(Solution Manual) Understanding Financial Accounting, Canadian Edition

Burnley, 3

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Solution Manual

3rd Edition

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Solution Manual for Understanding Financial Accounting, Canadian Edition, The downloadable file consists of 1159 pages, and the total size of the file is 6.66 MB. Purchase now only for highly discounted price.

Author(s): Burnley

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Solutions Manual for Understanding Financial Accounting, 3rd Canadian Edition By Christopher Burnley CHAPTER 1 OVERVIEW OF CORPORATE FINANCIAL REPORTING Learning Objectives 1.Define financial accounting and understand its relationship to economic decision -making. 2.Identify the main users of financial accounting information and explain how they use this information. 3.Describe the major forms of business organization and explain the key distinctions between them. 4.Explain the three categories of business activities and identify examples of transactions related to each category. 5.Identify and explain the content and reporting objectives of the four basic financial statements and the notes to the financial statements.Burnley, Understanding Financial Accounting, Third Canadian Edition Summary of Questions by Learning Objectives and Bloom’s Taxonomy Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT Discussion Questions 1. 1 K 6. 2 C 11. 5 C 16. 4 C 21. 5 C 2. 3 K 7. 2 C 12. 4 C 17. 4 C 22. 5 C 3. 3 C 8. 2 C 13. 4 C 18. 5 C 23 5 C 4. 3 C 9. 2 C 14. 4 C 19. 5 C 5. 2 C 10. 4 C 15. 4 C 20. 5 C Application Problems 1. 4 C 4. 5 C 7. 5 AP 10. 5 AP 13. 5 AP 2. 4 C 5. 5 AP 8. 5 AP 11. 5 AP 14. 5 AP 3. 4 AP 6. 5 AP 9. 5 AP 12. 5 AP 15. 5 AP User Perspective Problems 1. 2 C 2. 2 C 3. 3 C 4. 2 C 5. 2 C Work in Process 1. 5 C 3. 5 C 5. 5 C 2. 5 C 4. 5 C 6. 5 C Reading and Interpreting Published Financial Statements 1. 5 AN 3. 5 AN 5. 2,5 C 2. 5 AN 4. 5 AN 6. 5 AN Cases 1. 2 C Burnley, Understanding Financial Accounting, Third Canadian Edition Legend : The following abbreviations will appear throughout the solutions manual file. LO Learning objective BT Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation Difficulty: Level of difficulty E Easy M Medium H Hard Time: Estimated time to complete in minutes AACSB Association to Advance Collegiate Schools of Business Communication Communication Ethics Ethics Analytic Analytic Tech. Technology Diversity Diversity Reflec. Thinking Reflective Thinking CPA CM CPA Canada Competency Map Ethics Professional and Ethical Behaviour PS and DM Problem -Solving and Decision -Making Comm. Communication Self-Mgt. Self-Management Team & Lead Teamwork and Leadership Reporting Financial Reporting Stat. & Gov. Strategy and Governance Mgt. Accounting Management Accounting Audit Audit and Assurance Finance Finance Tax Taxation Burnley, Understanding Financial Accounting, Third Canadian Edition SOLUTIONS TO DISCUSSION QUESTIONS DQ1-1 Accounting, as an information system, provides economic information to users to allow them to determine whether the entity is operating effectively and efficiently. In addition, accounting facilitates the making of important decisions in the management of the entity, such as whether new assets should be purchased or leased , or whether equity financing should be used as opposed to debt fin ancing. LO 1 BT: K Difficulty: E Time: 5 min. AACSB: None CPA: cpa -t001 CM: Reporting DQ1-2 The owner’s legal liability is as follows for each form of business: Proprietorship: The own er (or proprietor) is responsible for the debts of the business. His or her personal assets are at risk in the event of legal action. Partnership: The owners (or partners) are responsible for the debts of the business. Their pe rsonal assets are at risk in event of legal action. Corporation: The owners (or shareholders) are only responsible for the debts of the corporation to the extent of their investment in the company’s shares. Any debts in excess of this amount are not their responsibility. The taxat ion of income is as follows for each form of business: Proprietorship: The income of a proprietorship is taxed in the hands of the owner (i.e. the proprietor). Partnership: The income of a partnership is taxed in the hands of the owners (i.e. the partners). Corporation: The income of a corporation is taxed separately (i.e. the corporation files its own tax return). Any income distributed to the shareholders (i.e. dividends) is then taxed in the hands of the owners (i.e. the shareholders). LO 3 BT: K Difficulty: E Time: 15 min. AACSB: None CPA: cpa -t001 CM: Reporting Burnley, Understanding Financial Accounting, Third Canadian Edition DQ 1 -3 If an entrepreneur has a relatively simple business with low liability risk , it may be better to operate the business as a proprietorship. If the entrepreneur is not looking to borrow any money he or she will not assume the personal risk. Proprietorships are easy to form and do not have any organizational costs. If the entrepreneur has no intention of expanding the business or selling the busi ness, a proprietorship makes sense. LO 3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa -t001 CM: Reporting DQ 1 -4 A private corporation is one whose shares are held by a small number of individuals. This makes the transfer of ownership more difficult , as the shares do not trade on a public stock exchange. A public corporation has shares held by a larger number of individuals or entities and these shares are bought and sold on a public stock exchange (such as the Toronto Stock Exchange). LO 3 BT: C Difficulty: E Time: 10 min. AACSB: None CPA: cpa -t001 CM: Reporting DQ 1 -5 Public companies have their share s traded on a public stock exchange. The federal and provincial governments have regulations related to how public companies report their financial statements and are interested in ensuring that these regulations are followed. The stock exchanges also have regulations about the timing and format of information that companies must convey to them and to investors. LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa -t001 CM: Reporting DQ 1 -6 Shareholders – These users are interested in the perfor mance of their investment in the company. They will use the financial statements to evaluate how well management is handling their investment. Individual shareholders may also use the financial statements in assessing whether to continue to hold the shares, purchases more or sell the shares they have. Creditors (i.e. Financial Institutions ) – These users are interested in evaluating the compan y to decide whether to lend money to it. They will use the statements to evaluate the risk that will be taken in making the loan. This includes assessing the company’s ability to service the debt (i.e. pay interest and repay principal). Burnley, Understanding Financial Accounting, Third Canadian Edition DQ1-6 (Continued) Taxing Authorities – These users establish the rules for how taxable income will be measured. They are interested in the fair measurement of the financial p erformance of the company so that the appropriate tax will be paid. Note, however, tha t income taxes are not paid based on the net earnings reported in the financial statements; rather, income taxes are based on taxable income. In preparing the tax return, the financial statements ’ net income is the starting point and is then adjusted to arrive at taxable income. Financial Analysts – These users provide investment advice to their customers. They are interested in evaluating the investment potential of various companies. They will wa nt to evaluate not only individual companies, but also make comparisons between companies , likely in the same industry . (Note: there are other users discussed in the chapter that would be equally acceptable answers to this question.) LO 2 BT: C Diffic ulty: M Time: 15 min. AACSB: None CPA: cpa -t001 CM: Reporting DQ1-7 Shareholders invest in the shares of a company. They may expect to receive dividends, which are a distribution of past profits to shareholders. They also expect to eventually sell their shares at a higher price than they paid for them , due to capital appreciation. LO 2 BT: C Difficulty: E Time: 5 min. AACSB: None CPA: cpa -t001 CM: Reporting DQ 1 -8 Capital appreciation is an increase in the market value of the shares of a company. Investors realize this type of return by purchasing shares in a company, and then later selling the shares at a higher market price than they had originally paid. Capital appreciation often results from a company’s growt h (i.e. increased revenues and increased profits). LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa -t001 CM: Reporting Burnley, Understanding Financial Accounting, Third Canadian Edition DQ 1 -9 When creditors loan money to a company, they expect to receive their money back. That is one cash stream, called return of principal. The other cash stream is periodic interes t that creditors receive for time they have allowed the company to use their money. LO 2 BT: C Difficulty: E Time: 5 min. AACSB: None CPA: cpa -t001 CM: Reporting DQ 1 -10 The three major types of activities in which all companies engage are financing, investing, and operating activities. Financing refers to the activity of obtaining funds for the company to operate. Two primary sources of funds are owners and creditors. Some typical financing activities are: short - and long -term borrowing, repayment of debt, dividend payments, and the issuance of additional shares. Investing refers to the activity of using funds generated by financing activities to acquire assets that will generate profits in the future. Investments include the purchase of property, plant, and equipment and the purchase and sale o f investments in other companies. Operating activities are associated with developing, producing, marketing, and selling the products and/or services of the company. Operating activities are m ainly concerned with the day -to-day activities of the company. LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa -t001 CM: Reporting DQ 1 -11 The three major categories of items that appear in a typical statement of financial position (balance sheet) are assets, liabilities, and shareholders’ equity. Burnley, Understanding Financial Accounting, Third Canadian Edition DQ1-11 (Continued) Assets are resources owned by a company that will be used or sold for its the future economic benefit. In order to have an asset, the event that gave the company the control of the resource must have already happened . The company is able to perform its activities and thereby generate profits with the help of its assets . This means that they are income earning. Assets may be current or non -current. Current assets will be used or converted into cash within the next year or operating cycle. Examples include cash, inventory, and accounts receivable. Non - current assets are those assets whose benefits may be realized over a period longer than one year or operating cycle. Examples includ e property, plant, and equipment, patents, trademarks, etc. Liabilities are the amounts that the company owes to others and which require a probable future outflow or sacrifice of resources to settle an obligation that exists as a result of a transaction that has already taken place . Liabilities may be classified as current and non -current. Current liabilities include notes payable due within one year, accounts payable, accrued expenses, and dividends payable. Non -current liabilities include long-term deb t, long -term warranties payable, and pension liabilities. Shareholders’ Equity represents the wealth or the ownership interest of the owners. Shareholders’ equity may also be defined as the difference between the assets and liabilities of a company: Shareholders’ Equity = Assets – Liabilities There are two major shareholders’ equity accounts: share capital and retained earnings. Share capital represents the amount that investors originally paid for the shares that the company issued. Retained earning s consist of the cumulative earnings of the company less the dividends distributed to shareholders . LO 5 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa -t001 CM: Reporting Burnley, Understanding Financial Accounting, Third Canadian Edition DQ 1 -12 Operating activities relate to the day -to-day activities of a company. This includes generating revenue s and incurring expenses, which are the most crucial activities in relation to the long -term sustainability of a company. Investing activities occur on a more sporadic basis and include the purchase or disposal of property, plant, and equipment as well as the purchase and resale of shares in other companies. LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa -t001 CM: Reporting DQ 1 -13 Operating activities relate to the day -to-day activities of a company. This includes generating revenue and incurring expenses, which are the most crucial to the long -term sustainability of a company. Financing activities are those actions taken by a company to obtain the funding necessary to purchas e assets such as buildings and equipment and investments . Financing activities also include the repayment of loan principal and payment of dividends. Financing activities are required in order to start a business. Without financing, most businesses would not be able to begin to engage in operating activities. Financing needs generally continue throughout the life of a company as it grow s and expand s. LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa -t001 CM: Reporting DQ1-14 Costs relating to hiring and training a company’s employees are considered an operating activity. The employees will perform and maintain operations so all costs related to them will be operating activities. Investing activities are related to the purchase or sale of property, plant, and equipment and shares in other companies . LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa -t001 CM: Reporting DQ1-15 We would normally expect a company to have an overall inflow of cash from its operating activities. Unless a company is successful at generating posit ive cash inflows from its operations, it will ultimately run out of cash. Financing sources will dry up because the company will be unable to attract new investors or lenders. Eventually it will have to sell the property, plant, and equipme nt it uses to g enerate revenue. LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa -t001 CM: Reporting Burnley, Understanding Financial Accounting, Third Canadian Edition DQ1-16 We would normally expect a company to have an overall cash outflow from its investing activities. These activities include the purchase of property, plant, and equipment that are purchased to generate operating revenue. Cash inflows from investing activities require the sale of investments or property, plant and equipment . Companies that are financially healthy and growing typically spend mo re cash on acquiring new assets than the proceeds they generate from selling the property, plant and equipment they have finished using . LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa -t001 CM: Reporting DQ1-17 The statement of income describes the results of the operating activities from the beginning of the current period to its end . Net income is defined as revenues less expenses. Revenues are cash or resources that flow into the company from operating activities. Expenses are cash or resources that flow out of company from operating activities. Investing and financing activities are typically depicted on statement of financial position . LO 4 BT: C Difficulty: H Time: 10 min. AACSB: None CPA: cpa -t001 CM: Reporting DQ1-18 The purpose of the statement of income is to measure the company’s performance by the results of its operating activities for a month, a quarter , or a year. The sum of these operating activities is known as the company’s profit, which is revenue less expenses. The purpose of a statement of cash flows is to present the cash related to the three categories of business activities and its objective is to enable financial statement users to assess the company’s inflows and outflows relative to each of these activities. The statement of income allows users to assess how well management has operated its business and if it is profitable where as the statem ent of cash flows allows users to assess how well management has managed its cash and whether they will have enough cash in the future to run the business effectively. LO 5 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa -t001 CM: Reporting Burnley, Understanding Financial Accounting, Third Canadian Edition DQ 1-19 The statement of changes in equity provides details on how each component of shareholders’ equity changed during the period. Retained earnings, a component of shareholders’ equity , changes each period by the net income reported on the statement of income , less any dividends that were declared by the board of directors during the period. As a result, the statement of income must be prepared first. LO 5 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa -t001 CM : Reporting DQ1-20 The accounting equation is Assets = Liabilities + Shareholders ’ Equity. Shareholders ’ Equity does represent the interests of the owners or residual value left in the business after the external claims or liabilities have been paid. This is supported by the reorganization of the accounting equation: Shareholders ’ Equity = Assets – Liabilit ies. LO 5 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa -t001 CM: Reporting DQ1-21 The four main financial statements contained in all annual reports are the statement of income , the statement of changes in equity, the statement of financial position, and the statement of cash flow s. Statement of Income : The statement of income records the inflow of revenues and gains and the outflow of expenses and losses over the year (or speci fied period) . The statement helps investors evaluate the performance of the company during the period and it is useful in forecasting the future results of the company. Statement of Changes in Equity : The statement of changes in equity provides details on how each component of shareholders’ equity changed during the period. This includes any changes in share capital , and any income generated by the company less amounts distributed to shareholders as dividends. Statem ent of Financial Position : The statement of financial position gives the financial status of the company at a particular point in time. Since it presents the details of assets, liabilities, and shareholders’ equity, it gives users a fair idea of the riski ness of the mix of assets and liabilities of the company. Burnley, Understanding Financial Accounting, Third Canadian Edition DQ1-21 (Continued) Statement of Cash Flow s: This statement measures the inflow and outflow of cash during a specific period of time. It is very useful in measuring the performance of the company as well as predicting future cash flows since it gives details about the inflow and outflow of cash broken down into operating, investing, and financing activities. It explains the change in cash between the beginning and the end of the period. LO 5 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa -t001 CM: Reporting DQ1-22 The notes to the financial statements provide more detail ed information on items in the financial statements and are cross -referenced. The first , second or sometimes third note to the financial statements often discusses the Summary of Significant Accounting Policies, which describes the choices made by management from among the possible choices and judgments acceptable under accounting standards . The notes help keep the financial statements free of excessive detail, while providing meaning ful information to financial statement users. LO 5 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa -t001 CM: Reporting DQ1-23 The management discussion and analysis (MD&A) section of the annual report provides an overview of the previous year, a discussion of the risks facing the company, and some information about busines s plans for the future . Many companies use this part of the report to make more extensive, detailed comments on the company and its operating results. Often the information is presented from the company's perspective . LO 5 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa -t001 CM: Reporting Burnley, Understanding Financial Accounting, Third Canadian Edition SOLUTIONS TO APPLICATION PROBLEMS AP1-1A Examples of Canadian Tire’s financing transactions: 1. Share issuance to raise capital for purchasing property, plant & equipment 2. Issuance of long -term debt to raise capital Examples of Canadian Tire’s investing transactions: 1. Purchase of buildings to house their retail stores 2. Purchase of shelving racks and other displays Examples of Canadian Tire’s operating transactions: 1. Purchase of inventory from suppliers 2. Sale of goods and services LO 4 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa -t001 CM: Reporting AP1-2A Examples of Bank of Nova Scotia’s financing transactions: 1. Issuance of shares to investors to raise capital to lend money to customers 2. Issuance of long -term debt to raise necessary capital to have funds available to lend money (provide mortgages and loans) to customers Examples of Bank of Nova Scotia's investing transactions: 1. Purchase of buildings and equipment for in branch operations 2. Purchase of information technology equipment and software to maintain the banking transactions and provide online access for customers Examples of Bank of Nova Scotia's operating transactions: 1. Sale of services ( interest revenue, service charges , etc.) to customers 2. Payment of wages to employees LO 4 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa -t001 CM: Reporting Burnley, Understanding Financial Accounting, Third Canadian Edition AP1-3A a. I b. F c. O d. O e. O f. I g. O h. I LO 4 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa -t001 CM: Reporting AP1-4A a. Sales revenue is found on the statement of income and represents the amounts charged to customers for the sale of goods and services. b. Accounts receivable appears on the statement of financial position and represents claims to cash , for the sale of goods and services , that have not yet been collected fr om the customer. Accounts receivable represents an asset of the company. c. The connection between these two accounts is that accounts receivable are created when sales have been made on credit. LO 5 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa -t001 CM: Reporting AP1-5A a. CL b. CA c. CL d. CA e. SCF f. SI g. SCE h. NCA i. NCL and SCF j. CL k. SC LO 5 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa -t001 CM: Reporting Burnley, Understanding Financial Accounting, Third Canadian Edition AP1-6A a. NCA b. SI c. SCF d. SI e. RE and SCE f. SI g. SCE and SCF h. SCF i. SI j. NCA k. SCE and SCF LO 5 BT: AP Difficulty: H Time: 15 min. AACSB: None CPA: cpa -t001 CM: Reporting AP1-7A a. SFP b. SFP c. SFP d. SI e. SI f. N g. SI h. N i. N j. SFP LO 5 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa -t001 CM: Reporting AP1-8A a. SFP b. N c. SFP d. SI e. SFP f. SFP g. SI h. N i. SI j. SI LO 5 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa -t001 CM: Reporting Burnley, Understanding Financial Accounting, Third Canadian Edition AP1-9A A B C D Current Assets $570,0001 $600,000 $180,000 $990,000 Non-current Assets 780,000 735,0002 390,000 660,0003 Total Assets 1,350,0004 1,335,000 570,0005 1,650,000 Current Liabilities 375,000 345,000 135,000 390,000 Non-current Liabilities 337,0006 330,000 105,0007 225,000 Shareholders’ Equity 638,000 660,0008 330,000 1,035,0009 Total Liabilities and Shareholders’ Equity 1,350,000 1,335,00010 570,00011 1,650,00012 1 $1,350,000 - $780,000 = $570,000 2 $1,335,000 - $600,000 = $ 735,000 3 $1,650,000 - $990,000 = $ 660,000 4 $1,350,000 = Total Liabilities and Shareholders’ Equity 5 $180,000 + $390,000 = $570,000 6 $1,350,000 - $638,000 -$375,000 = $337,000 7 $570,0005 - $330,000 -$135,000 = $105,000 8 $1,335,00010 (total assets) - $345,000 - $330,000 = $660,000 9 $1,650,00012 (total assets) - $390,000 - $225,000 = $1,035,000 10 $1,335,000 = Total Assets 11 $570,0005 = Total Assets 12 $1,650,000 = Total Assets LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: : Analytic CPA: cpa -t001 CM: Reporting AP1-10A A B C D Retained Earnings Dec. 31, 2023 $100,000 $420,000 $1,475,0001 $930,000 Net Earnings 40,000 160,0002 550,000 290,000 Dividends declared and paid 10,000 50,000 225,000 140,0003 Retained Earnings Dec. 31, 2024 130,0004 530,000 1,800,000 1,080,000 1 $1,800,000 - $550,000 + $225,000 = $1,475,000 2 $530,000 - $420,000 + $50,000 = $160,000 3 $930,000 + $290,000 - $1,080,000 = $140,000 4 $100,000 + $40,000 - $10,000 = $130,000 LO 5 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa -t001 CM: Reporting Burnley, Understanding Financial Accounting, Third Canadian Edition AP1-11A A ($862,000 - $194,000) = $668,000 D ($300,000 - $100,000) = $200,000 B ($686,000 + $200,000 + $428,000) = $1,314,000 C ($3,426,000 - $815,000 - $300,000) = $2,311,000 LO 5 BT: AP Difficulty: E Time: 15 min. AACSB: None CPA: cpa -t001 CM: Reporting AP1-12A a. Easy Peasy Ltd. Statement of Income For the month of January 31, 2xxx Service revenue $ 237,570 Wages expense $ 35,791 Advertising expense 10,000 Operating expenses 6,450 Supplies expense 16,465 Utilities expense 1,465 Total expenses 70,171 Net income $167,399 b. Other costs Friedrich might have incurred in January that were not listed above include: 1. Depreciation expense of vehicles 2. Income tax expenses 3. Interest expense on any outstanding loans 4. Insurance expense 5. Other employee benefit costs such as employer portion of CPP and EI LO 5 BT: AP Difficulty: E Time: 20 min. AACSB: None CPA: cpa -t001 CM: Reporting Burnley, Understanding Financial Accounting, Third Canadian Edition AP1-13A a. Call of the Wild Ltd. Statement of Income For the month of July, 2xxx Service r evenue $ 171,430 Wages expense $ 49,860 Advertising expense 14,610 Supplies expense 25,629 Operating e xpense s 3,460 Utilities expense 1,532 Total expenses 95,091 Net income $ 76,339 b. Other costs Michelle might have incurred in July that were not listed above include: 1. Depreciation expense of tents and rafting equipment 2. Income tax expense s 3. Interest expense on any outstanding loans 4. Insurance expense 5. Other employee benefit costs such as employer portion of CPP and EI LO 5 BT: AP Difficulty: E Time: 20 min. AACSB: None CPA: cpa -t001 CM: Reporting Burnley, Understanding Financial Accounting, Third Canadian Edition AP1-14A a. Item Classification Loan owed to bank Liability Common shares Shareholders’ equity Vehicles Asset Ski equipment Asset Amount prepaid by customers for February trips Liability Retained earnings Shareholders’ equity Prepaid Accommodations Asset Cash in bank accounts Asset b. Easy Peasy Ltd. Statement of Financial Position January 31 , 2xxx Cash $ 75,000 Deferred revenue $ 95,000 Prepaids 60,000 Bank loan payable 60,000 Ski equipment 22,000 Common shares 41,000 Vehicles 65,000 Retained earnings 26,000 Total Liabilities and Total Assets $222,000 Shareholders’ Equity $222,00 0 c. Inventory refers to products that have been purchased for resale to customers. Friedrich’s business does not have any products for resale to customers, but instead it provides a service, ski lessons and excursions. Thus, the real product is not inventory but a service. d. Friedrich’s business does not produce a pr oduct for which customers would be extended credit. Friedrich would want his customers to pay in advance. Unlike a car dealership where the company can repossess the car if the customer does not pay, it would not be possible for Friedrich to repossess a skiing excursion once it is complete. Furthermore, the cost for the service is likely not too high for customers to pay right away. Thus, Friedrich’s business is not likely to have an accounts receivable account. If Friedrich provided skiing excursions to a company for several people, it is possible that he would invoice the customer and allow them to pay after the event. In this case, Friedrich would have an account receivable. LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting Burnley, Understanding Financial Accounting, Third Canadian Edition AP1-15A a. Item Classification Loan owed to bank Liability Supplies on hand Asset Cash in bank accounts Asset Common shares Shareholders’ equity Cost of tents and rafts Asset Retained earnings Shareholders’ equity Amount prepaid by customers for August trips Liability Vehicles Asset b. Call of the Wild Ltd. Statement of Financial Position As at July 31, 2xxx Cash $33,670 Deferred revenue $19,140 Supplies 13,420 Bank loan payable 24,000 Equipment 34,100 Common shares 20,000 Vehicles 38,400 Retained earnings 56,450 $ 119,590 $ 119,590 c. Inventory refers to products that ha ve been purchased for resale to customers. Michelle’s business does not have any products for resale to customers , but instead it provides a service, rafting excursions. Thus, the real product is not inventory but a service. d. Michelle’s business does not produce a product for which customers would be extended credit. Michelle would want her customers to pay in advance. Unlike a car dealership where the company can repossess the car if the customer does not pay, it would not be possible for Michelle to repossess a rafting excursion once it is complete. Furthermore , the cost for the service is likely not too high for customers to pay right away. Thus, Michelle’s business is not likely to have an accounts receivable account. If Michelle pro vided rafting excursions to a company for several people, it is possible that she would invoice the customer and allow them to pay after the event. In this case, Michelle would have an account receivable. LO 5 BT: AP Difficulty: M Time: 20 min. AACS B: None CPA: cpa -t001 CM: Reporting Burnley, Understanding Financial Accounting, Third Canadian Edition AP1-1B Examples of Aritzia Inc.’ s financing transactions: 1. Issuance of shares to investors to raise capital for the purchasing of property, plant and equipment 2. Issuance of long -term debt to raise necessary capital to build new stores or invest in new retail technologies (such as online shopping) Examples of Aritzia Inc.’ s investing transactions: 1. Purchase of buildings and equipment for retail operations 2. Purchase of building and vehicles for a distr ibution network to move inventory between warehouses and retail stores Examples of Aritzia Inc.’ s operating transactions: 1. Sale of retail inventory to customers 2. Payment of wages to employees LO 4 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa -t001 CM: Reporting AP1-2B Examples of Telus Corporation’s financing transactions: 1. Issuance of shares to investors to raise capital for the purchasing of property, plant and equipment and research and development. 2. Issuance of long -term debt to raise necessary capital invest in new technologies (such as wifi calling and hot spots ) Examples of Telus Corporation’s investing transactions: 1. Purchase of equipment for manufacturing operations 2. Selling of equipment used for manufacturing operations. Examples of Telus Corporation’s operating transactions: 1. Sale of inventory to customers 2. Payment of wages to employees LO 4 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa -t001 CM: Reporting Burnley, Understanding Financial Accounting, Third Canadian Edition AP1-3B a. I b. I c. O d. F e. O f. I g. F LO 4 BT: AP Difficulty: H Time: 10 min. AACSB: None CPA: cpa -t001 CM: Reporting AP1-4B a. Wages payable is found on the statement of financial position and represents the amount that the company owes to the employees for time worked but not yet paid to the employees. b. Wages expense is found on the on the statement of income and represents the a mount of wages incurred (earned by the employees) during the period , whether paid or unpaid . Wages payable represents a liability of the company and wages expense represents a use of the resources of the company. c. The connection between these two accounts is that wages payable is created from wages expense for time that has been worked by the employees but has not yet been paid. LO 5 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa -t001 CM: Reporting AP1-5B a. CL b. CA c. SI d. SCF e. CA f. SI and SCE g. SCF h. SCF i. SI j. SI k. SCE and SCF LO 5 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa -t001 CM: Reporting Burnley, Understanding Financial Accounting, Third Canadian Edition AP1-6B a. NCA b. SI c. SCF d. CA e. CL and SCE f. SI g. CL h. SI i. SI j. CL and SCE k. SI LO 5 BT: AP Difficulty: H Time: 15 min. AACSB: None CPA: cpa -t001 CM: Reporting AP1-7B a. SFP b. SI c. SFP d. SFP e. SI f. SI g. N h. SFP i. SI j. SFP LO 5 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa -t001 CM: Reporting AP1-8B a. SFP b. SI c. N d. SFP e. SI f. SFP g. SFP h. SFP i. SI j. SFP LO 5 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa -t001 CM: Reporting Burnley, Understanding Financial Accounting, Third Canadian Edition AP1-9B A B C D Current Assets $ 650,000 $420,0001 $150,000 $ 320,000 Non-current Assets 1,150,0002 380,000 210,0003 760,000 Total Assets 1,800,000 800,0004 360,000 1,080,0005 Current Liabilities 750,000 170,000 50,000 410,000 Non-current Liab. 500,000 205,0006 120,000 270,0007 Shareholders’ Equity 550,0008 425,000 190,0009 400,000 Total Liabilities and Shareholders’ Equity 1,800,00010 800,000 360,00011 1,080,000 12 1 $800,0004 - $380,000 = $420,000 2 $1,800,000 - $650,000 = $ 1,150 ,000 3 $360,000 - $150,000 = $ 210,000 4 $800,000 = Total Liabilities and Shareholders’ Equity 5 $320,000 + $ 760,000 = $ 1,080,000 6 $800,000 - $425,000 -$170,000 = $ 205,000 7 $1,080 ,0005 - $400,000 -$410,000 = $ 270,000 8 $1,800,00010 (total assets) - $750,000 - $500,000 = $ 550,000 9 $360,00011 (total assets) - $50,000 - $120,000 = $1 90,000 10 $1,800,000 = Total Assets 11 $360,000 = Total Assets 12 $1,080,0005 = Total Assets LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: : Analytic CPA: cpa -t001 CM: Reporting AP1-10B A B C D Retained Earnings Dec. 31, 2023 $70,0001 $350,000 $2,400,000 $540,000 Net Earnings 30,000 400,000 500,0002 190,000 Dividends declared and paid 5,000 150,0003 200,000 340,000 Retained Earnings Dec. 31, 2024 95,000 600,000 2,700,000 390,0004 1 $95,000 - $30,000 + $5 ,000 = $ 70,000 2 $2,700,000 - $2,400 ,000 + $2 00,000 = $ 500,000 3 $400,000 - $350,000 - $600,000 = $1 50,000 4 $540,000 + $ 190,000 - $340,000 = $ 390,000 LO 5 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa -t001 CM: Reporting Burnley, Understanding Financial Accounting, Third Canadian Edition AP1-11B A ($2,687,000 + $792,000) = $3,479,000 D ($450,000 + $100,000) = $550,000 B ($2,564,000 + $1,775,000 + $550,000) = $4,889,000 C ($4,252,000 - $450,000 - $1,120,000) = $2,682,000 LO 5 BT: AP Difficulty: E Time: 15 min. AACSB: None CPA: cpa -t001 CM: Reporting AP1-12B a. Scents Unlimited Ltd. Statement of Income For the month of May, 2xxx Sales Revenue $24,730 Cost of goods sold $10,733 Wages expense 7,000 Telephone expense 160 Utilities expense 370 Rent expense 1,500 Operating expenses 329 Total expenses 20,092 Net income $ 4,638 b. Other costs that Lydia might have incurred in May not listed above include: 1. Depreciation expense for vehicles and equipment 2. Income tax expense 3. Cost of advertising 4. Other employee benefit costs such as employer portion of CPP and EI 5. Interest expense on any bank loans owing 6. Insurance expense LO 5 BT: AP Difficulty: E Time: 20 min. AACSB: None CPA: cpa -t001 CM: Reporting