FA Chap 1 Solution

8/11/2019 FA Chap 1 Solution

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Chapter 1Financial Statements and Business DecisionsRevised April 25, 2010

ANSWERS TO QUESTIONS

1. Accounting is a system that collects and processes (analyzes, measures, and records)financial information about an organization and reports that information to decisionmakers.

2. Financial accounting involves preparation of the basic financial statements and relateddisclosures for external decision makers. Reporting is generally on a quarterly andannual basis. Managerial accounting involves the preparation of detailed plans,budgets, forecasts, and performance reports for internal decision makers. Reporting ison an ongoing basis.

3. Financial reports are used by both internal and external groups and individuals. Theinternal users are the various managers of the entity, e.g. marketing, credit andpurchasing. The external groups include the owners, investors, creditors,governmental agencies, other interested parties, and the public at large.

4. Investors purchase all or part of a business and hope to gain by receiving part of whatthe company earns and/or selling the company in the future at a higher price than theypaid. Creditors lend money to a company for a specific length of time and hope to gainby charging interest on the loan.

5. An accounting entity is the organization for which financial data are to be collected.Typical accounting entities are a business, a church, a governmental unit, a universityand other nonprofit organizations such as a hospital. A business is defined and treatedas a separate entity because the owners, creditors, investors, and other interestedparties need to evaluate its performance and its potential separately from otherentities and from its owners.

6. The heading of each of the four required financial statements should include thefollowing:(a) Name of the entity(b) Title of the statement(c) Specific date or period of the statement, or the period of time it covers(d) Unit of measure

7. (a) The purpose of the income statement is to present information about therevenues, expenses, and the profit of the entity for a specified period of time, inorder to help assess its financial performance during that period.

Financial Accounting, 4ce, Libby, Libby, Short, Kanaan, Gowing 2011 McGraw-Hill Ryerson Limited. All rights reserved.


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(b) The purpose of the statement of financial position is to report the financialposition of an entity at a given date, that is, to report information about theassets, obligations and shareholders equity of the entity as of a specific date.

(c) The purpose of the statement of cash flows is to present information about theflow of cash into the entity (sources), the flow of cash out of the entity (uses), andthe net increase or decrease in cash during the period.

(d) The statement of changes in equity reports the way that profit, the distribution of profit(dividends), and other changes to shareholders equity affected the companysfinancial position during the accounting period. The focus in this chapter is onretained earnings. Profit earned during the year increases the balance ofretained earnings whereas the declaration of dividends to the shareholdersdecreases retained earnings.

8. The income statement and the statement of cash flows are dated For the Year EndedDecember 31, 2011, because they report the inflows and outflows of resources duringa period of time. In contrast, the statement of financial position is dated As atDecember 31, 2011 because it represents the resources, obligations and shareholders

equity as at a specific date, December 31, 2011.

9. Assets are important to investors and creditors because assets provide a basis forjudging whether sufficient resources are available to operate the company. Liabilitiesare important to creditors and investors because the company must be able togenerate sufficient cash from operations or further borrowing to meet the paymentsrequired by debt agreements. If a business does not pay its creditors, the law may givethe creditors the right to force the sale of assets sufficient to meet their claims.

10. Profit is the excess of total revenues over total expenses. Loss is the excess of totalexpenses over total revenues.

11. The accounting equation for the income statement is Revenues - Expenses = Profit.Revenues result from the sale of goods and services to customers, regardless of thetiming of collection of cash from customers. Expenses represent the monetary value ofresources the entity used up, or consumed, to earn revenues during the period. Profitis simply the excess of revenues over expenses.



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12. The accounting equation for the statement of financial position is:

Assets = Liabilities + Shareholders Equity

Assets are the probable (expected) future economic benefits owned by the entity as aresult of past transactions. They are the resources owned by the business at a givenpoint in time such as cash, trade receivables, merchandise inventory, machinery,buildings, land, and patents. Liabilities are probable (expected) debts or obligations ofthe entity as a result of past transactions which will be discharged with assets (usually,cash) or services in the future. They are the obligations of the entity such as tradepayables, notes payable, and bonds payable. Shareholders equity is financing providedby owners of the business and by the profit generated from the operations of thebusiness. It is the claim of the owners to the assets of the business after the creditorclaims have been satisfied. Shareholders equity may be thought of as the residualinterest because it represents assets minus liabilities.

13. The accounting equation for the statement of cash flows is: Cash flows from operating

activities +/ Cash flows from investing activities +/ Cash flows from financingactivities = Change in cash for the period. The net cash flows for the period representthe increase or decrease in cash that occurred during the period. Cash flows fromoperating activities are cash flows directly related to earning income (normal businessactivity including interest paid and income taxes paid). Cash flows from investingactivities comprise cash flows that are directly related to the acquisition or sale ofproductive assets used by the company, such as plant and equipment. Cash flows fromfinancing activities consist of cash flows that are directly related to the financing of theenterprise, such as issuing shares to investors.

14. The accounting equation for retained earnings is:

Beginning Retained Earnings+ Profit Dividends= Ending Retained Earnings

The equation begins with beginning-of-the-year Retained Earnings i.e., the prior yearsending retained earnings reported on the statement of financial position. The currentyear's Profitreported on the income statement is added to this amount and theDividends declared during the current year are subtracted from this amount. Theending Retained Earnings amount is reported on the end-of-period statement offinancial position.

15. Credit managers use customers' financial statements to decide whether to extend themcredit for their purchases. Purchasing managers use potential suppliers' financialstatements to judge whether the suppliers have the resources necessary to meetcurrent and future demand. Human resource managers use financial statements as abasis for contract negotiations to determine, for example, what pay rates the companycan afford. The profit figure can also serve as a basis to pay bonuses not only tomanagement, but to other employees through profit sharing plans.



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16. In Canada, provincial securities legislation created securities commissions, mostnotably the Ontario Securities Commission (OSC),to regulate Canadian capitalmarkets and the flow of financial information provided by publicly traded companieswhose shares trade on Canadian stock exchanges, such as the Toronto Stock Exchange.Similar to the SEC, the OSC plays an influential role in promoting sound accountingpractices by publicly traded companies. Since their establishment, these securitiescommissions have worked with organizations of professional accountants to establishgroups that are given the primary responsibilities to work out the detailed rules thatCanadian entities must use. The name of the current Canadian group that has thisresponsibility is theAccounting Standards Board (AcSB). The AcSB is responsiblefor establishing standards of accounting and reporting by Canadian companies and not-for-profit organizations.

17. The officers of the company, usually the CEO and the CFO, must personally sign acertification that they have designed or supervised the design, implementation andevaluation of effective, appropriate financial accounting and reporting processes. Theexecutives and officers of the company bear primary responsibility for information

prepared and reported in the financial statements and other information contained inthe annual report. Top management also nominates members to the Board of Directorsto oversee the integrity of the first two safeguards. Those owning shares of the firmvote to elect the Board of Directors which holds the officers of the companyaccountable to the shareholders for defects in the internal control and reportingsystem. It also appoints external, independent auditors who provide advice tocompanies on how to best comply with regulations on financial reporting.

18. A sole proprietorship is an unincorporated business owned by one individual. Apartnership is an unincorporated association of two or more individuals to carry on abusiness. A corporation is a business that is organized under federal or provincial laws,

whereby a charter is granted and the entity is thus authorized to issue shares of stockas evidence of ownership by the owners (i.e., shareholders). Corporations are legalentities separate from their owners, but sole proprietorships and partnerships are not.

19. Public practice accounting firms normally render three types of service: assuranceservices, management advisory services, and tax services. Assurance services,including auditing, involves examination of the records and financial statements todetermine whether they fairly present the financial position and results ofoperations of the entity in accordance with the applicable accounting standards.Management advisory (consulting) services include providing expert business adviceto management. Tax services involve providing tax-planning advice to clients (both

individuals and businesses) and preparation of their tax returns.



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Authors' Recommended Solution Time

(Time in minutes)

Exercises Problems

Alternate

Problems

Cases and

Projects

No. Time No. Time No. Time No. Time

1 20 M 1 45 M 1 45 M 1 30 E2 25 M 2 60 D 2 60 D 2 20 E3 20 M 3 30 M 3 30 M4 20 M 4 45 M 4 20 M5 20 M 5 60 M 5 25 M6 20 E 6 25 M7 20 E 7 25 M8 10 E 8 *9 20 M

10 10 E11 30 M12 35 D

E = Easy M = Moderate D = Difficult

* Due to the nature of these cases and projects, it is very difficult to estimate the amount oftime students will need to complete the assignment. As with any open-ended project, it ispossible for students to devote a large amount of time to these assignments. While studentsoften benefit from the extra effort, we find that some become frustrated by the perceiveddifficulty of the task. You can reduce student frustration and anxiety by making yourexpectations clear. For example, when our goal is to sharpen research skills, we devoteclass time discussing research strategies. When we want the students to focus on a realaccounting issue, we offer suggestions about possible companies or industries.



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EXERCISES

E11

Honda Motor Co., Ltd.Statement of Financial Position

As at March 31, 2009(in millions of Yen)

Assets

Cash and cash equivalents 690,369

Trade accounts, notes, and other receivables 854,214Inventories 1,243,961Investments 639,069Other current assets 4,232,916Property, plant and equipment, net 3,435,520Other assets 722,868

Total assets 11,818,917

Liabilities and shareholders equity

Trade payables and other current liabilities 4,237,368

Long-term borrowingsOther liabilities

1,932,637 1,641,624

Total liabilities 7,811,629Share capital 302,561Retained earnings 3,704,727 Total shareholders equity 4,007,288Total liabilities and shareholders equity 11,818,917



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E12

Req. 1READ MORE STORE

Statement of Financial PositionAs at December 31, 2011

ASSETS LIABILITIES AND

SHAREHOLDERS EQUITY

Liabilities

Cash $ 48,900 Accounts payable $ 7,000Accounts receivable 25,000 Note payable 3,000Store and office equipment 49,000 Interest payable 120

Total liabilities 10,120

Shareholders Equity

Share capital 100,000Retained earnings 12,780 Total shareholders equity 112,780

Total assets $122,900Total liabilities and shareholders' equity $122,900

Req. 2

This is the first year of operations and no dividends were declared. Therefore, the balanceof retained earnings, $12,780, at year-end consists entirely of the profit earned during thefirst year.

E13

THE UNIVERSITY SHOPIncome Statement

For the Month of September 2012

Revenue from sales $120,000 (*)Expenses:

Cost of goods sold $ 40,000Salaries, rent, supplies, and other expenses 38,000

Utilities 600 Total expenses 78,600

Profit for the period $ 41,400

(*) $119,000 + $1,000 = $120,000.

(Note: income taxes were ignored in this problem.)



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E14

Net sales 892,513

Cost of sales 424,461

Selling and distribution expenses 43,248

General and administrative expenses 187,397

Advertising and promotion expenses 66,917Interest expense 4,297

Total expenses excluding income taxes 726,320 424,461 + 43,24+187,397 + 66,91

+4,29

Profit before income tax 166,193 892,513 726,23

Income tax expense 48,603

Profit for the year 117,590 166,193 48,60

E15

HOME REALTY, INCORPORATEDIncome Statement

For the Year Ended December 31, 2011

Revenue: Commissions earned ($150,000 + $16,000) $166,000 Rental service fees 15,000

Total revenues $181,000

Expenses: Salaries $ 62,000 Commissions 35,000 Payroll tax 2,500 Rent [($2,200 / 11 months) x 12] 2,400 Utilities 1,600 Promotion and advertising 8,000 Miscellaneous 500

Total expenses, excluding income taxes 112,000Profit before income taxes 69,000Income tax expense 18,500

Profit for the period $50,500



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E16

A Profit = $100,000 - $82,000 = $18,000;Shareholders Equity = $150,000 - $70,000 = $80,000.

B Total Revenues = $80,000 + $12,000 = $92,000;Total Liabilities = $112,000 - $60,000 = $52,000.

C Profit (Loss) = $80,000 - $86,000 = ($6,000);Shareholders Equity = $104,000 - $26,000 = $78,000.

D Total Expenses = $50,000 - $13,000 = $37,000;Total Assets = $22,000 + $77,000 = $99,000.

E Total Revenues = $81,000 - $6,000 = $75,000;Total Assets = $73,000 + $28,000 = $101,000.

E17

DUCHARME CORPORATIONSummary Income Statement

For the Month of January 2011Total revenues $150,000

Less: Total expenses (excluding income taxes) 100,000Profit before income taxes 50,000

Less: Income tax expense 15,000Profit for the year $ 35,000

DUCHARME CORPORATIONStatement of Financial PositionAs at January 31, 2011

Assets

Cash $20,000 Receivables from customers 25,000 Merchandise inventory 32,000Total assets $77,000

Liabilities and Shareholders Equity

Liabilities: Payables to suppliers $11,000

Income taxes payable 15,000Total liabilities 26,000Shareholders equity: Share capital (2,600 shares issued) 26,000 Retained earnings (Note 1) 25,000Total liabilities and shareholders equity $77,000

Note 1: $35,000 $10,000



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E1-8

Retained earnings, January 1, 2011 $ -Profit for 2011 36,000Dividends for 2011 (15,000)Retained earnings, December 31, 2011 $ 21,000

Retained earnings, January 1, 2012 $ 21,000Profit for 2012 45,000Dividends for 2012 (20,000)Retained earnings, December 31, 2012 $ 46,000

E19

1. Average amount of monthly revenue, $216,000 12 = $18,000.2. Amount of monthly rent, $21,000 12 = $1,750.

3. Supplies, $25,000 is an expense because it represents the cost of supplies used inperforming the services sold.4. Interest is an expense because it represents the cost of borrowing. The company has

an outstanding loan (from another party); $8,000 is the amount of interest (owed, ifnot already paid) on that debt for the year 2010. The interest on the loan for the year2010 is an expense of the year 2010 (whether or not paid by December 31, 2010).

5. Average income tax rate, $21,000 $60,000 = 35%.6. The income statement does not report, or make it possible to determine, the ending

cash balance. Cash is reported on the statement of financial position under assets andon the statement of cash flows as the final amount reported.

7. Price/earnings ratio, $468,000$39,000 = 12.

E110

(O) (1) Cash paid to suppliers and employeesO (2) Cash received from customers

(O) (3) Income taxes paid

O (4) Interest and dividends received

(O) (5) Interest paid

I (6) Proceeds from sale of investment in Conner Peripherals, Inc.

(I) (7) Purchases of property, plant, and equipment

(F) (8) Repayment of borrowings



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E111

NITSU MANUFACTURING CORPORATIONStatement of Cash Flows


Cash flow from operating activities Cash collected from customers $270,000 Cash paid for operating expenses (180,000)

Net cash flow from operating activities $90,000Cash flow from investing activities Cash received for sale of land 15,000 Cash paid for purchase of new machines (38,000)

Net cash flow from (used in) investing activities (23,000)Cash flow from financing activities Cash received from sale of the companys shares 30,000 Cash paid on long-term notes (80,000)

Cash paid for dividends (22,000)Net cash flow from (used in) financing activities (72,000)Net decrease in cash during the year (5,000)Cash at beginning of year 63,000Cash at end of year $ 58,000

E112

Req. 1PAUL'S PAINTERS

Schedule of Cash Flow from OperationsFor the Month of January 2012

Cash Inflows Cash services $105,000Cash Outflows:

Salaries and wages paid $50,000Other expenses paid 26,000Total cash outflows 76,000

Net increase (decrease) in cash during January 2012 $ 29,000

Req. 2

Reconciliation with income: Profit $40,500 Non-cash services (30,500) Non-cash expenses ($3,000 + $2,000 + $500 + $13,500) 19,000 Net increase (decrease) in cash $29,000



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PROBLEMS

(Note to the instructor: Most students find the Problems in this chapter to be quite

challenging.)

P11

Req. 1NUCLEAR COMPANY

Summary Income StatementFor the Year Ended December 31, 2011

Total sales revenue (given) $140,000Total expenses, excluding income taxes (given) 89,100Profit before income taxes 50,900Income tax expense ($50,900 x 30%) 15,270Profit $ 35,630

Req. 2

NUCLEAR COMPANYStatement of Financial Position

As at December 31, 2011Assets

Cash (given) $ 25,000Accounts receivable (given) 12,000Merchandise inventory (given) 90,000

Equipment, net (given) 45,000 Total Assets $172,000


Liabilities:Accounts payable (given) $47,370Salary payable (given) 2,000 Total Liabilities $ 49,370Shareholders' equity:Share capital (given) $87,000Retained earnings* 35,630

Total shareholders' equity 122,630Total liabilities and shareholders' equity $172,000

* Ending RE = Beginning RE + Profit Dividends = $ 0 + $35,630 - $ 0 = $35,630.

Because this is the first year of operations the beginning balance of retainedearnings is zero.



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P12

Req. 1BRIGITTE'S LAWN SERVICE

Income StatementFor the Three Months Ended August 31, 2011

Service revenue ($12,600 + $800) $13,400Expenses:

Gas, oil, and lubrication ($920 + $200) $1,120Pickup truck repairs 210Repair of mowers 75Wages for helpers 4,500Payroll taxes 175Preparation of payroll tax forms 25Insurance 125Telephone 110

Interest expense on note paid 75Depreciation, equipment 500Miscellaneous supplies used 80Total expenses 6,995

Profit $ 6,405

Req. 2

BRIGITTE'S LAWN SERVICEStatement of Financial Position

As at August 31, 2011

Assets

Cash1 $ 3,905Accounts receivable 800Equipment 2,400 Less: Depreciation (500) 1,900Total Assets $6,605

Liabilities and Owners Equity

Accounts payable $ 200Brigitte Lebeau, capital 6,405

Total Liabilities and Owners Equity $6,605

1Cash = $12,600 + 2,500 (920 + 210 + 75 + 4500 + 175 + 25 + 125 + 110 + 75 + 80) 2,500 1500 900 = $3,905



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P12 (continued)

Req. 3

Because the above report reflects only revenues, expenses, and profit, it is reasonable tosuppose that Brigitte would need a statement of cash flows that is, a statement of theinflows and outflows of cash during the period in three categories: operations, investing,and financing. This will explain to Brigitte the reason for the increase in cash during theperiod and the differences between cash from operations and profit.

Because it is the first period of operations and the owner did not make any withdrawals, astatement of changes in equity is not necessary.

P13

Req. 1 Req. 2Explanation

Transaction Profit Cash (a) $+66,000 $+55,000 All services performed increase profit;cash received during the period was,$66,000 x 5/6 = $55,000.

(b) 0 +30,000 Cash borrowed is not profit.

(c) 0 2,700 Purchase of the truck does not representan expense because the truck is an asset;cash outflow was $9,000 x 30% = $2,700.

(d) 36,000 30,000 All expenses incurred reduce profit; cashexpended was $36,000 x 5/6 = $30,000.

(e) 2,400 2,250 Not all of the supplies were used; expense isthe amount used, $3,000 x 4/5 = $2,400.Cash paid during the quarter was $3,000 x3/4 = $2,250.

(f) 21,000 10,500 All of the wages incurred reduce profit,$21,000; cash paid during the quarter was$21,000 x 1/2 = $10,500.

Based onlyon the above:- Profit $6,600

- Cash inflow $ 39,550



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P14

Req. 1

The personal residences of the organizers are not resources of the business entity.Therefore, they should be excluded.

Req. 2

It is not indicated whether the $7,000 listed for service supplies and the $68,000 listed forservice trucks and equipment reflect their cost when acquired or the current market valueon December 31, 2013. Furthermore, the amount listed for bills from customers may notrepresent the potentially collectable amount.

Req. 3

The list of company resources (i.e., assets) suggests the following areas of concern:

Company resources:

(1) Service trucks and equipment as noted above, it is not indicated whether the$68,000 for service trucks and the $30,000 for service equipment are cost whenacquired or current market value on December 31, 2013.

(2) Personal residences as noted above, these items are not resources of the businessentity and should be excluded. Usually they would not be subject to creditors' claimsagainst the corporation. Also, there is no indication whether the $190,000 is cost atacquisition or current market value at December 31, 2013. Also, there is no indication

as to any amounts that might be owed on the residences.

Company obligations:(1) Unpaid wages of $19,000, which are now due, pose a serious problem because only

$12,000 cash currently is available.

(2) Unpaid taxes and accounts payable to suppliers it is not clear when these paymentsof $8,000 and $10,000, respectively, are due (cash needed to pay them is a problem).

(3) The $50,000 owed on the service trucks probably is long term; however, short-terminstallments may be required these details are very important to the bank.

(4) Loan from organizer the expected payment date and interest rate are importantissues for which details are not provided. This is a major cash demand.



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P14 (continued)

In general, the bank should request more details about the specific resources anddebts. The personal residences are not a part of the resources of the business entity.The bank should request that the owners provide audited information about theentity's assets and debts.

Req. 4

The amount of shareholders equity (i.e., assets minus liabilities) for West Company,assuming the amounts provided by the owners are acceptable, would be:

Assets ($322,000 $190,000) $132,000Liabilities 102,000Shareholders equity $ 30,000

P1-5

Req. 1 Deficiencies include:

(1) Heading: titles of the reports are missing and dates are not in proper form.(2) Income statement should show revenues and expenses separately.(3) Statement of financial position should separately report assets, liabilities, and

shareholders equity.(4) Retained earnings, $30,000, should be reported under shareholders equity.(5) Due from customers, $13,000, should be reported under assets, i.e., Trade receivables.(6) Supplies on hand, $15,000, should be reported under assets.(7) Accumulated depreciation, $10,000, should be subtracted from service vehicles.

Req. 2 Financial Statements

PERFORMANCE CORPORATIONIncome Statement


Sales revenue ($175,000 + $52,000) $227,000Expenses:

Cost of goods sold $ 90,000Selling expenses 25,000Depreciation expense 10,000Salaries and wages 62,000

Total expenses, excluding income taxes 187,000Profit before income taxes 40,000Income tax expense (25% x $40,000) 10,000Profit $30,000



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P15 (continued)

Req. 2 Financial Statements

PERFORMANCE CORPORATIONStatement of Financial Position

As at December 31, 2011

Assets

Cash $ 32,000Merchandise inventory 42,000Supplies inventory 15,000Trade receivables 13,000Service vehicles $ 50,000Less accumulated depreciation (10,000) 40,000 Total assets $142,000


LiabilitiesTrade payables $22,000Note payable 25,000 Total liabilities 47,000Shareholders' equity

Share capital (6,500 shares issued) $65,000Retained earnings 30,000 Total shareholders' equity 95,000Total liabilities and shareholders' equity $142,000



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ALTERNATE PROBLEMS

AP11

Req. 1MCCLAREN CORPORATION

Summary Income StatementFor the Fiscal Year Ended June 30, 2012

Total sales revenue (given) $90,000Total expenses, excluding income taxes (given) 60,500Profit before income taxes 29,500Income tax expense ($29,500 x 30%) 8,850Profit $20,650

Req. 2

MCCLAREN CORPORATIONStatement of Financial PositionAs at June 30, 2012

Assets

Cash (given) $ 13,150Trade receivables (given) 9,500Merchandise inventory (given) 57,000Equipment, net (given) 36,000 Total Assets $115,650


Liabilities:Trade payables (given) $31,500Salary payable (given) 1,500 Total Liabilities $ 33,000Shareholders' equity:Share capital (given) $62,000Retained earnings* 20,650 Total shareholders' equity 82,650Total liabilities and shareholders' equity $115,650

* Ending RE = Beginning RE + Profit Dividends

= $ 0 + $20,650 - $ 0 = $20,650.

Because this is the first year of operations the beginning balance of retained earnings iszero.



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AP12

Req. 1ABEL ELECTRIC REPAIR COMPANY, INCORPORATED

Income StatementFor the Three Months Ended December 31, 2011

Service revenues ($32,000 + $3,000) $35,000Expenses:

Wages for electrician's assistant $ 8,500Payroll taxes 175Supplies used 9,500Oil, gas, and maintenance - truck 1,200Insurance 700Rent ($500 + $200) 700Utilities and telephone 825Depreciation of truck and tools 1,200

Miscellaneous expenses 600 Total expenses, excluding income taxes 23,400Profit before income taxes 11,600 Income tax expense ($11,600 x 30%) 3,480Profit $ 8,120

Req. 2

ABEL ELECTRIC REPAIR COMPANY, INCORPORATEDStatement of Financial Position

As at December 31, 2011

Assets

Cash1 $11,500Accounts receivable 3,000Equipment (9,000 + 1,500) $10,500 Less: Amortization (1,200) 9,300Total Assets $23,800

Liabilities

Accounts payable $ 200Income tax payable 3,480

Total liabilities 3,680

Shareholders Equity

Share capital (initial investment) $12,000Retained earnings 8,120 20,120Total Liabilities and Shareholders Equity $23,800

1 Cash = $12,000 9,000 1,500 + 32,000 (23,400 200 1,200) = 11,500



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AP12 (continued)

Req. 3

Because the above report reflects only revenues, expenses, and profit, it is reasonable tosuppose that John would have need for a statement of the sources and uses of cash duringthe period; that is, a statement of cash flows. This will show John whether cash increased ofdecreased during a given period, and the main reasons for the change.



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CASES AND PROJECTS

FINDING AND INTERPRETING ACCOUNTING INFORMATION

CP11

Req. 1

The fiscal year ends on December 31

Req. 2

a. Statements of Financial Position 2 yearsb. Income Statements 2 yearsc. Statements of Cash Flows 2 years

Req. 3

Yes. The financial statements are audited by the firm KPMG SA (from the auditors report).

Req. 4

The companys total assets decreased by CHF 9,146 from CHF115,361 to CHF106,215(amounts in millions)

Req. 5

The balance of inventories was CHF 9,342 million at December 31, 2008.

Req. 6

Assets = Liabilities + Shareholders EquityCHF 106,215 = CHF 51,299 + CHF 54,916 (in millions)



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CP12

Req. 1

Profit for the year ended December 31, 2008 was 366 million, as disclosed in the incomestatement.

Req. 2

Revenue earned in the fiscal year ended December 31, 2008 was 5,384 million. This is alsodisclosed on the income statement.

Req. 3

Inventory as at December 31, 2008, amounted to 767 million. This information isdisclosed on the statement of financial position.

Req. 4

Cash decreased by 393 million during the fiscal year. This amount can be found on thestatement of cash flows.

Req. 5

The auditor is Deloitte, LLP. This information is found in the auditors report in the 2008annual report.

CP13

Req.1

Total assets for Nestl was higher at CHF106,215 million compared to CHF13,609 (8,895million x 1.53 exchange rate) for Cadbury.

Req. 2

Nestl also had higher sales at CHF109,908 million compared to CHF10,714 (5,384 millionx exchange rate 1.99) for Cadbury.

Req. 3

Both companies had a decline in total assets. Nestls decline was 8% [(CHF 106,215 115,361) 115,361] compared to 21.5% for Cadbury [(8,895 11,338) 11,338].

Cadbury had a higher growth rate in net sales at 15% [(5,384 4,699) 4,699] comparedto Nestls rate of 2% [(CHF109,908 107,552) 107,552].

Note that for these calculations the exchange rate is not needed as we are comparingpercentages based on calculations internal to each company.



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FINANCIAL REPORTING AND ANALYSIS CASES

CP14

Req. 1 Cash Received Balances Immediately After Sale

Case for Assets Assets = Liabilities + Shareholders Equity

A $90,000 $90,000 $50,000 $40,000 B 80,000 80,000 50,000 30,000 (note 1) C 100,000 100,000 50,000 50,000 (note 2) D 35,000 35,000 50,000 15,000 (note 3)

Note 1: Includes $10,000 loss on sale of assets, i.e., $80,000 minus $90,000.Note 2: Includes $10,000 gain on sale of assets, i.e., $100,000 minus $90,000.Note 3: Includes $55,000 loss on sale of assets, i.e., $35,000 minus $90,000, which results

in a negative shareholders equity of -$15,000.

Req. 2

Case To Creditors To Shareholders Total

A $50,000 $40,000 $90,000 B 50,000 30,000 80,000 C 50,000 50,000 100,000 D 35,000 -0- 35,000

Explanation: Legally, creditors' claims have a priority over shareholders claims.Therefore, cash necessary to satisfy all creditors' claims would be disbursed first. Anyremaining cash would be distributed to the owners in proportion to their ownershipinterests. In case D, creditors do not get all of the money owed to them and shareholders donot get any cash, because the total amount of cash is not sufficient to pay the creditors thetotal amount due to them.



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CRITICAL THINKING CASES

CP15

Req. 1

The personal items owned by Gonzalez should not be included in the financial statementsof the company. The company is a separate entity for accounting purposes.

The list of liabilities properly excluded the personal debts of Gonzalez because these arenot debts of the company.

Req. 2

Gonzalezs response does not explain or excuse the presentation in the financial report.It appears that deception is involved because of the listing of personal assets and theexclusion of the related liabilities. Such reporting is misleading and dishonest.

The financial report is not correct even if it were clearly stated that the accounting entityrepresents the company and owner combined as one entity. If this assumption were used,which would be appropriate only if clearly specified, it would require that allof the assetsand allof the liabilities of both the company and Gonzalez be included. Preferably thebusiness should be reported as a separate entity. The personal assets and liabilities shouldbe reported as another separate entity.

CP16

Req. 1

You should forcefully assert the need for an independent audit of the financial statementseach year because this is the best way to assure credibility conformance with IFRS,completeness and absence of bias.

You should firmly reject Roger as the auditor because there is no evidence about hiscompetence as an accountant or auditor. Also, he is related to the partner who prepares thefinancial statements; there is a conflict of interest.

Req. 2

You should strongly recommend the selection of an independent, licensed professionalaccountant in public practice because the financial statements should be audited by acompetent and independent professional who must follow prescribed accounting andauditing standards on a strictly independent basis. An audit by Roger would not meet anyof these requisites, particularly the most important one in this case independence (andabsence of bias).



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CP17

The textbook does not explicitly cover the elements of independence. The case is designed to

permit the students to develop their own values. We have found that it is useful to emphasize

the difference between independence in fact and in appearance during these discussions.

Req. 1

Most students feel that there is no problem with independence if the shares held areimmaterial in amount. When asked about a possible headline that might read Auditor whowas shareholder is accused of fraud, most students see a problem with the appearance.In fact, professional accounting organizations do not apply a materiality threshold wherethere is a direct financial interest. Any holding of shares is a problem.

Req. 2

This is an example of an indirect holding of shares. A materiality threshold is applied in

these situations. There could be a question of independence if the auditor held a materialinterest in the mutual fund (relative to her net worth) and the mutual fund held a materialinterest in the company that she audited.

Req. 3

Codes of Professional Conduct apply only to audit professionals who are members. Bob'semployers may want to assign him to a different company but there is no conflict in thiscase.

Req. 4

Clearly there is an ethics violation in this case because she would audit statements thatcovered a period of time where she was responsible for the accounting operations of thecompany. This is a problem both in appearance and in fact.

Req. 5

The loan from the bank was made under normal lending procedures, terms, andrequirements. Therefore, it may not be a source of impairment of independence. However,one has to be careful whether the loan has the appearance of being made under normalcredit terms or not.

FINANCIAL REPORTING AND ANALYSIS TEAM PROJECT

CP18

The solution to this case will depend on the company and/or accounting period selected foranalysis.

FA Chap 1 Solution

Documents

Transcript of FA Chap 1 Solution