares are reported on (a) the statement of financial position. (b) the statement of changes in equity. (c) both the statement of financial position and the income statement. (d) both the statement of changes in equity and the statement of financial position. 103. Shareholders’ equity is usually comprised of (a) common shares and dividends. (b) common shares and retained earnings. (c) dividends and retained earnings. (d) profit and retained earnings.

104. Common shares represent (a) the creditors’ claims on the company. (b) the total profit of the company to date. (c) the amount paid by investors for ownership in the company. (d) the owners’ claims on the company.

105. Retained earnings are (a) the shareholders’ claim on total assets. (b) equal to cash. (c) equal to revenues. (d) the amount of profit kept in the corporation for future use.

106. Which financial statement would indicate whether the company relies more on debt or on shareholders’ equity to finance its assets? (a) Statement of cash flows (b) Statement of changes in equity (c) Income statement (d) Statement of financial position

107. The primary purpose of the statement of cash flows is to report (a) a company's investing transactions. (b) a company's financing transactions. (c) information about cash receipts and cash payments of a company. (d) the net increase or decrease in cash.

108. The statement of changes in equity is dependent on the results from

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

(a) the statement of cash flows. (b) the statement of financial position. (c) the income statement. (d) a company's share capital.

109. The statement of financial position and statement of changes in equity are related because (a) the total assets on the statement of financial position is reported on the statement of changes in equity. (b) the ending amount on the statement of changes in equity is reported on the statement of financial position. (c) the ending amount on each statement is transferred to the statement of cash flows. (d) both contain information for the corporation.

110. The statement of cash flows and the statement of financial position are interrelated because (a) the ending amount of cash on the statement of cash flows must agree with the amount on the income statement. (b) the ending amount of cash on the statement of cash flows must agree with the amount in the statement of changes in equity. (c) the ending amount of cash on the statement of cash flows must agree with the amount in the statement of financial position. (d) both disclose the corporation's profit.

The Purpose and Use of Financial Statements

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ANSWERS TO MULTIPLE CHOICE QUESTIONS Item 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58.

Ans. d a d b c a b b c c b c

Item 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70.

Ans. b d a b c d d d a b d c

Item 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82.

Ans. c d b a d d b c c b c b

Item 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94.

Ans. d d c b c d a b b d b a

Item 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106.

Ans. b d c c a b c d b c d d

Item 107. 108. 109. 110.

Ans. c c b c

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

EXERCISES Ex. 111 Classify each of the following items as investing, financing, or operating activity: 1. Cash sale of merchandise 2. Repayment of bank loan 3. Purchase of inventory 4. Sale of equipment for cash 5. Payment of commission to a salesperson 6. Payment of dividends 7. Receipt of interest on accounts receivable 8. Payment for insurance for the current year 9. Purchase of shares in another company as a long-term investment 10. Issue of debt Solution 111 (6 min.) 1. Operating 2.

Financing

Operating

Investing

Operating

Financing

Operating

Investing

10. Financing

Ex. 112 Indicate in the space provided by each item whether it would appear on the statement of cash flows as a(n): (O) operating activity, (I) investing activity, or (F) financing activity. _____ 1. Cash receipts from customers _____ 2. Issue of common shares for cash _____ 3. Payment of cash dividends _____ 4. Cash purchase of equipment _____ 5. Cash payments to suppliers _____ 6. Sale of old machine for cash Solution 112 (5 min.) O 1.

The Purpose and Use of Financial Statements

Ex. 113 The following questions are unrelated: 1. You know that profit is $50,000, opening retained earnings $25,000, dividends $20,000, common shares $2,000, current assets $26,000 and total liabilities are $33,000. What is the amount of total assets? 2. Cash provided by operating activities is $25,000, cash used in investing activities is $20,000 and cash used in financing activities is $2,000. The ending cash balance is $10,000. What is the beginning cash balance? Solution 113 (10 min.) 1. Opening retained earnings ............................................................ Add: Profit ..................................................................................... Less: dividends ............................................................................. Ending retained earnings ..............................................................

$25,000 50,000 (20,000) $55,000

Retained earnings ......................................................................... Common shares ............................................................................ Total liabilities ............................................................................... Total liabilities and shareholders’ equity ........................................

$55,000 2,000 33,000 $90,000

Total assets...................................................................................

$90,000

Cash provided by operating activities ............................................ Cash used in investing .................................................................. Cash used in financing .................................................................. Net change in cash ....................................................................... Cash beginning ............................................................................. Cash ending ..................................................................................

$25,000 (20,000) (2,000) 3,000 X $10,000

Solving for X, cash beginning is $7,000

Ex. 114 Prepare an income statement, a statement of changes in equity, and a statement of financial position for Norman Rae Ltd., a service business, from the items listed below for the month of October, 2015: Accounts payable .......................................................................... $10,000 Accounts receivable ...................................................................... 14,000 Cash ............................................................................................. 10,000

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

Common shares ............................................................................ Dividends paid .............................................................................. Income tax expense ...................................................................... Office equipment ........................................................................... Office supplies .............................................................................. Office supplies expense ................................................................ Rent expense ................................................................................ Retained earnings, October 1........................................................ Salaries expense........................................................................... Service revenue ............................................................................ Utilities expense ............................................................................

28,000 6,000 4,500 30,000 2,800 3,500 3,000 15,000 7,000 28,500 700

NORMAN RAE LTD. Income Statement Month Ended October 31, 2015 ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Revenues............................................................................................. $________ Expenses ............................................................................................. $________ Total expenses..................................................................................... ________ Profit before income tax ....................................................................... Income tax expense ............................................................................. Profit ....................................................................................................

________ ________ ________

NORMAN RAE LTD. Statement of Changes in Equity Month Ended October 31, 2015 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Common Shares Retained Earnings Total Equity Balances, October 1 Profit Dividends Balances, October 31

$________

NORMAN RAE LTD. Statement of Financial Position October 31, 2015 ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Assets $________ Assets Total assets $________ Liabilities and Shareholders’ Equity Liabilities

$________ Shareholders’ equity

The Purpose and Use of Financial Statements

Total shareholders’ equity Total liabilities and shareholders’ equity

$________ $________

Solution 114 (30 min.) NORMAN RAE LTD. Income Statement Month Ended October 31, 2015 ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Revenues Service revenue ............................................................................ $28,500 Expenses Salaries expense........................................................................... $7,000 Office supplies expense ................................................................ 3,500 Rent expense ................................................................................ 3,000 Utilities expense ............................................................................ 700 Total expenses ....................................................................... 14,200 Profit before income tax ....................................................................... 14,300 Income tax expense ............................................................................. 4,500 Profit ............................................................................................... $ 9,800

NORMAN RAE LTD. Statement of Financial Position October 31, 2015 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Assets Cash .................................................................................................... $10,000 Accounts receivable ............................................................................. 14,000 Office supplies ..................................................................................... 2,800 Office equipment .................................................................................. 30,000 Total assets................................................................................... $56,800 Liabilities and Shareholders’ Equity Liabilities Accounts payable .......................................................................... Shareholders’ equity Common shares ............................................................................ Retained earnings .........................................................................

$10,000

$28,000 18,800

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Total shareholders’ equity......................................................... Total liabilities and shareholders’ equity ...................................

46,800 $56,800

Ex. 115 Use the following information to calculate for the year ended December 31, 2015: (a) profit, (b) ending retained earnings, and (c) total assets. Accounts payable ....................................................... Accounts receivable ................................................... Bank loan payable...................................................... Cash .......................................................................... Common shares ......................................................... Dividends ................................................................... Income tax expense ................................................... Office equipment ........................................................ Operating expenses ................................................... Retained earnings (beginning) ................................... Revenues ................................................................... Supplies .....................................................................

11,000 6,000 2,000 20,000 10,000 3,000 1,500 3,500 10,000 4,000 18,500 $ 1,500

Solution 115 (5 min.) (a) $7,000 ($18,500 – $10,000 – $1,500) (b) $8,000 ($4,000 + $7,000 – $3,000) (c) $31,000 ($1,500 + $20,000 + $6,000 + $3,500)

Ex. 116 Use the following information to prepare, in good form, an income statement, a statement of changes in equity, and a statement of financial position for Lockerby Industries Ltd. for the month ended July 31, 2015. Accounts payable ....................................................... $ 7,500 Accounts receivable ................................................... 4,400 Bank loan payable...................................................... 11,000 Cash .......................................................................... 47,000 Common shares ......................................................... 75,500 Dividends ................................................................... 5,000 Income tax expense ................................................... 13,900 Insurance expense ..................................................... 1,700 Office building ............................................................ 100,000 Retained earnings (beginning) ................................... 32,500 Revenues ................................................................... 63,000 Salaries expense........................................................ 16,500 Supplies ..................................................................... 1,000

The Purpose and Use of Financial Statements

LOCKERBY INDUSTRIES LTD. Income Statement Month Ended July 31, 2015 ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Revenues............................................................................................. $________ Expenses ............................................................................................. $________ Total expenses..................................................................................... ________ Profit before income tax ....................................................................... Income tax expense ............................................................................. Profit ....................................................................................................

________ ________ ________

LOCKERBY INDUSTRIES LTD. Statement of Changes in Equity Month Ended July 31, 2015 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Common Shares Retained Earnings Total Equity Balances, July 1 Profit Dividends Balances, July 31

$________ $________ $________ $________

LOCKERBY INDUSTRIES LTD. Statement of Financial Position July 31, 2015 ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Assets Assets $________ Total assets $________ Liabilities and Shareholders’ Equity Liabilities

$________ Shareholders’ equity

Total shareholders’ equity Total liabilities and shareholders’ equity

$________ $________

Solution 116 (30 min.) LOCKERBY INDUSTRIES LTD. Income Statement Month Ended July 31, 2015 ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Revenues Service revenue ............................................................................ $63,000 Expenses Salaries expense........................................................................... $16,500 Insurance expense ........................................................................ 1,700

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Total expenses ....................................................................... Profit before income tax ....................................................................... Income tax expense ............................................................................. Profit ....................................................................................................

18,200 44,800 13,900 $ 30,900

$75,500 ______ $75,500

$32,500 30,900 (5,000) $58,400

$108,000 30,900 (5,000) $133,900

LOCKERBY INDUSTRIES LTD. Statement of Financial Position July 31, 2015 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Assets Cash .................................................................................................... $ 47,000 Accounts receivable ............................................................................. 4,400 Supplies ............................................................................................... 1,000 Office building ...................................................................................... 100,000 Total assets................................................................................... $152,400 Liabilities and Shareholders’ Equity Liabilities Accounts payable .......................................................................... Bank loan payable......................................................................... Total liabilities ........................................................................... Shareholders’ equity Common shares ............................................................................ Retained earnings ......................................................................... Total liabilities and shareholders’ equity ...................................

$ 7,500 11,000 $ 18,500 $75,500 58,400

133,900 $152,400

Ex. 117 Listed below in alphabetical order is accounting information for Ching Corp. at December 31, 2015. Prepare a statement of financial position in good format. Accounts payable ....................................................... $ 19,000 Accounts receivable ................................................... 32,000 Building ...................................................................... 100,000 Cash .......................................................................... 42,000 Common shares ......................................................... 160,000 Land ........................................................................... 60,000 Office equipment ........................................................ 40,000 Retained earnings ...................................................... 95,000

The Purpose and Use of Financial Statements

Solution 117 (10 min.) CHING CORP Statement of Financial Position December 31, 2015 ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Assets Cash .................................................................................................... $ 42,000 Accounts receivable ............................................................................. 32,000 Land..................................................................................................... 60,000 Building ................................................................................................ 100,000 Office equipment .................................................................................. 40,000 Total assets .................................................................................... $274,000 Liabilities and Shareholders’ Equity Liabilities Accounts payable ........................................................................... Shareholders’ equity Common shares ............................................................................. Retained earnings .......................................................................... Total liabilities and shareholders’ equity .................................

$ 19,000

$160,000 95,000

255,000 $274,000

Ex. 118 Indicate in the space provided by each item whether it would appear on the Income statement (IS), Statement of financial position (SFP), and/or Statement of changes in equity (SCE): 1. ____

Service Revenue

____ Accounts Receivable

2. ____

Utilities Expense

____ Common Shares

3. ____

Cash

____ Equipment

4. ____

Accounts Payable

10. ____ Advertising Expense

5. ____

Office Supplies

11. ____ Dividends

6. ____

Salaries Expense

12. ____ Notes Payable

Solution 118 (5 min.) 1. IS 2.

SFP

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SFP

SCE and SFP

SFP

10. IS 11. SCE 12. SFP

Ex. 119 Grayson Inc. was reviewing its business activities at the end of its fiscal year (November 30, 2015) and decided to prepare a statement of changes in equity. At the beginning of the year, its assets were $600,000, liabilities were $150,000, and common shares were $200,000. The profit for the year was $220,000. Dividends of $120,000 were paid during the year. Instructions Prepare a statement of changes in equity for the year ended November 30, 2015. Solution 119 (10 min.) GRAYSON INC. Statement of Changes in Equity Year Ended November 30, 2015 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Common Shares Retained Earnings Total Equity Balances, Dec 1, 2014 Profit Dividends Balances, Nov 30, 2015

$200,000 _______ $200,000

$250,000 220,000 (120,000) $350,000

$450,000 220,000 (120,000) $550,000

(opening R/E = $600,000 – $150,000 – $200,000 = $250,000)

Ex. 120 At September 1, the statement of financial position accounts for GoodFood Restaurant Ltd. were as follows: Accounts payable ....................................................... $ 3,800 Accounts receivable ................................................... 1,600 Bank loan payable...................................................... 46,000 Building ...................................................................... 68,000 Cash .......................................................................... 5,000 Common shares ......................................................... ? Furniture .................................................................... 18,700 Land ........................................................................... 33,000 Retained earnings ...................................................... 43,200

The Purpose and Use of Financial Statements

Supplies .....................................................................

4,600

The following transactions occurred during the next two days: Shareholders invested an additional $32,000 cash in the business. The accounts payable were paid in full. (No payment was made on the bank loan payable.) Instructions Prepare a statement of financial position at September 3, 2015. Solution 120 (10 min.) GOODFOOD RESTAURANT LTD. Statement of Financial Position September 3, 2015 ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Assets Cash .................................................................................................... $ 33,200 Accounts receivable ............................................................................. 1,600 Supplies ............................................................................................... 4,600 Land..................................................................................................... 33,000 Building ................................................................................................ 68,000 Furniture .............................................................................................. 18,700 Total assets................................................................................... $159,100 Liabilities and Shareholders’ Equity Liabilities Notes payable ............................................................................... Shareholders’ equity Common shares ............................................................................ Retained earnings ......................................................................... Total liabilities and shareholders’ equity ................................. Cash ($5,000 + $32,000 – $3,800) = $33,200 Accounts Payable ($3,800 – $3,800) = $0 Shareholders’ Equity: Beginning balance ($130,900 – $49,800) Additional investment Ending balance

$ 46,000

$69,900 43,200

113,100 $159,100

$ 81,100 32,000 $113,100

Common Shares ($113,100 – $43,200) = $69,900

Ex. 121 From the following list of selected accounts taken from the records of Smiles Unlimited Clinic Inc., identify those that would appear on the statement of financial position: (a) Common Shares (f) Accounts Payable (b) Patient Revenue (g) Cash (c) Land (h) Medical Supplies Expense (d) Wages Expense (i) Medical Supplies (e) Notes Payable (j) Utilities Expense Solution 121 (5 min.)

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(a), (c), (e), (f), (g), (i)

Ex. 122 One item is omitted in each of the following summaries of statement of financial position and income statement data for three different corporations, X, Y, and Z. Instructions Determine the amounts of the missing items, identifying each corporation by letter.

X Beginning of the Year: Assets ...................................................... Liabilities .................................................. End of the Year: Assets ...................................................... Liabilities .................................................. During the Year: Common shares issued by shareholders.. Dividends ................................................. Revenue .................................................. Expenses, including income tax expense .

Corporation Y

$400,000 250,000

$150,000 105,000

$199,000 168,000

450,000 280,000

195,000 95,000

195,000 169,000

? 70,000 195,000 155,000

79,000 83,000 ? 113,000

78,000 ? 187,000 185,000

Solution 122 (30 min.) Corporation X ($50,000) Beginning shareholders’ equity ($400,000 – $250,000) ................................... Common shares issued ($170,000 + $70,000 – $150,000 – $40,000) ............ Profit for year ($195,000 – $155,000) .............................................................. Less: dividends ............................................................................................... Ending shareholders’ equity ($450,000 – $280,000) .......................................

$150,000 50,000 40,000 240,000 70,000 $170,000

Corporation Y ($172,000) Beginning shareholders’ equity ($150,000 – $105,000) ................................... Common shares issued................................................................................... Profit for year ($183,000 – $45,000 – $79,000) .............................................. [Revenues = $172,000 ($113,000 + $59,000)] ......................................... Less: dividends ............................................................................................... Ending shareholders’ equity ($195,000 – $95,000) .........................................

$ 45,000 79,000 59,000 183,000 83,000 $100,000

Corporation Z ($85,000) Beginning shareholders’ equity ($199,000 – $168,000) ................................... Common shares issued................................................................................... Profit for year ($187,000 – $185,000) .............................................................. Less: dividends ($111,000 – $26,000)............................................................. Ending shareholders’ equity ($195,000 – $169,000) .......................................

$ 31,000 78,000 2,000 111,000 85,000 $ 26,000

Ex. 123

The Purpose and Use of Financial Statements

Calculate the missing items. Assets $80,000 (b) $84,000

= = = =

Liabilities $32,000 $28,000 (c)

+ + + +

Shareholders’ Equity (a) $90,000 $65,000

Solution 123 (5 min.) (a) $48,000 (b) $118,000 (c) $19,000

Ex. 124 Identify which of the following accounts appear on a statement of financial position: (a) Service revenue (b) Cash (c) Common shares (d) Accounts payable (e) Rent expense (f) Supplies (g) Land Solution 124 (5 min.) (b), (c), (d), (f), (g)

Ex. 125 For the items listed below, fill in the appropriate code letter to indicate whether the item is an asset, liability, or shareholders’ equity item. Code Asset A Liability L Shareholders’ Equity SE _____

1. Rent expense

____

7. Accounts receivable

_____

2. Office equipment

____

8. Retained earnings

_____

3. Accounts payable

____

9. Service revenue

_____

4. Common shares

____ 10. Bank loan payable

_____

5. Insurance expense

____ 11.

Dividends

_____

6. Cash

____ 12.

Unearned revenue

Solution 125 (5 min.) 1. SE

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

10. L 11. SE 12. L

Ex. 126 Classify each of these items as an asset (A), liability (L), or shareholders’ equity (SE). _____ 1. Rent receivable _____ 6. Cash _____ 2. Salaries payable _____ 7. Mortgage payable _____ 3. Preferred shares _____ 8. Land _____ 4. Office supplies _____ 9. Dividends _____ 5. Retained earnings _____ 10. Office supplies expense Solution 126 (5 min.) 1. A 2.

The Purpose and Use of Financial Statements

10. SE

Ex. 127 At the beginning of the year, Hanover Limited had total assets of $600,000 and total liabilities of $300,000. Answer the following questions, viewing each situation as being independent of the others. 1. 2. 3.

If total assets increased $225,000 during the year, and total liabilities decreased $100,000, what is the amount of shareholders’ equity at the end of the year? During the year, total liabilities increased $315,000 and shareholders’ equity decreased $130,000. What is the amount of total assets at the end of the year? If total assets decreased $60,000 and shareholders’ equity increased $180,000 during the year, what is the amount of total liabilities at the end of the year?

Solution 127 (5 min.) 1. $625,000 Total Assets Beginning $600,000 Change 225,000 Ending $825,000 2.

Shareholders’ Equity $300,000 325,000 = $625,000 (1.)

Total Liabilities $300,000 315,000 $615,000

Shareholders’ Equity $300,000 (130,000) + $170,000

Total Liabilities $300,000 (240,000) $ 60,000 (3.)

Shareholders’ Equity $300,000 180,000 + $480,000

$785,000

Beginning Change Ending 3.

–

Total Liabilities $300,000 (100,000) $200,000

Total Assets $600,000 185,000 $785,000 (2.)

$60,000

Beginning Change Ending

Total Assets $600,000 (60,000) $540,000

Ex. 128 Rug Repairs Ltd. has the following statement of financial position items: Accounts Payable Accounts Receivable Bank Loan Payable Cash Common Shares Equipment Retained Earnings Unearned Revenue Van Instructions Identify which items are (a) Assets (b) Liabilities

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(c) Shareholders’ Equity Solution 128 (5 min.) (a) Assets—Accounts Receivable; Cash; Equipment; Van (b) Liabilities—Accounts Payable; Bank Loan Payable; Unearned Revenue (c) Shareholders’ Equity—Common Shares; Retained Earnings

Ex. 129 On June 1, Carmelo Ltd. prepared a statement of financial position that shows the following: Assets (no cash) ........................................................................... $125,000 Liabilities ....................................................................................... 75,000 Shareholders’ Equity ..................................................................... 50,000 Shortly thereafter, all of the assets were sold for cash. Instructions How would the statement of financial position appear immediately after the sale of the assets for cash for each of the following cases?

Case A

Cash Received for the Assets Assets $135,000 $________

Balances Immediately After Sale – Liabilities = Shareholders’ Equity $________ $________

Case B

125,000

________

Case C

110,000

________

Solution 129 (5 min.) Cash Received for the Assets Case A $135,000

Balances Immediately After Sale Assets – Liabilities = Shareholders’ Equity $135,000 $75,000 $60,000

Case B

125,000

75,000

50,000

Case C

110,000

75,000

35,000

Ex. 130 Calculate the missing amount in each category of the accounting equation: Assets Liabilities Shareholders’ Equity (a) $360,000 $ ? $ 98,000 (b) $178,000 $ 73,000 $ ?___ (c) $ ? $302,000 $310,000 Solution 130 (5 min.) (a) $262,000 ($360,000 – $98,000 = $262,000). (b)

$105,000 ($178,000 – $73,000 = $105,000).

The Purpose and Use of Financial Statements

(c)

$612,000 ($302,000 + $310,000 = $612,000).

Ex. 131 Use the following information to prepare the statement of cash flows for Greece Corporation for the year ended December 31, 2015: Cash received from customers ................................... $25,000 Cash dividends paid ................................................... 3,000 Cash paid to suppliers ................................................ 10,000 Cash paid for new equipment ..................................... 30,000 Cash received from lenders ....................................... 7,000 Cash, January 1, 2015 ............................................... 25,000 Cash, December 31, 2015 ......................................... 14,000 Solution 131 (10 min.) GREECE CORPORATION Statement of Cash Flows Year Ended December 31, 2015 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Operating activities Cash received from customers ...................................................... $25,000 Cash paid to suppliers ................................................................... (10,000) Net cash provided by operating activities ...................................... $15,000 Investing activities Cash paid for new equipment ........................................................ (30,000) Financing activities Cash received from lenders .......................................................... $ 7,000 Cash dividends paid ...................................................................... (3,000) Net cash provided by financing activities ....................................... 4,000 Net increase (decrease) in cash ........................................................... (11,000) Cash, January 1 ................................................................................... 25,000 Cash, December 31 ............................................................................. $14,000

Ex 132 Speedway Corporation’s shareholders’ equity equals one-fifth of the company’s total assets. The company’s liabilities are $125,000. What is the amount of the company’s shareholders’ equity? Solution 132 $31,250 (X = 1/5X + $125,000) where X = total assets Solving for X: X – 1/5X = $125,000 4/5X = $125,000 X = $125,000 × 5/4 X = $156,250 Shareholder’s equity = (1/5) × $156,250 = $31,250 Proof: $31,250 + $125,000 = $156,250

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MATCHING 133. Match the items below by entering the appropriate code letter in the space provided. (a) Internal users (b) Proprietorship (c) Expenses (d) Investing activities (e) Fiscal year

(f) (g) (h) (i) (j)

Assets Liabilities Private corporation Loss Dividends

_____ 1. Officers and others who manage the business _____ 2. Ownership is limited to one person. _____ 3. A separate legal entity that issues shares that are not publicly traded _____ 4. Consumed assets or services _____ 5. Creditor claims against the assets of the business. _____ 6. Amount by which expenses exceed revenues. _____ 7. Future economic benefits _____ 8. Involves acquiring the resources necessary to run the business _____ 9. Distributions to shareholders _____ 10. An accounting period that is one year long

The Purpose and Use of Financial Statements

ANSWERS TO MATCHING 1.

(a)

(b)

(h)

(c)

(g)

(i)

(f)

(d)

(j)

10. (e)

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SHORT-ANSWER ESSAY QUESTIONS S-A E 134 The information that a specific user of financial information needs depends upon the kinds of decisions that a user makes. Identify the major users of accounting information and discuss what questions financial information answers for each group of users. Solution 134 The major users of accounting information are internal and external users. Internal users are those who manage the business. External users are those outside the business who have either a present or potential financial interest. Financial information may answer the following questions for internal users: 1. Is cash sufficient to pay our debts? 2. Can we afford to give our employees a raise this year? 3. What is the cost of manufacturing each unit of product? 4. Which product line is the most profitable? Questions answered by financial information for external users include: 1. Is the company earning satisfactory profit? 2. How does the company compare in size and profitability with competitors? 3. Will the company be able to pay its debts as they come due?

S-A E 135 Anthony Davidson, an old friend of yours from high school, started a small business about a year ago, which is organized as a private corporation. Anthony is currently in the process of applying for a bank loan to expand his business. He shows you the most recent statement of financial position that he has prepared for the bank, which is as follows: DAVIDSON CORPORATION Statement of Financial Position September 30, 2015 ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Assets Cash ...................................................................................................................... $ 80,000 Accounts receivable ............................................................................................... 22,000 Equipment.............................................................................................................. 160,000 Total assets..................................................................................................... $262,000 Liabilities and Shareholders’ Equity Accounts payable................................................................................................... Shareholders’ equity .............................................................................................. Total liabilities and shareholders’ equity ..........................................................

$ 27,000 235,000 $262,000

Since Anthony knows that you are studying accounting at college, he asks your opinion. “What do you think?” he says. “Do you think the bank will be impressed and lend me the $100,000 I’m asking for?”

The Purpose and Use of Financial Statements

You study the statement for a few minutes. You are pretty sure Anthony doesn’t have anywhere near $160,000 worth of equipment belonging to the business, so you ask where all this equipment is. “Well,” explains Anthony, “in order to increase my assets, I included my personal vehicle, computer and camera equipment, and some of my furniture. They’re worth about $90,000. That should be OK, since they belong to me and I am the only shareholder anyway.” On further questioning, Anthony admits that he added his personal savings account of $45,000 in with the company cash to “make it look better.” Instructions (a) Who are the stakeholders here? (b) Is Anthony’s “creative accounting” acceptable? Why or why not? (c) What would you recommend be done here? Solution 135 (a) The stakeholders in this situation are Anthony, the bank, and any other external users who may rely on Anthony’s financial statements. (b) No, it is not acceptable. Anthony is ignoring the reporting entity concept, which requires the separation of business and personal records. It is unethical to include personal assets in with the business assets, as it distorts the overall financial picture and will mislead the bank. (c) You should recommend that Anthony revise the statement so that it correctly reflects his true financial position. It should then be as follows: DAVIDSON CORPORATION Statement of Financial Position September 30, 2015 ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Assets Cash ($80,000 – $45,000) ..................................................................................... $ 35,000 Accounts receivable ............................................................................................... 22,000 Equipment ($160,000 – $90,000) ........................................................................... 70,000 Total assets..................................................................................................... $127,000 Liabilities and Shareholders’ Equity Accounts payable................................................................................................... Shareholders’ equity ($235,000 – $45,000 – $90,000) ........................................... Total liabilities and shareholders’ equity .................................................................

$ 27,000 100,000 $127,000

It may be that Anthony will still be able to obtain the loan, but even if the bank turns him down, at least he can rest easy, knowing that he has acted ethically and presented a true picture of his business.

S-A E 136 Why would it be “safer” for a wealthy individual to set up his or her business as a corporation rather than as a proprietorship or partnership? Solution 136

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

With a proprietorship or partnership, the owner(s) have unlimited liability. That is, they may be required to use personal assets to satisfy business debts. The liability of a corporate shareholder, however, is limited to his or her investment in the business.

S-A E 137 Which two types of transactions affect shareholders’ equity, and how do they affect it? Solution 137 Shareholders’ equity consists generally of share capital and retained earnings. Share capital is increased by issues of common or preferred shares, for example. Retained earnings are increased by revenues, and decreased by expenses and dividends.

S-A E 138 In what order should the four financial statements be prepared? Explain why it is necessary to prepare the financial statements in the proper order. Solution 138 Order of financial statement preparation: 1. income statement; 2. statement of changes in equity; 3. statement of financial position; and 4. statement of cash flows. It is necessary to prepare the financial statements in proper order because they are interrelated. The statement of changes in equity cannot be prepared without knowing the results from the income statement. Thus the income statement must be prepared first. The statement of financial position cannot be prepared without knowing the ending balance for retained earnings, which is taken from the statement of changes in equity. Finally, the statement of cash flows shows how the cash account changed during the period. The ending cash balance shown on the statement of cash flows must agree with the cash balance shown on the statement of financial position.

S-A E 139 The framework used to record and summarize the economic activities of a company is referred to as the accounting equation. (a) State the basic accounting equation and define its major components. (b) How are business transactions and financial statements related to the accounting equation? Solution 139 (a) The basic accounting equation is expressed as follows: Assets = Liabilities + Shareholders’ Equity Assets are defined as resources owned by the business. Liabilities are creditors’ claims against the assets of the business—in other words, existing debts and obligations. Shareholders’ equity is the ownership claim on the total assets of the business; it is equal to total assets minus total liabilities. (b) Business transactions are economic events and activities that affect the elements of the basic accounting equation; that is, transactions cause increases or decreases in assets, liabilities, and shareholders’ equity. Financial statements report the results and effects of

The Purpose and Use of Financial Statements

transactions on the business' assets, liabilities, and shareholders’ equity. The statement of financial position is a summary expression of the basic accounting equation.

S-A E 140 Identify each of the four financial statements. For each statement, explain the primary purpose and identify the primary users and their uses. Answer in point form. Solution 140 Income statement • Primary purpose – report the success or failure of the company for a specific period of time • Primary users and uses 1. Shareholders/investors – to decide whether to invest or sell their investment 2. Creditors/lenders – to decide whether to loan the company money and assess whether it will be able to repay any debt. Statement of changes in equity • Primary purpose – to show the amounts and causes of changes in each component of shareholders’ equity during a specific period of time (same period as income statement) • Primary users and uses 1. Shareholders/investors – to evaluate dividend policy 2. Creditors/lenders – to monitor dividend policy as it affects the ability to repay debt Statement of financial position • Primary purpose – to report assets and claims to assets at a particular point in time • Primary users and uses 1. Creditors/lenders – to assess the likelihood that they will be repaid 2. Managers – to determine if they have the best mix of debt and equity financing Statement of cash flows • Primary purpose – to provide information about cash receipts and payments of a business for a specific period of time (same period as income statement) • Primary users and uses 1. Shareholders/investors – to decide whether to invest or sell their investment 2. Creditors/lenders – to decide whether to lend the business money and assess whether it will be able to repay its debts.

S-A E 141 Lisa Brunet is a friend of yours from high school. She decided to become a beautician after leaving high school, rather than to attend college. She recently opened her own shop on September 1, 2015 and has contracted her services to a local hospital. She is paid a fee for her services from the hospital, and receives a small gratuity (tip) from each patient. She has invested $1,000 of her own money into the company, which is a private corporation, as she plans to expand by providing services to hospitals in other nearby cities. She is the sole shareholder. She has just received her first set of financial statements from her accountant. She is quite upset. Since the income statement reports profit of $1,075 and she put $1,000 into the company, she is surprised to see her cash account only has $925 in it.

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She has written you a letter, asking you how this is possible. She does not understand why her cash balance isn’t $2,075 (her profit plus the $1,000 she invested). Along with her letter she has included her financial statements. BRUNET BEAUTICIAN LTD Income Statement Month Ended September 30, 2015 ————————————————————————————————————————— Revenues Contract revenue............................................................................................. $2,500 Gratuities………………………………………………………………... ................. 75 Total revenues…………………………………………………….. ................. 2,575 Operating expenses ............................................................................................... 1,200 Profit before income tax ......................................................................................... 1,375 Income tax expense ............................................................................................... 300 Profit ...................................................................................................................... $1,075

BRUNET BEAUTICIAN LTD. Statement of Changes in Equity Month Ended September 30, 2015 ————————————————————————————————————————— Common Shares Retained Earnings Total Equity Balances, Sep 1 $ 0 $ 0 $ 0 Issued common shares 1,000 1,000 Profit 1,075 1,075 Balances, Sep 30 $1,000 $1,075 $2,075

BRUNET BEAUTICIAN LTD. Statement of Financial Position September 30, 2015 —————————————————————————————————————————— Assets Cash .................................................................................................... $ 925 Accounts receivable ............................................................................. 1,500 Total assets................................................................................... $2,425 Liabilities and Shareholders’ Equity Liabilities Accounts payable ........................................................................... Income tax payable ........................................................................ Total liabilities ......................................................................... Shareholders’ equity Common shares ............................................................................. Retained earnings .......................................................................... Total liabilities and shareholders’ equity ................................

$ 50 300 $ 350 $1,000 1,075

2,075 $2,425

Instructions Using proper form, write a short letter to Lisa, answer her question completely, but briefly.

The Purpose and Use of Financial Statements

Solution 141 Answers will vary. The instructor's requirements concerning proper form should be followed. The letter may be either business or personal. At a minimum, the letter should be in a recognizable form, and proper grammar and spelling should be used. A suggested personal letter follows:

1010 Carlsen Avenue Ottawa, Ontario K2P 1G0 (Date) Dear Lisa, The reason that your cash balance is not $2,075 is because some of the revenue you have earned has not been paid to you yet. This is the balance in the Accounts Receivable account which shows what your customer, the hospital, still owes you for the services you have provided. There are also expenses that you have incurred that you have not paid yet. The Accounts Payable account shows the money you still owe to your suppliers and the Income Tax Payable account shows the amount of money you still have to pay for income tax expense. When your customer has paid to you what they owe and when you pay off your liabilities, your cash balance will be $2,075, as the following calculation shows: Cash balance ................................................................................................ Add: Cash to be received from the hospital (Accounts Receivable)............... Less: Cash paid to your suppliers (Accounts Payable) .................................. Less: Cash paid for income tax (Income Tax Payable) .................................. Cash balance ................................................................................................

$ 925 1,500 (50) (300) $2,075

The amount of cash reported on your statement of financial position is correct. A statement of cash flows will provide information on the cash receipts and payments for your business and will help to explain the cash balance that appears on your statement of financial position.

Sincerely, (signature)

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CHAPTER 2 A FURTHER LOOK AT FINANCIAL STATEMENTS SUMMARY OF QUESTION TYPES BY STUDY OBJECTIVE AND LEVEL OF DIFFICULTY Item

LOD

Item

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

E E E E E E M M M M M M M M M

16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90.

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

E M E E M E M E E E E E M M M

91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105.

1 1 1 1 1 1 1 1 1 1 2 2 2 2 2

151. 152. 153. 154.

1 1 1 1

M E E E

155. 156. 157. 158.

1,2 1,2 2 2

169.

LOD

Item SO LOD Item True-False Statements E 31. 2 E 46. E 32. 2 M 47. M 33. 2 M 48. E 34. 2 M 49. 2 M 35. E 50. M 36. 2 E 51. E 37. 2 M 52. M 38. 2 M 53. M 39. 2 M 54. E 40. 3 E 55. M 41. 3 E 56. M 42. 3 M 57. M 43. 3 E 58. E 44. 3 M 59. M 45. 3 M 60. Multiple Choice Questions M 106. 2 E 121. M 107. 2 E 122. M 108. 2 M 123. H 109. 2 E 124. M 110. 2 M 125. M 111. 2 E 126. E 112. 2 M 127. H 113. 2 M 128. M 114. 2 E 129. M 115. 2 E 130. E 116. 2 M 131. M 117. 2 M 132. M 118. 2 M 133. E 119. 2 E 134. E 120. 2 M 135. Exercises M 159. 2 E 163. M 160. 2 M 164. H 161. 2 E 165. H 162. 2 H 166. Matching

LOD

Item

LOD

3 3 3 3 3 3 3 3 3 3 3 3 3 3 3

M M M M M E E E M M E M M E M

61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75.

3 3 3 3 3 3 3 3 3 3 3 3 3 3 3

E E E M M E E E M M H M E M E

2 2 2 2 2 2 2 2 2 3 3 3 3 3 3

E H H M M M H M M E E M M M E

136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150.

3 3 3 3 3 3 3 3 3 3 3 3 3 3 3

E E M H E E E E E M E H E E E

2 2 2 3

M E E E

167. 168.

3 3

M E

1–3

170. 171.

1,2 2

E M

Note:

E = Easy

172. 173.

3 3

E E

M = Medium

Short-Answer Essay 174. 3 E

H = Hard

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item

Type

Item

Type

Item

1. 2. 3. 4. 5. 6. 7.

TF TF TF TF TF TF TF

8. 9. 10. 11. 12. 13. 14.

TF TF TF TF TF TF TF

15. 76. 77. 78. 79. 80. 81.

16. 17. 18. 19. 20. 21. 22. 23. 24. 25.

TF TF TF TF TF TF TF TF TF TF

26. 27. 28. 29. 30. 31. 32. 34. 34. 35.

TF TF TF TF TF TF TF TF TF TF

36. 37. 38. 39. 101. 102. 103. 104. 105. 106.

40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50.

TF TF TF TF TF TF TF TF TF TF TF

51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61.

TF TF TF TF TF TF TF TF TF TF TF

62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72.

Note: TF = True-False MC = Multiple Choice

Type Item Type Item Study Objective 1 TF 82. MC 89. MC 83. MC 90. MC 84. MC 91. MC 85. MC 92. MC 86. MC 93. MC 87. MC 94. MC 88. MC 95. Study Objective 2 TF 107. MC 117. TF 108. MC 118. TF 109. MC 119. TF 110. MC 120. MC 111. MC 121. MC 112. MC 122. MC 113. MC 123. MC 114. MC 124. MC 115. MC 125. MC 116. MC 126. Study Objective 3 TF 73. TF 138. TF 74. TF 139. TF 75. TF 140. TF 130. MC 141. TF 131. MC 142. TF 132. MC 143. TF 133. MC 144. TF 134. MC 145. TF 135. MC 146. TF 136. MC 147. TF 137. MC 148. Ma = Matching Ex = Exercise

Type

Item

Type

Item

Type

MC MC MC MC MC MC MC

96. 97. 98. 99. 100. 151. 152.

MC MC MC MC MC Ex Ex

153. 154. 155. 156. 169. 170.

Ex Ex Ex Ex Ma SAE

MC MC MC MC MC MC MC MC MC MC

127. 128. 129. 155. 156. 157. 158. 159. 160. 161.

MC MC MC Ex Ex Ex Ex Ex Ex Ex

162. 163. 164. 165. 169. 170. 171.

Ex Ex Ex Ex Ma SAE SAE

MC MC MC MC MC MC MC MC MC MC MC

149. 150. 166. 167. 168. 169. 172. 173. 174.

MC MC Ex Ex Ex Ma SAE SAE SAE

SAE = Short-Answer Essay

A Further Look at Financial Statements

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CHAPTER STUDY OBJECTIVES 1.

Identify the sections of a classified statement of financial position. In a classified statement of financial position, assets are classified as current or non-current assets. In the non-current asset category, they are further classified as investments; property, plant and equipment; intangible assets and goodwill; or other assets. Liabilities are classified as either current or non-current. There is also a shareholders’ equity section, which shows share capital and retained earnings, among other equity items if any exist.

Identify and calculate ratios for analyzing a company’s liquidity, solvency, and profitability. Liquidity ratios, such as working capital and the current ratio, measure a company’s short-term ability to pay its maturing obligations and meet unexpected needs for cash. Solvency ratios, such as debt to total assets, measure a company’s ability to survive over a long period by having enough assets to settle its liabilities as they fall due. Profitability ratios, such as earnings per share and the price-earnings ratio, measure a company’s operating success for a specific period of time.

Describe the framework for the preparation and presentation of financial statements. The key components of the conceptual framework are (1) the objective of financial reporting; (2) qualitative characteristics of useful financial information, which include fundamental and enhancing characteristics and the cost constraint; (3) the going concern assumption underlying the accounting process; (4) elements of the financial statements; and (5) measurement of the elements of financial statements.

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

TRUE-FALSE STATEMENTS 1. Cash and office supplies are both classified as current assets.

2. Inventories and prepaid expenses are classified as long-term investments.

3. Long-term investments appear in the property, plant, and equipment section of the statement of financial position.

4. Special rights and privileges that provide a future economic benefit to the company are classified as intangible assets.

5. A liability is normally classified as a current liability if it is to be paid within the coming year. 6. Shareholders’ equity is divided into at least two parts: share capital and retained earnings.

7. All long-lived assets including land have estimated useful lives over which they are expected to generate revenue.

8. All long-lived assets are depreciated over their estimated useful lives.

9. Mortgages and pension liabilities are examples of non-current liabilities.

10. The investment classification on the statement of financial position normally includes investments that are intended to be held for a short period of time (less than one year).

11. Shareholders' equity consists of two parts: common and preferred shares.

12. The main difference between intangible assets and property, plant, and equipment is the length of the asset’s life.

13. Listing assets and liabilities in reverse order of liquidity is not permitted in Canada.

14. The statement of financial position is normally presented as follows, when ordered in order of liquidity: Current assets, current liabilities, non-current assets, non-current liabilities, and shareholders’ equity.

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15. The statement of financial position is normally presented as follows, when ordered in order of reverse liquidity: Non-current assets, current assets, shareholders’ equity, non-current liabilities, and current liabilities.

16. Intracompany comparisons are based on comparisons with competitors in the same industry.

17. Calculating financial ratios can give clues to underlying conditions that may not be noticed by examining each financial statement item separately.

18. Liquidity ratios are concerned with the frequency and amounts of dividend payments.

19. Analysis of financial statements is enhanced with the use of comparative data. 20. Solvency ratios measure the entity’s ability to survive over a long period.

21. A single ratio by itself is not very meaningful.

22. Profitability means having enough funds on hand to pay debts when they fall due.

23. Working capital is the difference between total assets and current liabilities.

24. The excess of current assets over current liabilities is called working capital.

25. The current ratio is calculated by dividing total assets by total liabilities.

26. The current ratio takes into account the composition of current assets.

27. A current ratio of 1.2 to 1 indicates that a company's current assets exceed its current liabilities.

28. All companies, regardless of size, should have a current ratio of at least 2:1.

29. The most liquid resource is inventory.

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

30. Solvency ratios measure the short-term ability of the company to pay its maturing obligations.

31. The debt to total assets ratio measures the percentage of assets financed by creditors rather than shareholders.

32. From a creditor's point of view, the higher the total debt to total assets ratio, the lower the risk that the company may be unable to pay its obligations.

33. Earnings per share is calculated by dividing profit for the period by the dollar value in the common shares account.

34. The price-earnings ratio is calculated by dividing the market price per share by the earnings per share.

35. The price-earnings ratio is a measure of liquidity.

36. Earnings per share is the only ratio that must be presented in the financial statements for publicly traded companies.

37. Earnings per share is frequently compared across companies in the same industry. 38. The higher the price-earnings ratio, the higher are investors’ expectations of the company’s future profitability.

39. Companies using Accounting Standards for Private Enterprises (ASPE) are not required to present earnings per share information in their financial statements.

40. Having a conceptual framework of accounting ensures that standards and practices are clear and consistent.

41. Canada has adopted International Financial Reporting Standards for publicly traded companies.

42. The conceptual framework is fundamentally similar for both Canadian publicly traded companies and Canadian private companies.

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43. The objective of financial reporting is to provide financial information about a company that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the company.

44. The objective of financial reporting is to provide financial information that is useful to all types of internal and external users in making decisions.

45. The two fundamental qualitative characteristics are relevance and timeliness.

46. The two fundamental qualitative characteristics are faithful representation and relevance. 47. Information is relevant if it will make a difference in a user’s decision(s).

48. Faithful representation means that accounting information must be complete, neutral, and free from material error.

49. Financial reporting does not have to present the economic substance of a transaction in order to provide a faithful representation of what really happened.

50. Information has predictive value if it helps users confirm or correct their previous predictions.

51. Materiality and relevance are both defined in terms of what influences or makes a difference to a decision maker.

52. Enhancing qualitative characteristics include timeliness and comparability.

53. Accounting information does not have to be understood by the average user with a general business background in order to be useful.

54. Under the going concern assumption, reporting assets, such as land, at their cost may be more appropriate than reporting land at its fair value.

55. In order for information to be relevant, it must be reported on a timely basis.

56. Consistency aids comparability when a company uses the same accounting principles and methods from year to year or when companies with similar circumstances use the same accounting principles.

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

57. Comparability in accounting means that a company uses the same generally accepted accounting principles from one accounting period to the next.

58. In order to compare the financial statements of different companies, it would be desirable to have each company develop its own set of accounting rules and practices.

59. Comparability and understandability are examples of enhancing qualitative characteristics.

60. Information has verifiability if the information is comparable.

61. The cost constraint ensures that the value of information provided is greater than the cost of providing it.

62. The cost constraint ensures that information costs less than budget.

63. The going concern assumption states that the business will continue in operation for the foreseeable future.

64. If a company is not a going concern, the classification of its assets and liabilities does not matter.

65. Using a simplified version of Canadian GAAP for small companies in order to reduce the cost of providing financial information is an example of the application of materiality.

66. Elements of financial statements include assets, equity, and expenses, but not liabilities.

67. Two measurement principles are historical cost and fair value.

68. Two recognition principles are the fair value basis of accounting and the going concern assumption.

69. In general, standard setters require that most assets be recorded using historical cost because cost is representationally faithful.

70. The fair value basis of accounting states that all assets and liabilities can be reported at fair value.

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71. Fair values may not always be representationally faithful.

72. The cost basis of accounting states that assets and liabilities should be recorded at their cost not only when originally acquired, but also during the time the entity holds them.

73. Qualitative characteristics help ensure that the information provided in financial statements is useful.

74. The going concern assumption underlies the preparation of financial statements.

75. A conceptual framework is still under development for companies using International Financial Reporting Standards (IFRS).

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

ANSWERS TO TRUE-FALSE STATEMENTS Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 1. T 14. F 27. T 40. T 53. F 66. F 2. F 15. T 28. F 41. T 54. T 67. T 3. F 16. F 29. F 42. T 55. T 68. F 4. T 17. T 30. F 43. T 56. T 69. T 5. T 18. F 31. T 44. F 57. F 70. F 6. T 19. T 32. F 45. F 58. F 71. T 7. F 20. T 33. F 46. T 59. T 72. T 8. F 21. T 34. T 47. T 60. F 73. T 9. T 22. F 35. F 48. T 61. T 74. T 10. F 23. F 36. T 49. F 62. F 75. T 11. F 24. T 37. F 50. F 63. T 12. F 25. F 38. T 51. T 64. T 13. F 26. F 39. T 52. T 65. F

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MULTIPLE CHOICE QUESTIONS 76. On a classified statement of financial position, prepaid expenses are classified as (a) a current liability. (b) property, plant, and equipment. (c) a current asset. (d) a long-term investment.

77. A current asset is (a) the last asset purchased by a business. (b) an asset which is not currently being used to produce a product or service. (c) usually found as a separate classification in the income statement. (d) expected to be converted to cash or used in the business within a relatively short period of time.

78. Which of the following is not classified as a current asset? (a) supplies (b) short-term (trading) investments (c) a fund to be used to purchase a building within the next year (d) equipment with an estimated useful life of five years

79. An intangible asset (a) derives its value from the rights and privileges it provides the company. (b) is worthless because it has no physical substance. (c) is converted into a tangible asset during the year. (d) cannot be classified on the statement of financial position because it lacks physical substance.

80. Which of the following is not considered to be an asset? (a) equipment (b) dividends (c) accounts receivable (d) inventory

81. The difference between cost and accumulated depreciation is referred to as (a) net depreciation. (b) carrying amount. (c) fair value. (d) cost value.

82. Trademarks would appear in which section of the statement of financial position? (a) Shareholders’ equity (b) Investments

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

83. Liabilities are generally classified on a statement of financial position as (a) small liabilities and large liabilities. (b) present liabilities and future liabilities. (c) tangible liabilities and intangible liabilities. (d) current liabilities and non-current liabilities.

84. Which of the following would not normally be classified as a non-current liability? (a) current maturities of non-current debt (b) bonds payable (c) mortgage payable (d) lease liabilities

85. Which of the following is not normally a current liability? (a) salaries payable (b) accounts payable (c) income tax payable (d) bonds payable

86. Office equipment is classified on the statement of financial position as (a) a current asset. (b) property, plant, and equipment. (c) shareholders’ equity. (d) a long-term investment.

87. Current liabilities are expected to be (a) converted to cash within one year. (b) paid within one year. (c) used in the business within one year. (d) acquired within one year.

88. On a classified statement of financial position, current assets are often listed (a) in alphabetical order. (b) with the largest dollar amounts first. (c) in the order in which they are expected to be converted into cash. (d) in the order of acquisition.

89. Long-lived assets without physical substance are (a) listed directly under current assets on the statement of financial position. (b) not listed on the statement of financial position because they do not have physical substance. (c) intangible assets.

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(d) listed as a long-term investment on the statement of financial position.

Use the following information to answer questions 90–94. HONEST RON'S FURNITURE OUTLET LTD. Statement of Financial Position December 31, 2015 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Cash $ 5,000 Accounts payable $ 30,000 Accounts receivable 20,000 Salaries payable 10,000 Supplies 1,000 Mortgage payable 130,000 Inventory 170,000 Total liabilities $170,000 Land 100,000 Shareholders’ equity Building $100,000 Common shares $140,000 Less: Accum. depreciation 20,000 80,000 Retained earnings 96,000 Trademark $ 40,000 Total shareholders' equity 236,000 Less:Accum. amortization 10,000 30,000 Total liabilities and Total assets $406,000 shareholders' equity $406,000

90. The dollar amount of current liabilities is (a) $196,000. (b) $170,000. (c) $ 40,000. (d) $ 30,000.

91. The dollar amount of net property, plant and equipment is (a) $ 80,000. (b) $180,000. (c) $210,000. (d) $350,000.

92. The dollar amount of current assets is (a) $ 26,000. (b) $ 40,000. (c) $ 25,000. (d) $196,000.

93. The dollar amount of share capital is (a) $406,000. (b) $236,000. (c) $140,000. (d) $ 96,000.

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

94. The total obligations that have resulted from past transactions are (a) $ 20,000. (b) $ 40,000. (c) $ 96,000. (d) $170,000.

Use the following information to answer questions 95–100. MARCOTTE MASONARY LTD. Statement of Financial Position December 31, 2015 ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Cash $ 50,000 Accounts payable $ 40,000 Prepaid insurance 5,000 Salaries payable 5,000 Accounts receivable 75,000 Bonds payable 190,000 Inventory 110,000 Total liabilities 235,000 Land 90,000 Building $220,000 Common shares 200,000 Less: Accumulated Retained earnings 105,000 depreciation 60,000 160,000 Total shareholders’ equity 305,000 Trademark $ 75,000 Less: Accum. amort. 25,000 50,000 Total liabilities and Total assets $540,000 shareholders’ equity $540,000

95. The total dollar amount of assets to be classified as current assets is (a) $240,000. (b) $220,000. (c) $170,000. (d) $130,000.

96. The total dollar amount of assets to be classified as net property, plant, and equipment is (a) $300,000. (b) $250,000. (c) $240,000. (d) $160,000.

97. The total dollar amount of assets to be classified as investments is (a) $ 0. (b) $ 50,000. (c) $ 90,000. (d) $190,000.

98. The total amount in the contra asset accounts is (a) $ 60,000.

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(b) $ 85,000. (c) $210,000. (d) $235,000.

99. Non-current liabilities total (a) $540,000. (b) $235,000. (c) $190,000. (d) $ 45,000.

100. Profit retained for use in the business is (a) $540,000. (b) $305,000. (c) $200,000. (d) $105,000.

101. A measure of profitability is the (a) current ratio. (b) debt to total assets ratio. (c) earnings per share. (d) working capital.

102. Earnings per share is calculated by dividing (a) revenue by weighted average shareholders’ equity. (b) revenue by the weighted average number of common shares. (c) profit by weighted average shareholders’ equity. (d) profit by the weighted average number of common shares.

103. The price-earnings ratio is calculated by dividing (a) the market price per share by earnings per share. (b) earnings per share by the average number of shares. (c) profit by the market price per share. (d) earnings per share by the market price per share.

104. The relationship between current assets and current liabilities is important in evaluating a company's (a) profitability. (b) liquidity. (c) fair value. (d) solvency.

105. The most important information needed to determine if companies can pay their current obligations is the (a) profit for this year.

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

(b) projected profit for next year. (c) relationship between current assets and current liabilities. (d) relationship between current and non-current liabilities.

106. A short-term creditor is primarily interested in the ___ of the borrower. (a) liquidity (b) profitability (c) comparability (d) solvency

107. The current ratio is calculated as (a) current assets plus current liabilities. (b) current assets minus current liabilities. (c) current assets divided by current liabilities. (d) current assets times current liabilities.

108. Working capital is calculated as (a) current assets plus current liabilities. (b) current assets minus current liabilities. (c) current assets divided by current liabilities. (d) current assets times current liabilities.

109. Working capital is a measure of (a) comparability. (b) liquidity. (c) profitability. (d) solvency.

110. Long-term creditors are usually most interested in evaluating (a) liquidity and profitability. (b) comparability and profitability. (c) profitability and solvency. (d) consistency and solvency.

111. A liquidity ratio measures the (a) profit or operating success of a company over a period of time. (b) ability of a company to survive over a long period of time. (c) short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash. (d) percentage of total financing provided by creditors.

112. Working capital is (a) calculated by dividing current assets by current liabilities. (b) used to evaluate a company’s liquidity and short-term debt paying ability.

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(c) used to evaluate a company’s solvency and long-term debt paying ability. (d) calculated by subtracting current liabilities from total assets.

113. The ability of a business to pay obligations that are expected to become due within the next year is called (a) leverage. (b) liquidity. (c) profitability. (d) solvency.

Use the following information to answer questions 114–118. Current assets.................... Current liabilities ................ Average assets .................. Total assets ....................... Profit ..................................

$18,000 8,000 80,000 60,000 18,000

Net sales ..................................... Total liabilities ............................. Shareholders’ equity ................... Market price of shares................. Weighted average number of common shares ......................

$40,000 10,000 50,000 $4 26,000

114. What is the total amount of working capital? (a) $4,000 (b) $8,000 (c) $10,000 (d) $14,000

115. What is the current ratio? (a) 2.3:1 (b) 2.0:1 (c) 0.6:1 (d) 0.4:1

116. What is the earnings per share? (a) $0.44 (b) $0.70 (c) $1.92 (d) $1.54

117. What is the price-earnings ratio? (a) 9.1 times (b) 5.7 times (c) 2.1 times (d) 1.7 times

118. What is the debt to total assets?

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

(a) 12.5% (b) 20.0% (c) 75.0% (d) 16.7%

119. The debt to total assets ratio is calculated by dividing (a) non-current liabilities by total assets. (b) non-current liabilities by average assets. (c) total liabilities by total assets. (d) total liabilities by average assets.

120. A useful measure of solvency is the (a) current ratio. (b) price-earnings ratio. (c) earnings per share. (d) debt to total assets.

121. Which of the following is not considered a measure of liquidity? (a) current ratio (b) working capital (c) both current ratio and working capital (d) debt to total assets

122. Investors are usually most interested in evaluating (a) liquidity and solvency. (b) solvency and marketability. (c) liquidity and profitability. (d) profitability and solvency.

123. Shareholders are most interested in evaluating (a) liquidity and solvency. (b) profitability and solvency. (c) liquidity and profitability. (d) marketability and solvency.

124. The current assets of Mario Corporation are $420,000. The current liabilities are $300,000. The current ratio expressed as a ratio is (a) 140% (b) 1.4:1 (c) 0.7:1 (d) $420,000 ÷ $300,000

125. A weakness of the current ratio is (a) the difficulty of the calculation.

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(b) that it doesn't take into account the composition of the current assets. (c) that it is rarely used by sophisticated analysts. (d) that it can be expressed as a percentage, as a rate, or as a proportion.

126. A supplier to a company would probably be most interested in the (a) debt to total assets. (b) price-earnings ratio. (c) current ratio. (d) earnings per share.

Use the following information for questions 127–128. Cooney Corporation had $275,000 in current assets and $105,000 in current liabilities before borrowing $75,000 from the bank for a 6-month period.

127. What effect did the borrowing transaction have on the amount of Cooney's working capital? (a) No effect (b) $75,000 increase (c) $105,000 increase (d) $75,000 decrease

128. What effect did the borrowing transaction have on Cooney's current ratio? (a) The ratio remained unchanged. (b) The change in the current ratio cannot be determined. (c) The ratio decreased. (d) The ratio increased.

129. City Recycling Inc. has $120,000 in current assets and $100,000 in current liabilities. When the company pays $20,000 owed to employees (salaries payable), what effect does this have on their current ratio? (a) The ratio increases. (b) The ratio decreases. (c) The ratio stays the same. (d) Cannot be determined.

130. The conceptual framework of accounting helps to ensure that (a) users with no accounting or business knowledge will understand financial statements. (b) a rule will be in place for every possible situation. (c) there are consistent standards prescribing the nature, functions and limits of financial statements. (d) all countries have their own unique accounting standards.

131. The objective of financial reporting is to (a) provide information to the Canada Revenue Agency.

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

(b) provide financial information that is useful to existing and potential investors, lenders and other creditors. (c) comply with Accounting Standards for Private Enterprises. (d) comply with International Financial Reporting Standards.

132. The conceptual framework of accounting begins with (a) qualitative characteristics. (b) the going concern assumption. (c) the objective of financing reporting. (d) elements of financial statements.

133. Which one of the following is not a qualitative characteristic of useful accounting information? (a) relevance (b) verifiability (c) going concern (d) comparability

134. Which one of the following is a fundamental qualitative characteristic? (a) relevance (b) timeliness (c) understandability (d) comparability

135. In order for accounting information to be relevant, it must (a) have very little cost. (b) help predict future events or confirm prior expectations. (c) be verifiable. (d) be used by a lot of different organizations.

136. If accounting information has relevance, it (a) is not required to be complete. (b) will not have predictive value. (c) will only make a difference for internal stakeholders. (d) will make a difference in users’ decisions.

137. The two qualitative characteristics that are defined in terms of what influences or makes a difference to a decision maker are (a) faithful representation and materiality. (b) comparability and timeliness (c) materiality and relevance. (d) relevance and understandability

138. Which of the following is not an enhancing qualitative characteristic?

A Further Look at Financial Statements

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(a) verifiability (b) faithful representation (c) comparability (d) timeliness

139. Accounting information should be neutral in order to enhance (a) faithful representation. (b) materiality. (c) comparability. (d) understandability.

140. Which of the following is not a main section of the conceptual framework of accounting? (a) the objective of financial reporting (b) the going concern assumption (c) financial analysis (d) the elements of financial statements

141. Which of the following statements is not true? (a) Comparability means using different accounting principles from year to year within a company. (b) Faithful representation means information must be neutral, complete, and free from material error. (c) Relevant accounting information must be capable of making a difference in a user’s decision. (d) For accounting information to be relevant, it must have timeliness.

142. A company can change to a new accounting principle if management can justify that the change will result in (a) less likelihood of clerical errors. (b) higher profit. (c) lower profit for tax purposes. (d) more relevant information for decision-making.

143. If accounting information has predictive value, it will help users (a) prepare for future Canada Revenue Agency audits. (b) make predictions about future events. (c) make predictions about foreign currency exchange rates. (d) confirm or correct previous predictions or expectations.

144. The going concern assumption assumes that the business (a) will be liquidated in the near future. (b) will be purchased by another business. (c) is in a growth industry. (d) will remain in operation for the foreseeable future.

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

145. The going concern assumption is inappropriate when (a) the business is just starting up. (b) liquidation appears likely. (c) fair values are higher than costs. (d) the business is organized as a proprietorship.

146. Which of the following is a constraint in accounting? (a) comparability (b) cost (c) faithful representation (d) timeliness

147. In general, standard setters require that most assets be recorded using historical cost because (a) fair values may overstate assets and equity. (b) fair values may not always be representationally faithful. (c) cost often cannot be verified. (d) cost values may or may not be relevant.

148. Which of the following is not a financial statement element? (a) Liabilities (b) Equity (c) Expenses (d) Fair value

149. The qualitative characteristic that says the value of information should exceed the cost of preparing it is called (a) relevance. (b) understandability. (c) cost constraint. (d) verifiability.

150. The measurement principle that says assets are reported at the price that would be received if the item were sold is called (a) fair value. (b) historical cost. (c) materiality. (d) going concern.

A Further Look at Financial Statements

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ANSWERS TO MULTIPLE CHOICE QUESTIONS Item Ans. 76. c 77. d 78. d 79. a 80. b 81. b 82. c 83. d 84. a 85. d 86. b 87. b 88. c

Item 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101.

Ans. c c b d c d a b a b c d c

Item 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114.

Ans. d a b c a c b b c c b b c

Item Ans. 115. a 116. b 117. b 118. d 119. c 120. d 121. d 122. d 123. b 124. b 125. b 126. c 127. d

Item 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140.

Ans. c a c b c c a b d c b a c

Item 141. 142. 143. 144. 145. 146. 147. 148. 149. 150.

Ans. a d b d b b b d c a

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

EXERCISES Ex. 151 Identify the errors, corrections required, and corrected subtotals required in the following classified statement of financial position. Then prepare a corrected statement of financial position. RUMPBELL INC. Statement of Financial Position Year Ended December 31, 2015 ———————————————————————————————————–––––––—— Assets Current assets Accounts receivable (net of accounts payable of $2,000)..................... $12,000 Prepaid expenses ................................................................................ 1,500 Goodwill ............................................................................................... 1,200 ............................................................................................................ 14,700 Property, plant and equipment ............................................................. $4,300 Less: Accounted depreciation .............................................................. 1,100 Other assets (non-current) ................................................................... 1,720 4,920 Total assets ......................................................................................... $19,620 Liabilities Bank loan payable (due in 6 months) ................................................... Long term debt ..................................................................................... Total liabilities ......................................................................................

$9,500 6,700

Shareholders' equity Retained earnings ................................................................................ Less: Dividends.................................................................................... Common shares................................................................................... Total.....................................................................................................

$2,460 150 1,110

16,200

3,420 $19,620

Solution 151 (15 min.) 1. The date is not properly identified in the heading—it should be December 31, 2015, not year ended. 2. The accounts payable should not be netted against the receivables—accounts receivable should be $14,000 and accounts payable shown as a current liability of $2,000. 3. Goodwill should not be a current asset. Goodwill is a type of intangible asset, shown separately. Current assets should be $15,500. 4. Other (non-current) assets should not be included with property, plant and equipment subtotal. The subtotal should be $3,200. 5. Accounted depreciation should be accumulated depreciation. 6. A heading “Liabilities and Shareholders' Equity” should replace the “Liabilities” heading. 7. Liabilities should be classified as current and non-current. 8. Current liabilities should include accounts payable of $2,000 and note payable (due in 6 months) of $9,500—for total current liabilities of $11,500. 9. Common shares should be listed first under the shareholders' equity heading. 10. Dividends should not be shown on the statement of financial position—only the ending

A Further Look at Financial Statements

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amount of retained earnings of $2,310 ($2,460 – $150) should be shown. Corrected statement of financial position: RUMPBELL INC. Statement of Financial Position December 31, 2015 ———————————————————————————————————–––––––—— Assets Current assets Accounts receivable ...................................................................... $14,000 Prepaid expenses ......................................................................... 1,500 Total current assets ............................................................................. 15,500 Property, plant and equipment ............................................................. $4,300 Less: Accumulated depreciation .......................................................... 1,100 3,200 Goodwill ............................................................................................... 1,200 Other assets (non-current) ................................................................... 1,720 Total assets ......................................................................................... $21,620 Liabilities and Shareholders’ Equity Liabilities Current liabilities Accounts payable .......................................................................... Bank loan payable (due in 6 months) ............................................ Total current liabilities .......................................................................... Non-current liabilities Long term debt .............................................................................. Total liabilities ...................................................................................... Shareholders' equity Common shares ............................................................................ Retained earnings ......................................................................... Total shareholders’ equity .................................................................... Total liabilities and shareholders’ equity ...............................................

$2,000 9,500 $11,500 6,700 18,200

$1,110 2,310 3,420 $21,620

Ex. 152 The following information is available for Jordi Ltd. at December 31, 2015: Accounts payable ....................................................... Accounts receivable ................................................... Accumulated amortization, patents ............................ Accumulated depreciation, equipment........................ Retained earnings ...................................................... Cash .......................................................................... Common shares ......................................................... Equipment .................................................................. Land ........................................................................... Long-term investments ............................................... Bank loan payable (due in 5 years) ............................ Patents.......................................................................

$14,500 2,500 3,500 3,000 6,400 41,900 40,000 3,500 15,000 500 4,200 5,500

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

Short-term (trading) investments ................................

2,700

Instructions Use the above information to prepare a classified statement of financial position at December 31, 2015. Solution 152 (20 min.) JORDI LTD. Statement of Financial Position December 31, 2015 ———————————————————————————————————–––––––—— Assets Current assets Cash ............................................................................................. $41,900 Short-term (trading) investments ................................................... 2,700 Accounts receivable ...................................................................... 2,500 Total current assets ............................................................................. $47,100 Long-term Investments ........................................................................ 500 Property, plant, and equipment Land .............................................................................................. 15,000 Equipment ..................................................................................... $3,500 Less Accumulated depreciation, equipment .................................. 3,000 500 Intangible assets Patents.......................................................................................... $5,500 Less: Accumulated amortization, patents ...................................... 3,500 2,000 Total assets ......................................................................................... $65,100 Liabilities and Shareholders’ Equity Current liabilities Accounts payable ......................................................................... Total current liabilities .......................................................................... Non-current liabilities Bank loan payable......................................................................... Total liabilities ..................................................................................... Shareholders’ equity Common shares ............................................................................ Retained earnings ......................................................................... Total shareholders’ equity .................................................................... Total liabilities and shareholders’ equity ...............................................

$14,500 14,500 4,200 18,700 $40,000 6,400 46,400 $65,100

Ex. 153 The following accounts were taken from a company’s statement of financial position: Account Classification Cash Inventory Trading Investments Building Accounts payable Trademarks

A Further Look at Financial Statements

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Equipment Prepaid Insurance Long term debt Unearned Revenue Mortgage Payable Accounts Receivable Accumulated Depreciation- Building Land Notes Receivable (due in 24 months)

Instructions Classify each of the above accounts as current assets (CA), non-current assets (NCA), current liabilities (CL), non- current liabilities (NCL), or shareholders’ equity (SE). Solution 153 Account Cash Inventory Trading Investments Building Accounts payable Trademarks Equipment Prepaid Insurance Long term debt Unearned Revenue Mortgage Payable Accounts Receivable Accumulated Depreciation- Building Land Notes Receivable (due in 24 months)

Classification CA CA CA NCA CL NCA NCA CA NCL CL NCL CA NCA NCA NCA

Ex. 154 Accounting standards do not prescribe the order in which items are presented in the statement of financial position. Below are various categories to the statement of financial position: Non-current assets Shareholders’ equity Current liabilities Current assets Non-current liabilities Instructions (a) Present each category in “Order of Liquidity”. (b) Present each category in “Order of Reverse Liquidity”. Solution 154 (a) Order of Liquidity Current assets

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

Non-current assets Current liabilities Non-current liabilities Shareholders’ equity (b) Order of Reverse Liquidity Non-current assets Current assets Shareholders’ equity Non-current liabilities Current liabilities

Ex. 155 The following items are taken from the financial statements of La Brea Ltd. for the fiscal year ended December 31, 2015. Note they are in alphabetical order. Accounts payable ....................................................... Accounts receivable ................................................... Accumulated depreciation—video equipment............. Advertising expense ................................................... Cash .......................................................................... Common shares (10,000 shares) ............................... Depreciation expense ................................................ Dividends ................................................................... Income tax expense ................................................... Insurance expense ..................................................... Bank loan payable...................................................... Prepaid insurance ...................................................... Rent expense ............................................................. Retained earnings, January 1, 2015 .......................... Salaries expense........................................................ Salaries payable......................................................... Service revenue ......................................................... Supplies ..................................................................... Supplies expense ....................................................... Video equipment ........................................................

$ 15,500 18,000 30,500 21,000 15,000 90,000 12,000 5,000 10,000 3,000 70,000 6,000 22,000 12,000 32,000 3,000 143,000 4,000 6,000 210,000

Instructions (a) Calculate the profit for the year. (b) Calculate the balance of Retained Earnings that would appear on the statement of financial position at December 31, 2015. (c) Prepare a classified statement of financial position for La Brea Ltd. at December 31, 2015, assuming the bank loan payable is a non-current liability. (d) Calculate the current ratio, debt to total assets, and earnings per share. Assets at the beginning of 2015 totalled $183,000. No additional shares were issued or redeemed during the year. Solution 155 (20 min.) (a) Profit is $143,000 – $21,000 – $12,000 – $3,000 – $22,000 – 32,000 – $6,000 – $10,000 = $37,000

A Further Look at Financial Statements

(b)

Retained earnings, January 1 ................................... Add: Profit ................................................................ Less: Dividends ........................................................ Retained earnings, December 31 .............................

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$12,000 37,000 49,000 5,000 $44,000

(c) LA BREA LTD. Statement of Financial Position December 31, 2015 ———————————————————————————————————–––––––—— Assets Current assets Cash ............................................................................................. $ 15,000 Accounts receivable ...................................................................... 18,000 Supplies ........................................................................................ 4,000 Prepaid insurance ......................................................................... 6,000 Total current assets ................................................................ 43,000 Property, plant and equipment Video equipment ........................................................................... $210,000 Less: Accumulated depreciation—video equipment ...................... 30,500 179,500 Total assets ............................................................................ $222,500 Liabilities and Shareholders’ Equity Current liabilities Accounts payable .......................................................................... Salaries payable............................................................................ Total current liabilities ............................................................. Non-current liabilities Bank loan payable......................................................................... Total liabilities ......................................................................... Shareholders’ equity Common shares ............................................................................ Retained earnings ......................................................................... Total liabilities and shareholders’ equity ................................. (d)

$ 15,500 3,000 18,500 70,000 88,500 $90,000 44,000

134,000 $222,500

Current ratio: $43,000 ÷ $18,500 = 2.3:1 Debt to total assets: $88,500 ÷ $222,500 = 39.8% Earnings per share: $37,000 ÷ 10,000 = $3.70

Ex. 156 The following items are taken from the financial statements of Columbia Ltd. for the year ended December 31, 2015: Accounts payable ....................................................... Accounts receivable ................................................... Accumulated depreciation – equipment...................... Bonds payable ........................................................... Cash ..........................................................................

$19,500 4,000 4,800 18,000 22,000

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

Common shares (1,500 shares issued) ...................... Cost of goods sold ..................................................... Depreciation expense ................................................ Dividends ................................................................... Equipment .................................................................. Goodwill ..................................................................... Income tax expense ................................................... Interest expense......................................................... Market price per common share ................................. Retained earnings, beginning ..................................... Salaries expense........................................................ Sales revenue ............................................................ Supplies .....................................................................

25,000 12,000 4,800 300 48,000 7,500 1,000 3,500 $4.50 16,000 8,200 32,500 4,500

Instructions (a) Prepare an income statement and a classified statement of financial position for Columbia for 2015. (b) Calculate the following ratios: 1. Current ratio 2. Debt to total assets 3. Earnings per share 4. Price-earnings ratio Solution 156 (25 min.) (a) COLUMBIA LTD. Income Statement Year Ended December 31, 2015 ———————————————————————————————————–––––––—— Sales revenue ...................................................................................... $32,500 Operating expenses Cost of goods sold ........................................................................ $12,000 Salaries expense........................................................................... 8,200 Depreciation expense ................................................................... 4,800 Interest expense............................................................................ 3,500 28,500 Profit before income tax ....................................................................... 4,000 Income tax expense ............................................................................. 1,000 Profit .................................................................................................... $ 3,000 COLUMBIA LTD. Statement of Financial Position December 31, 2015 ———————————————————————————————————–––––––—— Assets Current assets Cash ............................................................................................. $22,000 Accounts receivable ...................................................................... 4,000 Supplies ........................................................................................ 4,500 Total current assets ................................................................ 30,500 Property, plant, and equipment

A Further Look at Financial Statements

Equipment ..................................................................................... Less: Accumulated depreciation—equipment................................ Goodwill ............................................................................................... Total assets ............................................................................ Liabilities and Shareholders’ Equity Current liabilities Accounts payable .......................................................................... Non-current liabilities Bonds payable .............................................................................. Total liabilities ......................................................................... Shareholders’ equity Common shares ............................................................................ Retained earnings ......................................................................... Total liabilities and shareholders’ equity .................................

$48,000 4,800

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43,200 7,500 $81,200

$19,500 18,000 37,500 $25,000 18,700*

43,700 $81,200

*Retained earnings = $18,700 ($16,000 + $3,000 – $300) (b) 1. 2. 3. 4.

Current ratio: $30,500 ÷ $19,500 = 1.6:1 Debt to total assets: $37,500 ÷ $81,200 = 46.2% Earnings per share: $3,000 ÷ 1,500 = $2.00 Price-earnings ratio: $4.50 ÷ $2.00 = 2.3 times

Ex. 157 Presented below is information on XBRL Ltd.: 2015 Cash .................................................................................... $ 15,000 Cash provided by financing activities.................................... 20,000 Cash used in investing activities........................................... 18,000 Common shares ................................................................... 30,000 Current assets ...................................................................... 85,000 Current liabilities................................................................... 60,000 Dividends paid on common shares ...................................... 11,000 Long term assets.................................................................. 125,000 Price-earnings ratio .............................................................. 12 Retained earnings ................................................................ 60,000 Total liabilities ...................................................................... 110,000 Weighted average number of shares issued ........................ 1,000

2014 $ 12,000 0 7,000 30,000 75,000 45,000 15,000 110,000 14 40,000 95,000 1,000

Instructions Calculate the following for 2015: (a) Earnings per share (b) Market price per common share (c) Working capital (d) Current ratio (e) Debt to total assets Solution 157 (15–20 min.) (a) Earnings per share Calculate profit

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

Retained earnings 2014 ............................................. $40,000 Less: Dividends paid on common shares ................... 11,000 Subtotal ................................................. 29,000 Profit ................................................. X Retained earnings 2015 ............................................. $60,000 Solving for X, profit = $31,000 Earnings per share = profit ÷ weighted average number of common shares = $31,000 ÷ 1,000 = $31 (b) Market price per common share Price-earnings ratio = Market price per share ÷ EPS Therefore Market price per share = Price-earnings ratio × EPS = 12 × $31 = $372 (c) Working capital = current assets – current liabilities = $85,000 – $60,000 = $25,000 (d) Current ratio = current assets ÷ current liabilities = $85,000 ÷ $60,000 = 1.4:1 (e) Debt to total assets = Total liabilities ÷ Total assets = $110,000 ÷ ($85,000 + $125,000) = 52%

Ex. 158 The following data are taken from the financial statements of Kamloops Inc.: Accounts payable ....................................................... Accounts receivable ................................................... Cash .......................................................................... Dividends ................................................................... Market price per share ............................................... Other current liabilities................................................ Profit .......................................................................... Wages payable .......................................................... Weighted average number of common shares ...........

$28,000 56,000 54,000 10,000 12.75 17,000 44,000 5,000 10,000

Instructions Calculate the following ratios: (a) Current ratio (b) Working capital (c) Earnings per share (d) Price-earnings ratio Solution 158 (10 min.) Current assets = $56,000 + $54,000 = $110,000 Current liabilities = $28,000 + $17,000 + $5,000 = $50,000 (a)

Current ratio = Current assets ÷ Current liabilities = $110,000 ÷ $50,000 = 2.2:1

(b)

Working capital = Current assets – Current liabilities = $110,000 – $50,000 = $60,000

A Further Look at Financial Statements

(c)

Earnings per share = Profit ÷ Weighted average number of common shares = $44,000 ÷ 10,000 = $4.40

(d)

Price-earnings ratio = Market price ÷ Earnings per share = $12.75 ÷ $4.40 = 2.9

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Ex. 159 The following data are taken from the financial statements of Estevan Inc.: Current assets ............................................................ Current liabilities......................................................... Dividends ................................................................... Market price per share ............................................... Net sales .................................................................... Profit .......................................................................... Total liabilities ............................................................ Total assets................................................................ Weighted average number of common shares ...........

$150,000 100,000 5,000 5 150,000 21,000 105,000 175,000 5,000

Instructions Calculate the following ratios: (a) Current ratio (b) Working capital (c) Earnings per share (d) Price-earnings ratio (e) Debt to total assets Solution 159 (15 min.) (a) Current ratio = Current assets ÷ Current liabilities = $150,000 ÷ $100,000 = 1.5:1 (b)

Working capital = Current assets – Current liabilities = $150,000 – $100,000 = $50,000

(c)

Earnings per share = Profit ÷ Weighted average number of common shares = $21,000 ÷ 5,000 = $4.20

(d)

Price-earnings ratio = Market price per share ÷ Earnings per share = $5 ÷ $4.20 = 1.2

(e)

Debt to total assets = Total debt ÷ Total assets = $105,000 ÷ $175,000 = 60%

Ex. 160 The following selected data are taken from the financial statements of Wolsco Inc. The data are in alphabetical order. Accounts payable ....................................................... Accounts receivable ................................................... Average assets .......................................................... Cash .......................................................................... Market price/share ..................................................... Net sales ....................................................................

$ 40,000 65,000 460,000 92,000 52.00 500,000

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

Other current liabilities................................................ Profit .......................................................................... Salaries payable......................................................... Shareholders’ equity .................................................. Total assets................................................................ Weighted average number of common shares ...........

15,000 160,000 14,000 269,000 472,000 3,500

Instructions Calculate the following ratios: (a) Current ratio (b) Working capital (c) Earnings per share (d) Price-earnings ratio (e) Debt to total assets Solution 160 (10 min.) (a) Current ratio = Current assets ÷ Current liabilities = $157,000 ÷ $69,000 = 2.3:1 (b) Working capital

= Current assets – Current liabilities = $157,000 – $69,000 = $88,000

= Profit ÷ Weighted avg. number of common shares = $160,000 ÷ 3,500 = $45.71

(d) Price-earnings ratio

= Market price per share ÷ Earnings per share = $52.00 ÷ $45.71= 1.1

(e) Debt to total assets = Total liabilities ÷ Total assets = $203,000 ÷ $472,000 = 43% (Total liabilities = Total assets – Shareholders’ equity = $472,000 – $269,000 = $203,000)

Ex. 161 For each of the ratios listed below, indicate by the appropriate code letter, whether it is a liquidity ratio, a profitability ratio, or a solvency ratio. Code: L = Liquidity ratio P = Profitability ratio S = Solvency ratio ____ ____ ____ ____

1. 2. 3. 4.

Earnings per share Debt to total assets Price-earnings ratio Current ratio

Solution 161 (5 min.) P 1. Earnings per share S

2. Debt to total assets

A Further Look at Financial Statements

3. Price-earnings ratio

4. Current ratio

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Ex. 162 The following information is available from the 2015 financial statements of Hubble Corp. and Bubble Inc. (amounts in millions, except share price) Hubble Bubble Beginning total assets ................................................ $17,102 $33,130 Current assets ............................................................ 11,712 28,447 Current liabilities......................................................... 7,966 14,950 Ending total assets ..................................................... 22,088 36,167 Profit .......................................................................... 565 1,271 Sales .......................................................................... 26,510 34,512 Share price................................................................. $79 $112 Total liabilities ............................................................ 16,136 31,222 Weighted average number of common shares ........... 22 39 Instructions (a) For each company, calculate the following ratios: 1. Current ratio 2. Debt to total assets 3. Earnings per share 4. Price-earnings ratio (b) Based on your calculations, discuss the relative liquidity, solvency, and profitability of the two companies. Solution 162 (15 min.) (a) 1. Current ratio 2. Debt to total assets 3. Earnings per share 4. Price-earnings ratio

Hubble 1.5:1 ($11,712 ÷ $7,966) 73.1% ($16,136 ÷ $22,088) $25.68 ($565 ÷ 22) 3.1 ($79 ÷ $25.68)

Bubble . 1.9:1 ($28,447 ÷ $14,950) 86.3% ($31,222 ÷ $36,167) $32.59 ($1,271 ÷ 39) 3.4 ($112 ÷ $32.59)

(b) Based on the current ratio, Bubble is more liquid than Hubble since its current ratio (1.9:1) is 27% higher than Hubble’s ratio (1.5:1). However, Hubble would be considered more solvent than Bubble since its debt to total assets (73.1%) is lower than Bubble’s debt to total assets ratio (86.3%). A lower debt to total assets ratio indicates a company is more solvent and better able to survive over a long period of time. Bubble has a higher earnings per share and price-earnings ratio than Hubble. Bubble’s earnings per share ($32.59) is 26.9% higher than Hubble’s earnings per share ($25.68); as well, Bubble’s price-earnings ratio (3.4) is 9.7% higher than Hubble’s ratio (3:1).

Ex. 163 Selected information from the comparative financial statements of National Falls Inc. for the year ended December 31 appears below: 2015 2014

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

Accounts receivable ................................................... $ 142,000 Bonds payable ........................................................... 490,000 Cash .......................................................................... 27,000 Cost of goods sold ..................................................... 970,000 Current liabilities......................................................... 125,000 Income tax expense ................................................... 80,000 Interest expense ........................................................ 40,000 Inventory .................................................................... 136,000 Profit .......................................................................... 220,000 Total assets................................................................ 1,350,000 Total revenues ........................................................... 2,100,000 Weighted average number of common shares ........... 15,000

$ 182,000 390,000 17,000 900,000 95,000 60,000 15,000 154,000 155,000 950,000 1,100,000 7,000

Instructions Calculate the following ratios for 2015: (a). Current ratio. (b) Working capital. (c) Debt to total assets. (d) Earnings per share. Solution 163 (12 min.) (a) Current ratio is 2.4:1. $27,000 + $142,000 + $136,000 —————————–—————– = 2.4:1 $125,000 (b) Working capital is $180,000. ($27,000 + $142,000 + $136,000) – $125,000 = $180,000 (c) Debt to total assets is 46%. $125,000 + $490,000 ———————–——– = 46% $1,350,000 (d). Earnings per share is $15. $220,000 ——–—— = $15 15,000

Ex. 164 Channing Corporation reported the following current assets and current liabilities: Dec. 31, 2015 Current assets Cash .......................................................................... $ 40,000 Short-term investments .............................................. 40,000

Dec. 31, 2014 $ 30,000 10,000

A Further Look at Financial Statements

Accounts receivable ................................................... Inventory .................................................................... Prepaid expenses ...................................................... Total current assets ............................................. Current liabilities Accounts payable ....................................................... Salaries payable......................................................... Income tax payable .................................................... Total current liabilities ..........................................

55,000 110,000 35,000 $280,000

95,000 90,000 20,000 $245,000

$120,000 40,000 20,000 $180,000

$110,000 30,000 15,000 $155,000

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Instructions (a) Calculate the following ratios for 2015: 1. Current ratio. 2. Working capital. (b) Explain the purpose of each ratio. Solution 164 (10–15 min.) (a) 1. Current ratio = Current assets ÷ Current liabilities = $280,000 ÷ $180,000 = 1.56:1 2. Working capital = $280,000 – $180,000 = $100,000 (b) The purpose of each ratio: 1. The current ratio is a measure of liquidity. For example, for every dollar of current liabilities, the corporation has $1.56 of current assets. 2. Working capital is a measure of liquidity. When working capital is positive, there is a greater likelihood that the company can pay its liabilities.

Ex. 165 Selected data from Doghouse Ltd. are presented below: Net sales .................................................................... $1,250,000 Profit .......................................................................... 195,000 Share price................................................................. 12.25 Weighted average number of common shares ........... 163,000 Instructions (a) Based on the above information, calculate two profitability ratios. (b) Explain the purpose of each ratio. Solution 165 (10–15 min.) (a) With the information provided, the profitability ratios that can be calculated are as follows: 1. Earnings per share = Profit ÷ Weighted average number of shares = $195,000 ÷ 163,000 = $1.20 2. Price-earnings = Market price per share ÷ Earnings per share = $12.25 ÷ $1.20 = 10.21 (b) The purpose of each ratio:

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1. 2.

Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

Earnings per share measures the profit for each common share. The price-earnings ratio measures the ratio of the market price of each common share to its earnings per share. It reflects the investors’ assessment of the company’s future profit expectations.

Ex. 166 Insert the characteristics listed below that are associated with relevance and faithful representation: Confirmatory value Completeness Neutral

1. 2. 3.

Materiality Free from material errors Predictive value

RELEVANCE _________________________ _________________________ _________________________

Solution 166 (5 min.) RELEVANCE 1. Confirmatory value

FAITHFUL REPRESENTATION 1. ______________________ 2. ______________________ 3. ______________________

FAITHFUL REPRESENTATION 1. Free from material errors

Predictive value

Completeness

Materiality

Neutral

Ex. 167 The following terms relate to the characteristics of useful information. Match the key letter of the correct term with the descriptive statement below. (a) Confirmatory value (b) Neutral (c) Predictive value (d) Relevance

(e) Faithful representation (f) Timeliness (g) Verifiability

_____ 1. Accounting information cannot be selected, prepared, or presented to favour one set of interested users over another. _____ 2. Providing information in time to make decisions _____ 3. Providing information that can be confirmed or duplicated by independent parties _____ 4. Providing information that would make a difference in a business decision _____ 5. Providing information that represents economic reality _____ 6. Helping evaluate prior decisions Solution 167 (5 min.) 1. (b) 2.

(f)

(g)

A Further Look at Financial Statements

(d)

(e)

(a)

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Ex. 168 For each of the independent situations described below, list the fundamental or enhancing qualitative characteristic that has been violated, if any. List only one term for each case. (a) Brunswick Corporation is in its third year of operations and has yet to issue financial statements. (b) Ontario Corporation has used different methods for recording the cost of inventory. In the current year, the cost of goods sold is calculated based on the average cost of inventory. Last year, the cost of inventory was calculated based on the actual cost of each item sold. Next year, the company plans to change back to average cost. (c) Manitoba Inc. is carrying inventory at its current cost of $110,000. The inventory has a fair value of $135,000. (d) Saskatchewan Corporation expenses some inexpensive office equipment even though it has a useful life of more than one year. Solution 168 (5 min.) (a) Timeliness (b) Comparability (consistency) (c) No violation (d) No violation (materiality)

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Test Bank for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

MATCHING 169. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. F. ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____

Relevance Liquidity ratios Comparability Liabilities Intangible assets Timeliness 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

G. H. I. J. K. L.

Working capital Current ratio Earnings per share Solvency ratios Price-earnings ratio Materiality

Measures of the ability of an entity to survive over a long period of time Current assets divided by current liabilities Knowledge that will influence a user’s decision. Market price per share divided by earnings per share An omission or statement that could influence the decisions of users. Obligations that result from past transactions. Noncurrent assets that do not have physical substance. Profit divided by the weighted average number of common shares Different companies using the same accounting principles Measures of the short-term ability of the company to pay its maturing obligations. The excess of current assets over current liabilities Information is available to stakeholders before it loses its ability to influence decisions.

A Further Look at Financial Statements

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ANSWERS TO MATCHING 1.

10. B 11. G 12. F