Solution Manual for Understanding Financial Accounting Canadian Edition by Burnley

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Solution Manual for Understanding Financial Accounting Canadian Edition by Burnley Complete downloadable file at: https://testbanu!eu/Solution"Manual"for" Understanding"Financial"Accounting"Canadian" Edition"by"Burnley S#$U%&#'S %# (&SCUSS&#' )UES%&#'S ()*"*

Accounting, Accounting, as an information information system, system, provides provides economic economic information information to users to allow them to determine whether the entity is operating effectively and efficiently efficiently.. In addition, accounting facilitates the making of impor importa tant nt decis decision ions s in the the manag manageme ement nt of the the entit entity y, such such as whether new assets should be purchased or leased, or whether equity financing should be used as opposed to debt financing.

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The owner’s legal liability is as follows for each form of business: roprietorship: The owner !or proprietor" is responsible for the debts of the business. #is or her personal assets are at risk in the event of legal action. artnership: The owners !or partners" are responsible for the debts of the business. Their personal assets are at risk in event of legal action. $orporation: The owners !or shareholders" are only responsible for the debts of the corporation to the e%tent of their investment in the company’s shares. Any debts in e%cess of this amount are not their responsibility. The ta%ation of income is as follows for each form of business: roprietorship: The income of a proprietorship is ta%ed in the hands of the owner !i.e. the proprietor". artnership: The income of a partnership is ta%ed in the hands of the owners !i.e. the partners".

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$orporation: The income of a corporation is ta%ed separately !i.e. the corporation corporation files its own ta% ta% return". return". Any income distributed distributed to the shareholders !i.e. dividends" is then ta%ed in the hands of the owners !i.e. the shareholders". () *".

A private private corporat corporation ion is one whose whose shares shares are held held by a small small number of individuals. This makes the transfer of ownership more difficult, as the the shar shares es do not not trad trade e on a publ public ic stoc stock k e%ch e%chan ange ge.. A publ public ic corporation has shares held by a larger number of individuals or entities and these shares are bought and sold on a public stock e%change !such as the Toronto 'tock 5%change".

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Shareholders 0 These users are interested in the performance of thei theirr inve invest stme ment nt in the the comp compan any y. The They will will use use the the fina financ ncia iall state statemen ments ts to eval evalua uate te how how well well mana manage geme ment nt is hand handlin ling g thei their r investme investment. nt. Indivi Individua duall sharehold shareholders ers may also also use the financial financial statements in assessing whether to continue to hold the shares, purchases more or sell the shares they have. Creditors ,i!e! Financial &nstitutions- 0 These users are interested in evaluating the company 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 service the debt !i.e. pay interest and repay principal". %a1ing Authorities 0 These users establish the rules for how ta%able income will be measured. They are interested in the fair measurement of the financial performance of the company so that the appropriate ta% will be paid. 6ote, however, however, that income ta%es are not not paid paid base based d on the the net net earn earnin ings gs rep reporte orted d in the the fina financ ncia iall statements7 rather, income ta%es are based on ta%able income. In preparing the ta% return, the financial statements’ net income is the starting point and is then ad8usted to arrive at ta%able income.

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()*" ,ContinuedFinancial Analysts 0 These users provide investment advice to their customers. They are interested in evaluating the investment potential of various companies. They will want to evaluate not only individual companies, but also make comparisons between companies, likely in the same industry. ,'ote: there are other users discussed in the chapter that would be e2ually acceptable answers to this 2uestion!()*"3

'hareholders invest in the shares of a company. company. They may e%pect to rece receiv ive e divi divid dends ends,, which hich are are a dist distri ribu buti tion on of past past pro profits fits to shareholders shareholders.. They also also e%pect e%pect to eventually eventually sell sell their shares at a higher price than they paid for them due to capital appreciation.

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$apital appreciation appreciation is an increase increase in the market value of the shares of a company. company. Investors Investors reali4e reali4e this type of of return by purcha purchasing sing shares in a company, and then later selling the shares at a higher market price than they had originally paid. $apital appreciation often resu result lts s from from a compa company ny’s ’s grow growth th !i.e. !i.e. incre increas ased ed reve revenu nues es and and increased profits".

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0hen creditors loan money to a company, they e%pect to receive their money back. That is one cash stream, called return of principal. The other cash stream is periodic interest that creditors receive for time they have allowed the company to use their money. money.

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The three ma8or 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. 'ome typical financing activities are: short* and long*term borrowing, repa repaym ymen entt of debt debt,, divi divide dend nd paymen yments ts,, and and the the issu issuan ance ce of additional shares.

()*"6 ,Continued&n7esting refers to the activity of using funds generated by financing acti activi viti ties es to acqu acquir ire e asse assets ts that that will will gene genera rate te prof profit its s in the the futu future re.. &&&&&&&&&&&& &&&&&&&&&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&&& &&&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&& 'olutions (anual )*9 $hapter ) $opyright + -) /ohn 0iley 1 'ons $anada, 2td. 3nauthori4ed copying, distribution, or transmission of this page is strictly prohibited.


Investments include the purchase of property, plant, and equipment and the purchase and sale of investments in other companies. activi viti ties es are are asso associ ciat ated ed with with deve develo lopi ping ng,, prod produc ucin ing, g, #perating acti marketin marketing, g, and selling selling the produc products ts andor andor service services s of the company company.. (ainly concerned with the day*to*day day*to*day activities of the company co mpany.. ()*"8

The three ma8or categories of items that appear in a typical statement of financial position !balance sheet" are assets, liabilities, and shareholders’ equity. 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. $urrent assets will be converted into cash within the ne%t year or operating cycle. 5%amples include cash, inventory, and account accounts s receiva receivable. ble. 6on*cu 6on*curre rrent nt assets assets are those those assets assets whose whose benefits may be reali4ed over a period longer than one year or operating cycl cycle. e. 5%am 5%ampl ples es incl includ ude e prop proper erty ty,, plan plant, t, and and equi equipm pmen ent, t, pate patent nts, s, trademarks, etc. $iabilities 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 e%ists as a result of a transaction that has already taken place. 2iabilities may be classified as current and non*current. $urrent liabilities include notes payable due within one year, accounts payable, accrued e%penses, and dividends payable. 6on*current liabilities include long*term debt, long*term warranties payable, and pension liabilities.

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Shareholders9 E2uity represents the wealth or the ownership interest of the the owne owners rs.. 'har 'hareh ehol olde ders rs’’ equi equity ty may may also also be defi define ned d as the the difference between the assets and liabilities of a company: Shareholders’ Equity = Assets – Liabilities

There are two ma8or shareholders’ equity accounts: share capital and retained earnings. 'hare capital represents the amount that investors origi origina nalllly y paid paid for the shar shares es that that the compan company y issue issued. d.
=perating activities relate to the day to day activities of a company. company. This includes generating revenues and incurring e%penses, which are the most crucial crucial activiti activities es in relatio relation n to the long*t long*term erm sustain sustainabi abilit lity y of a company company.. Invest Investing ing activiti activities es occur on a more sporadic sporadic basis basis and includes the purchase or disposal of property, plant, and equipment as well as shares in other companies.

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=perating activities relate to the day to day activities of a company. company. This includes generating revenue and incurring e%penses, which are the most crucial to the long*term long*term sustainability sustainability of a company. company. >inancing >inancing activities are those actions taken by a company to obtain the funding necessary to purchase purchase assets such such as buildings buildings and equipment. equipment. >inancing >inancing activities also include the repayment of loan principal and payment of dividends. >inanci >inancing ng activitie activities s are requir required ed in order to start a business. business. 0ithout 0ithout financing, most businesses would not be able to begin to engage in operating activities. >inancing needs generally continue throughout the life of a company as it grows and e%pands.

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0e would normally e%pect a company to have an overall inflow of cash from from its its oper operat atin ing g acti activi viti ties es.. 3nle 3nless ss a comp compan any y is succ succes essf sful ul at generating positive cash inflows from its operations, it will ultimately run out of cash. >inancing sources will dry up because the company will be unable unable to attract new investors investors or lenders. lenders. 5ventually 5ventually it will have to sell sell the property, property, plant, and equipment it i t uses to generate revenue.

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0e would normally e%pect a company to have an overall cash outflow from from its investin investing g activities activities.. These These activitie activities s include include the purchase purchase of property, plant, and equipment that are purchased in order to generate operating revenue. $ash inflows from investing activities require the sale of investments investments or property property,, plant and equipment. equipment. $ompanies $ompanies that are financially healthy and growing typically spend more cash on acquiring

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new assets than the proceeds they generate from selling the property, plant and equipment they have finished using. ()*"*

The statement of income describes the results of the operating activities from the beginning of the current period to its end. 6et income is defined as revenues less e%penses.
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The The stat statem emen entt of chan change ges s in equi equity ty prov provid ides es deta detailils s on how how each each component of shareholders’ equity changed during during the period.
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The four main financial statements contained in all annual reports are the the state statemen mentt of incom income, e, the the statem statemen entt of chang changes es in equi equity ty,, the the statement of financial position, and the statement of cash flows. statement of of income records records the inflow inflow of Statement of &ncome: The statement revenues and gains and the outflow of e%penses and losses over the year. year. The statement statement helps investors investors evaluate evaluate the performance performance of the company during the period and it is useful in forecasting the future results of the company. Statement of Changes in E2uity: The statement statement of changes changes in equity equity prov provid ides es deta detailils s on how how each each comp compon onen entt of shar shareh ehol olde ders rs’’ equi equity ty 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.

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position Statement of Financial ;osition: The statement of financial position gives the financial status of the company at a particular point in time. 'ince it presents the details of assets, liabilities, and shareholders’ equity, it gives users a fair idea of the riskiness of the mi% of assets and liabilities of the company.

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Statement of Cash Flows: This statement statement measures measures the inflow inflow and 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 e%plains the change in cash between the beginning and the end of the period. ()*"*5

The The note notes s to the the fin financi ancial al state tateme ment nts s prov provid ide e more more deta detaililed ed infor informat matio ion n on items items in the fina financ ncial ial stat stateme ements nts and and are are cross cross** referenced. The first or second note to the financial statements often discusses the 'ummary of Accounting olicies, which describes the choices made by management from among the possible choices and 8udgments 8udgments acceptable acceptable under accounting accounting standards. standards. The notes help keep the financial statements free of e%cessive detail, while providing meaning information to financial statement users.

()*"*6 The management discussion and analysis !(@1A" section of the annual report provides an overview of the previous year, a discussion of the risks facing the company, and some information about future plans. plans. (any (any compani companies es use this part part of the report report to make more e%tens e%tensive ive,, detaile detailed d comments comments on the compan company y and its operat operating ing resu result lts. s. =ften =ften the the infor informat matio ion n is pres presen ente ted d from from the compa company nys s perspective.

S#$U%&#'S %# A;;$&CA A;;$&CA%&#' ;<#B$EMS ;<#B$E MS A;*"*

a. A one*year one*year insurance policy covering covering the company’s company’s delivery vehicles, paid in advance.

This would be an asset, known as prepaid insurance or prepaid e%penses. It meets the definition of an asset in that it is: i.

$ont $ontro rolle lled d by by the the compa company ny !i.e. !i.e. itit is the their ir ins insur uran ance ce polic policy" y"77

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ii. ii.

iii.

The The comp compan any y e%pe e%pec cts futu future re econ econom omic ic ben benefit efits s from from its its use use !i.e. !i.e. insur insuran ance ce is requ requir ired ed to oper operat ate e the the deliv deliver ery y vehicles which enable the company to generate revenue"7 and, The event giving the company control has already happened !i.e. the company has paid for and has obtained the insurance coverage".

b! Cift cards sold to customers

The gift cards would represent a liability, known as unearned revenu revenue e or deferred deferred reven revenue. ue. They They meet the definit definition ion of a liability in that: i. ii. ii. iii. iii.

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They are are a present obl obligation of the the comp compa any !i. !i.e. the company must provide goods or services to the holders of these gift cards when they are redeemed"7 The The comp compan any y e%p e%pe ects cts to set settl tle e the the obli obliga gati tion on th throug rough h an outflow of resources !i.e. this will result from providing the goods or services"7 and, The The obliga ligati tio on results fro from an event that has alr already happened !i.e. the obligation arose at the time the gift cards were sold and cash was obtained".

5%amples of $anadian Tire’s financing transactions: ). 'hare issuance issuance to raise capital capital for purchasing purchasing property property,, plant 1 equipment . Issuance Issuance of of long*term long*term debt debt to raise capital

A;*"+ ,Continued-

5%amples of $anadian Tire’s investing transactions: ). urchase urchase of buildings buildings to house house their retail stores stores . urchase urchase of shelving shelving racks and and other other display displays s 5%amples of $anadian Tire’s operating transactions: ). urchase urchase of inventory inventory from suppliers suppliers . 'ale of good goods s and and servic services es A;*".

5%amples of #udson Day $ompany’s financing transactions:

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). Issuance of shares to inves nvesttors to raise capita ital for the purchasing of property, property, plant and equipment . Issu Issuan ance ce of long* long*te term rm debt debt to rais raise e nece necessa ssary ry capit capital al to build build new new stores or invest in new retail technologies !such as online shopping" 5%amples of #udson Day $ompany’s investing transactions: ). urchase urchase of buildings buildings and equipment equipment for retail retail operations operations . urchas urchase e of buildin building g and vehicles vehicles for a distrib distributio ution n network network to move inventory between warehouses and retail stores 5%amples of #udson Day $ompany’s operating transactions: ). 'ale of retail inventory to customers . ayment of salaries and wages to employees A;*"

5%amples of Dank of 6ova 'cotia’s financing transactions: ). Issuance of shares to investors to raise capital to lend money to customers . Issuance of long*term debt to raise necessary capital to have funds available to lend money !provide mortgages and loans" to customers 5%amples of Dank of 6ova 'cotias investing transactions: ). urchase of buildings and equipment for in branch operations . urchase of information technology equipment and software to maintain the banking transactions and provide online access for customers

A;*" ,Continued-

5%amples of Dank of 6ova 'cotias operating transactions: ). 'ale of services services !interest !interest revenue, revenue, service service charges, charges, etc." to customers customers . ayment ayment of salaries salaries and wages to employee employees s A;*"3

A statement statement of income presents presents the results of the operating operating activities of a company for a period of time. A statement of cash flows reports the net cash flows of a company for a period of time. Doth statements cover the the same time period.

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A statement statement of income presents presents mainly the results of the operating operating activities while a statement of cash flows reports cash flows related to operating, investing, and financing activities. A statement statement of income gives the net earnings earnings !net incomeprofits" of a company whereas a statement of cash flows e%plains the inflows and outflows of cash for the period. The state stateme ment nt of income income includ includes es some some items items that that are are not not related to cash, such as depreciation. The statement of cash flows includes items related only to cash. A;*"4

'ales s reven revenue ue is foun found d on the the state statemen mentt of income income and and a! 'ale represents represents the amounts charged to customers customers for the sale of goods and services. Accounts receivable receivable appears appears on the statement statement of financial financial b! Accounts position and represents claims to cash for the sale of goods and serv servic ices es that that have have not not yet yet been been paid paid for for by the the cust custom omer er.. Accounts Accounts receivable receivable represents represents an asset asset of the company company.. c! The connection between these two accounts is that accounts receivable are created when sales have been made on credit.

A;*"5 a! 0ages payable is found on the statement of financial position and and repr repres esen ents ts the the amou amount nt that that the the comp compan any y owes owes to the the employees for time worked but not yet paid to the employees. b! 0ages e%pense is found on the on the statement of income and repr repres esen ents ts the the amoun amountt of salar salaries ies incu incurr rred ed !ear !earne ned d by the the employe employees" es" durin during g the period. period. 0ages 0ages payable payable represe represents nts a liability of the company and wages e%pense represents a use of the resources of the company. company. connection tion between between these two accounts accounts is that that wages wages c! The connec payable are created from wages e%pense for time that has been worked by the employees but has not yet been been paid. A;*"6

a! $2

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b! 'I c. $2 d! 6$A e. $A f! 'I g! '$> h. 'I 1 '$> i! '$ =! $A ! 6$2 A;*"8

a! $2 b! $A c! 'I d! '$> e! $A f! 'I and '$5 g! '$> h! '$> i! 'I =! 'I ! '$5 and '$>

A;*"*

a! 6$A b! 'I c! '$> d! 'I e! <5 and '$5 f! 'I g! '$5 and '$> h! '$> i! 'I =! 6$A ! '$5 and '$>

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a! = b! = c! > d! I e! >

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f! I g! = h! > A;*"*+

a. I b! = c! = d! > e! = as an ad8ustment to income for non*cash item f! I g! >

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a! '> b! '> c! '> d! 'I e! 'I f! 6 g. 'I h! 6 i! 6 =! '>

A;*"*

a! '> b! 'I c! '> d! '> e! 'I f! 'I g! 6 h! '> i! 'I =! '>

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There were no items that appeared on both the statement of financial position and the statement of income. This is to be e%pected because revenues revenues !e%penses !e%penses"" represent represent increases increases !decreases !decreases"" in economic economic resources and only appear on a statement of income whereas assets, liab liabililit itie ies s and and equi equity ty repr repres esen entt econ econom omic ic reso resour urce ces s owne owned d or obligations owed by the company and only appear on a statement of financial position.

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A;*"*4 $urrent Assets 6on*current Assets Total Assets $urrent 2iabilities 6on*current 2iabilities 'hareholders’ 5q 5quity Total 2iabilities and 'hareholders’ 5quity

A >35? BE-,--*?.3? 9B,--..5? ?9E,--),9-,---

D G?--,--5.3? ),99,--9;,--99-,--44? *?..3?

$ G)E-,--9F-,--35? )9,--*3? 99-,--35?

@ GFF-,--44? ),?-,--9F-,--,--*?.3? *?43?

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A $urrent Assets 6on*current Assets Total Assets $urrent 2iabilities 6on*current 2iab. 'hareholders’ 5quity Total 2iabilities 2iabi lities and a nd 'hareholders’ 5quity

D

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A;*"*8 a! A Slice of $ife $td! Statement of &ncome For the month of 'o7ember? +111

'ales

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$ost of goods sold 0ages e%pense
GB,)9,)),-),-F);,B?G

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b! =ther costs that /ason might have incurred in 6ovember not listed above include:

). @epr @eprec ecia iati tio on e%p e%pense nse for for kitc kitche hen n faci facililiti ties es and equipment . Income Income ta% e%pens e%pense e 9. @epreciation @epreciation e%pens e%pense e and operating operating e%pense e%penses s such as gas and insurance for pi44a delivery vehicles ;. =the =therr empl employ oyee ee bene benefi fitt cost costs s such such as empl employ oyer er portion of $ and 5I . Interest e%pense e%pense on any any bank bank loans owing

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A;*"+ a! Scents Unlimited $td! Statement of &ncome For the month of May? May? +111

'ales

G;,B9-

$ost of goods sold 0ages e%pense Telephone e%pense 3tilities e%pense
G)-,B99 B,--)?9B),-9F -,-F G ;,?9E

b! =ther costs that 2ydia might have incurred in (ay not listed above include:

). @epreciation @epreciation e%pense e%pense of vehicles vehicles and equipmen equipmentt . Incom Income e ta% e%pe e%pens nse e 9.

$ost $ost of any any certi certific ficati ation ons, s, lice licence nces s or ass assoc ociat iatio ion n memberships

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=the =therr empl employ oyee ee bene benefi fitt cost costs s such such as emp emplo loye yerr portion of $ and 5I

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Inte Intere rest st e%pe e%pens nse e on on any any bank bank loan loans s owi owing ng

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A;*"+* a!

Call of the @ild $td! Statement of &ncome For the month of uly? uly? +111

'ervice revenue 0ages e%pense Advertising Advertising e%pens e%pense e 'upplies e%pense =perating e%penses 3tilities e%pense Total e%penses 6et income

G )B),;9G ;F,E?);,?));,?),?F 9,;?),9 F,-F) G B?,99F

b! =ther costs (ichelle might have incurred in /uly that were not listed above include:

). @epreciation e%pense of tents and rafting equipment . Income ta% e%penses 9. Interest e%pense e%pense on any outstanding loans ;. =the =therr empl employ oyee ee bene benefi fitt cost costs s such such as empl employ oyer er portion of $ and 5I A;*"++ a!

Item 'upply of ingredients 0ages owed to employees 2oan owed to the bank $ash held in chequing account $ost of ovens 1 refrigerators repaid rent for @ecember $ommon shares
$lassification Asset 2iability 2iability Asset Asset Asset 'hareholders’ equity 'hareholders’ equity

A;*"++ ,continued &&&&&&&&&&&& &&&&&&&&&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&&& &&&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&& 'olutions (anual )*)B $hapter ) $opyright + -) /ohn 0iley 1 'ons $anada, 2td. 3nauthori4ed copying, distribution, or transmission of this page is strictly prohibited.


b!

A Slice of $ife $td! Statement of Financial ;osition 'o7! .? +111

$ash 'upplies repaid rent 5quipment

G 9,;F?B),-);,9--

Total otal Asset ssets s G )F,? )F,?? ?-

0ages payable G ),;?Dank loan )),--$ommon shares ,--
unlike kelly that that /aso /ason n will ill have have an acco accoun untt call called ed Hacc Hacco ounts unts c! It is unli receivable’ since most of his sales will be on a cash basis. If customers purchased pi44a and other food items on credit, then /ason would have accounts receivable on his statement of financial position that would represent the amount that he is owed from his customers. #owever, pi44a parlours sell products that are relatively ine%pensive, therefore most customers, if not all, will have enough funds to pay cash for their purchase, which is why it is unlikely that /ason will have an account called accounts accounts receivableJ receivableJ.. It may be necessar necessary y for him to have an acco accoun unts ts rece receiv ivab able le acco accoun untt if he has has cust custom omer ers s that that purc purcha hase se frequently frequently andor andor in large large quantities, quantities, such as a school. In that case, case, it would be appropriate to ship a large order of pi44as along with an invoi invoice ce.. 3ntil 3ntil the invoice invoice is paid paid !by the schoo schooll for for e%amp e%ample le", ", the amount owing would be accounts receivableJ.

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A;*"+. a!

b!

Item Inventory 0ages owed to employees 2oan owed to the bank $ash held in chequing account $ost of refrigerator repaid rent for /une $ommon shares
$lassification Asset 2iability 2iability Asset Asset Asset 'hareholders’ equity 'hareholders’ equity

Scents Unlimited Statement of financial position May .*? +111

$ash Inventory repaid rent

G E,9?) ),)-),--

5quipment )E,?F Total tal As Assets G F F,??

0ages payable Dank loan

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c! It is unlikely that 2ydia will have an account called Haccounts receivable’ since most of her sales will be on a cash basis. If customers purchased flowers and other items on credit, then 2ydia would have accounts receivable on her statement of financial position that would represent the amount that she is owed from her customers. #owever, florist shops sell products that are relatively ine%pensive, therefore most customers, if not all, will have enough funds to pay cash for their purchase, which is why it is unlikely that 2ydia will have an account called accounts receivableJ. It may be necessary for her to have an accounts receivable account if she has customers that purchase frequently andor andor in large quantities, such as an event planner. planner. In that case, it would be appropriate to ship a large order of flowers along with an invoice. 3ntil the invoice is paid !by the event planner for e%ample", the amount owing would be accounts receivableJ.

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A;*"+ a.

Item 2oan owed to bank 'upplies on hand $ash in bank accounts $ommon shares $ost of tents and rafts
b!

$lassification 2iability Asset Asset 'hareholders’ equity Asset 'hareholders’ equity 2iability Asset

Call of the @ild $td! Statement of Financial ;osition As at uly .*? +111

$ash 'upplies 5quipment Kehicles

G99,?B)9,;-

3nearned revenue Dank loan

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c!

Inventory refers to products that have been purchased for resale to customers. (ichelle’s business does not have any products for resale to customers, but instead it provides a service, rafting e%cursions. Thus, the real product is not inventory but a service.

d!

(ichelle’s (ichelle’s business business does not produce produce a product product for which customers customers would be e%tended credit. (ichelle would want her her customers to pay in advance. 3nlike a car dealership where the company can repossess the car if the customer does not pay, it would not be possible for (ichelle to repossess a rafting e%cursion once it is complete. >urthermore, the cost for the service is likely not too high for customers to pay right away. Thus, (ichelle’s business is not likely to have an acco accoun unts ts rece receiva ivable ble accou account nt.. If (ich (ichell elle e prov provid ided ed rafti rafting ng e%cu e%curs rsio ions ns to a company for a large number of persons, it is possible that she would invoice the custome customerr and allow allow them to pay after after the event. event. In this case, (ichel (ichelle le would would have an account receivable.

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A;*"+3 a! Bobardier !n". Assets Inventories Aerospace Aerospace program program tooling tooling $iabilities Advances Advances on aerospace aerospace programs programs  



 



b! Sobeys !n". Assets Inventory !groceries, pharmaceutical products" 'helving * equipment $iabilities 0ages payable

c! #"$ain Foods Liited Assets rocessing and packaging equipment Inventory of ingredients and finished food products $iabilities Accounts payable payable

 



 



 



d! %oyal Bank Assets 2oans
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A;*"+3 ,Continuedf! 'est(et Airlines Assets Airplanes Airplanes Airport terminal terminal licensing licensing contracts contracts and agreem agreements ents !intang !intangible ible asset" asset" $iabilities @eposits from customers for future flights !unearned revenue"  



g! )anier Leather !n". Assets Inventory for sale


A;*"+4 a! Bobardier !n". Statement of income
b! Sobeys !n". Statement of income $ost of goods sold !grocery items" Ceneral 1 administrative e%penses  

c! #"$ain Foods Liited Statement of income 'ales revenue $ost of goods sold !processed and packaged food"  

d! %oyal Bank Statement of income Interest revenue !from customer loans" Interest e%pense !on customer deposits"  

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A;*"+4 ,Continuede! Sun"or Ener&y !n". Statement of income 'ales revenue
f! 'est(et Airlines Statement of income 'ales revenue >uel e%pense  

g! )anier Leather !n". Statement of income 'ales revenue $ost of goods sold  

A;*"+5 a! Bobardier !n". Statement of Cash Flows 6et proceeds from sale of business urchase of manufacturing equipment  

b! Sobeys !n". Statement of Cash Flows Increasedecrease in inventory Issuance of common shares  

c! #"$ain Foods Liited Statement of Cash Flows roceeds from debt issuance urchase of free4ers 



d! %oyal Bank Statement of Cash Flows urchase of investments Increasedecrease in customer deposits 



A;*"+5 ,Continued &&&&&&&&&&&& &&&&&&&&&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&&& &&&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&&&&&&& &&&&& 'olutions (anual )*9 $hapter ) $opyright + -) /ohn 0iley 1 'ons $anada, 2td. 3nauthori4ed copying, distribution, or transmission of this page is strictly prohibited.


. Sun"or Ener&y !n".

e

Statement of Cash Flows $ash $ash proc procee eeds ds from from the the sale sale of unsu unsucc cces essf sful ul prop proper erti ties es e%plored !dry wells" urchases of e%ploration equipment 



f! 'est(et Airlines Statement of Cash Flows urchases of aircraft
g! )anier Leather !n". Statement of Cash Flows urchases of store display fi%tures Increase or decrease in inventory  

USE< ;E
'elling price of each model of laptop computer $ost of each model of laptop computer

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

'elling price of assembly services $ost of assembly services 'alaries and wages paid to any employees $osts of parts inventory that would be required Information on customers, as in name, model purchased, account balance Information on suppliers such as time to delivery and payment policy



0arranty information on laptops sold



    

An accounting accounting software software package could reliably reliably keep track of the above information, as well as other relevant information for running the business. A bank bank would would want assuran assurance ce that the the loan will will be repaid. repaid. This might include include information information about past sales and further sales prospects, prospects, as well as the cost of goods and services provided. A bank would also want to know about about other current financial obligations of the business, and what the loan would be used for. for. It would be of particular interest whether the loan would be used to cover oper operat atin ing g e%pe e%pens nses es or used used for for e%pa e%pans nsio ion. n. The The bank bank woul would d also also be interested in any other assets you may have that could be used as security for the loan. U;*"+ ability to repay the loan a! The loan officer would be interested in your company’s ability and thus would look at net income and cash flows. The loan officer would also need to consider a backup plan in the event your company does not make the required loan payments. >or e%ample, which assets of your company could be given to the bank in lieu of repayment, or sold to provide cash for repaymentL The loan officer would also look at your statement of financial position to identify the assets owned by your company, company, but would prefer up*to*date market values for these assets rather than the historical

U;*"+ ,Continued-

costs listed on the statement statement of financial financial position. position. Any other current current or non* non* current liabilities would be of interest to the loan officer, as they may indicate previous obligations that could compromise the ability to repay a new loan.

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b!

). Is your your net net income income sufficient sufficient to repay repay a loanL . Is your your net net income income susta sustaina inable bleL L 9. @o you have assets assets that could could be liquidated liquidated if your your cash cash flows flows are insufficientL ;. @o you have currentl currently y e%isting e%isting debt debt that will make it difficult difficult to repay new loansL M=ther answers may also be accepted. U;*". a! The advantages of operating the business as a proprietorship are that it is simple and ine%pensive to establish and maintain.

Taylor’s b! The advantages of operating the business as a corporation are that Taylor’s personal assets would not be at risk in the event that the company was unsuccessful. unsuccessful. This form of business business would would also enable enable the company company to raise raise fund funds s by issuing issuing shar shares es,, whic which h is not not an optio option n if the the busine business ss operated operated as a proprietors proprietorship. hip. If the business business proves proves to be success, there there can be ta% advantages from operating it as a corporation. c! $ustomers would likely prefer that he operates as a corporation. This gives the appearance that the business is more than a single individual. d! $reditors would likely prefer that he operate as a proprietorship as they would be able to access any personal assets Taylor might have in the event that that the business business is not successful. successful. They may may be able to do this this anyway, by requiring personal guarantees from Taylor for any debts.

U;*". ,Continuede! The corporate form of business would be the most advantageous if Taylor e%pects the business to grow grow rapidly. rapidly.

additio additional nal capital capital to fund fund the company company’s ’s growth growth.. There There may also be ta% advantages associated with company being organi4ed as a corporation corporation in the event that profits increase as a result of the growth. U;*"

>unds can be raised from several sources, but the two primary sources are from lenders and shareholders. The advantage of borrowing from a lender is that your friend would retain complete ownership of the business and would not be required to share the decision*making and the profit of the company with anyone else. Dringing in another shareholder may result in a loss of control over the company and would also mean giving up some share of the future profits. The disadvantage of borrowing from a lender is that loan contracts require repayment repayment of the the amount on a set schedule schedule.. This increases increases the risk to the company that it will not be able to make payments on a timely basis. There could be significant consequences for not making payments, including losing ownership of the company. company. A new shareholder would not have this same type of contractual arrangement and would be at risk in the same way as your friend. #owever, the new shareholder would probably e%pect a higher return from herhis investment than would a lender. Nour friend would be giving up more potential profit to a new shareholder than lender. Another Another disadvantag disadvantage e to borrowi borrowing ng is that that interest interest must be paid paid on the the loan. It is not not optional optional but but is ta% ta% deductibl deductible. e. @ividends, @ividends, on the other other hand hand,, are are opti option onal al and and woul would d norm normal ally ly only only be decl declar ared ed by the the company’s board if the company was profitable.

U;*"3

The board should consider the number of shares outstanding and the proposed dividend per share, which will determine the total cash cash requ requir irem emen ents ts.. They They must must also also cons consid ider er whet whethe herr the the available cash in the company is sufficient to make the dividend payment without disturbing the overall liquidity of the business in its day to day operations. If not, they may have to delay payment of the dividend, or look for ways to generate additional cash. The dividend declaration will reduce retained earnings, so the retai retaine ned d earn earnin ings gs amoun amountt must must be large largerr than than the the prop propos osed ed dividend. The board should also consider the company’s future

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plans. The retained earnings account represents the cumulative profits of the business that are kept within the company to fund future e%pansion plans. @ividends are declared and paid when the company has no plans to use the accumulated profits to fund future e%pansion. Thus, the declaration and payment of dividends only makes sense if the company does not need the cash for future e%pansion plans.

b.

Dividends declared in 2014 are $40,141. This amount is incl includ uded ed in the the cons consol olid idat ated ed st stat atem emen entt of chan change ges s in shareholders’ equity. equity. The actual amount of dividends dividends paid $!",41"# is shon on the consolidated statement of cash %os. &ll amounts are in thousands of 'anadian dollars. i. (evenues from the sale of merchandise in $2,0)4,)*).

2014

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are


ii. 'ost of sales, and general, administra administrative tive and store operating operating e+penses, in 2014 are respectively, $1,2,02 and $!)!,1"2. iii. -et nancing costs in 2014 $11,)*!. iv. /ncome ta+ e+pense in 2014 $2,*!*. v. -et earnings in 201! $220,". vi. erchandise inventories inventories at the end of 201! 201! $!!",!". $!!",!". vii. &ccounts payale and accrued liailities at the eginning of 2014 scal year ere $101,2"). viii. (etained earnings at the end of 2014 $!4),4*" from the consolidated statement of changes in shareholders3 equity or the statement of nancial position#. i+. ong5term det at the eginning of 2014 $2)2,0*1 +. 'ash %os %os generat generated ed from from operati operating ng activi activitie ties s in 2014 2014 $!0",!*" +i. 'ash payments to acquire property, plant, and equipment in 2014 $),!0!#. +ii. 'ash proceeds from the issuance of common shares in 2014 $1,4!0. +iii +iii.. 'ash 'ash %os %os us used ed for for nan nanci cing ng acti activi viti ties es in 20 201! 1! $1*,21!#. +iv +iv. 'ash 'ash paym payment ents s to reduc educe e long long5t 5ter erm m det det in 20 2014 14 $2)4,420#. c.

The largest largest sources sources of cash cash are are $400,000 $400,000 from proceeds from seni enior uns unsecur ecured ed notes otes,, and and $!0 !0" ",! ,!*" *" from operating activities. The largest uses of cash are $2**,4!"# for repurchase repurchase and cancellation of shares and $2)4,420# for disursements on long5term det.

<&*"* ,Continuedd.

To compute compute cash %o from from operations, net earnings are are increased y the non5cash items including depreciation and and amor amorti ti6a 6ati tion on e+pen +pense se,, and and furt furthe herr ad7u ad7ust sted ed y changes in or8ing capital items such as inventory and accounts payale.

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e.

'ost ost of goods ods sold incr ncreas eased y $1! !,1 ,11 1!. 9ene 9enera rall, administrative and store operating e+penses increased y $2!, $2 !,20 20.. Depreci Depreciati ation on and amorti6at amorti6ation ion incre increase ased d y $ ",)14. ",)14. Together ogether these help e+plain e+plain :her :here e the additional additional sales revenue ent.;

The The us use e of the the term term :con :conso soli lida date ted; d; mean means s that that the the company has, at a minimum, a parent company and a susidiary < a company that is controlled y the parent company generally through holding voting shares.

b.

&mounts are in thousands of 'anadian dollars dollars

=ear =ear capital 2014 201!

'urrent assets assets 'urrent liailities liailities $1!*,1*! 1!2,22!

$)2,2"4 4*,!"2

Decrease in or8ing capital

>or8ing

$*4,"" "4,"41 $ ,2

The The work workin ing g capi capita tall did did not not impr improv ove e from from -)9 -)9 to -); -);,, it decr decrea ease sed d by GF,F GF,F ,,----.. This This repr repres esen ents ts a decr decrea ease se of appro%imately )O in the ability to cover current liabilities with current assets. c.

&ll amounts are are in thousands of 'anadian dollars. i. ?ales revenues in 2014 $2*4,"40. ii. 'ost of sales in 2014 $101,**0. $101,**0. iii. @inance cost cost of det# in 201! $!,0)! iv. iv. /ncome ta+ e+pense recovery# in 2014 $,*22# v. -et income loss# in 201! $",*1*#.


vii vii. Trad rade recei eceiva va les les acc accou ount nts s recei eceiva val le# e# at the the eginning of 2014 $1,0). viii. ?hare capital at the end en d of 2014 $42,)0. i+. i+. Aroper operty ty,, plant plant,, and and equi equipm pment ent at the end of 20 2014 14 $),"*0. +. 'as 'ash %os used in operat rating activities in 2014 $!,!)#. +i. 'ash 'ash payments payments to acquir acquire e intangi intangiles les and prope property rty and equipment and an d intangile assets in 201! $,2!*#. +ii. 'ash used for the payment payment of dividends dividends in 201! $ nil#. +iii. 'ash produced for nancing activities in 2014 $,!!*. d.

/n 20 2014 14,, 40 40.* .*B B $" $",* ,* C$ C$21 210, 0," ""# "# of e'ha e'hate teau au’s ’s assets ere nanced ith det, hile .!B $12,0C$210,""# ere nanced y equity.

e.

The to largest sources of cash ere an increase in an8 indetedness of $1*,4"2 and the issuance of shares of $1. The to largest uses uses of cash ere the repayment of long5term det $",!04# and the addition to property and equipment and intangile assets of $),!1"#.

f. f.

The loss of $1,")# included non5cash depreciation and amort amorti6 i6at atio ion n of $1 $1", ",*2 *2!. !. This This is the most most sign signi ica cant nt die diere renc nce e ete eteen en the net loss loss on the cons consol olid idat ated ed statement of loss and the cash %os from operations. operations.

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a.

&ll amounts in thousands of 'anadian dollarsE i. Total sales revenue in 201!E $!,"*!. ii. 'ost of sales in 201!E $4*,))2. iii. ?ales and mar8eting e+pense in 2012E $1,22. iv. iv. @inance e+pense in 201!E $14 iiv. iiv. /ncome ta+ e+pense in 201!E $4". vi. -et income in 201!E $1,)4. vii. ii. /nve /nvent ntor orie ies s at at the the end end of of 201 201!E !E $), ),4) 4)! ! viii iii. &ccounts unts paya ayalle at the the egi eginn nniing of 201 01!E !E $1,. i+. ?hareholders’ equity at the end of 201!E $22,0. +. Decit at the eginning of 201!E $2,21!. +i. 'ash provid provided ed from from operating operating activities activities in 201!E 201!E $,*!. +ii. +ii. 'ash 'ash paym payment ents s to acqu acquir ire e plant plant and and equip equipme ment nt in 201!E $!*0. +iii +iii.. 'ash 'ash used used in the repa repaym ymen entt of det det in 201!E 201!E $2,12. +iv. +iv. 'ash used to pay dividends in 201!E $1,)).

b.

&t Decemer Decemer !1, 201!, 201!, Ten Ten Aea8s’ ea8s’ total assets assets of $!0,)" $!0,)" ere nanced y liailities of $",4 and equity of $22,0. &ppr &p pro o+ima +imate tely ly *2 *2.* .*B B of Aea8s ea8s’’ asse assets ts er ere nan nance ced d y shareholders, hile 2*.!B ere nanced using det.

c.

/n 201!, 201!, Ten Ten Aea8s Aea8s had a net cash cash out%o out%o of $4,1"1 $4,1"1 from from nancing activities the company paid dividends and repaid det principal# and a net cash out%o of $!*0 for investing activities the company purchased plant and equipment#.

d.

& classied statement of nancial position presents information information in orde orderr of liqui liquidi dity ty.. This This is ho ho Ten Aea8s ea8s stru struct ctur ures es its its consol consolid idated ated stateme statement nt of nanci nancial al positi position, on, y separat separating ing current current from non5current non5current assets and liailities. liailities. 'urrent assets are reported according to liquidity, ith least liquid rst and most liquid last.

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<&" a.

&ll amounts are in thousands of F.?. dollars i. -et sales in 201! 5 $2,1"4,!0! $2,1"4,!0! ii. Total selling, general, and administrative administrativ e e+penses in 201! < $2"2,)! iii. /ncome ta+ recovery# recovery# in 2012 5 $4,!!*# iv. iv. -et income earnings# in 201! 5 $!20,1*" v. /nventories in the eginning of 201! 5 $!,0)" $!,0)" vi. vi. Trade rade accou account nts s recei eceiva val le e at the the end end of 2012 2012 5 $2*, vii. (etained (etained earnings at the end of 201! 5 $1,"!,!4) viii. ong5term ong5term det at the end of 2012 5 $1"1,000 i+. 'as 'ash %o %os s from oper operat atiing acti activi viti tie es in in 20 201! 5 $42*,1) +. 'ash payments to acquire property, plant, and equipment equipment in 201! 5 $1)2,)4! +i. Dividends paid paid in 201! 201! 5 $4!,*2! $4!,*2! +ii. 'ash us used ed## for investin ting activitie ties in 201! 5 $1*2,1!)#.

b.

&t ?eptemer 2, 201!, 9ildan’s total assets assets of $2,04!,)1 er ere nan nance ced d y lia liail ilit itie ies s of $! $!24 24,2 ,22 2 and and equi equity ty of $1,*1,42). $1,*1,42). &ppro+imately &ppro+imately "4.1B "4.1B of 9ildan’s assets ere nanced y shareholders, hile only 1.B ere nanced using det.

c.

The to to largest largest sourc sources es of cash in in 201! ere ere cash %os %os from operating activities of $42*,1) and proceeds from issuance of shares of $),014. The to largest uses of cash cash in 20 201! 1! er ere addi additi tion ons s to prop proper erty ty,, pl plan ant, t, and and equipm equipment ent of $1 $1)2, )2,)4 )4! ! and princi principal pal repay repaymen ments ts of a revolving long5term an8 credit facility, of $1"1,000.

d.

9ilda 9ildan n &c &ctiv tivee eear ar prepar prepared ed a classi classied ed stateme statement nt of nan nanci cial al posi positi tion on pres presen ents ts info inforrmati mation on in orde orderr of liquidit liquidity y. The presence presence of su5totals su5totals for current current assets assets and and cur current ent lia liail ilit itie ies s sh sho o that that the the st stat atem emen entt is a clas lassied state tateme ment nt of nanc nancia iall posit ositiion. on. 9ilda ildan n separates current from non5current assets and liailities.

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'urrent assets are reported according to liquidity, ith most liquid rst and least liquid last.

<&" ,Continuede.

=ear 'urrent assets 'urrent liailities >or8ing capital 201! "0,*12 2",414 )1,2" 2012 12,)00 2),442 )),1" /ncrease in or8ing capital !,140

9ildan’s or8ing capital increased y $!,140,000 in 201!. This is appro+imately appro+imately B higher than or8ing capital in 2012.

Answers to this question will depend on the company selected.

Answer Answers s to this questi question on will will depe depend nd on the the comp company any select selected. ed.

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CASE S#$U%&#'S C*"* 5nticing >ashions 2td. Memorandum

To: $5=, 5nticing >ashions 2td. >rom: Accountant inancial 'tatements As the company company is seeking financing financing from its bank to support support its e%pansion plans, it is understandable that the bank will be taking a grea greate terr inte intere rest st in the the compa company ny’s ’s fina financi ncial al report reportin ing. g. rior rior to approving any loan, the bank will use 5nticing’s financial statements to assess the following: !i" !i"

The The com compa pan ny’s y’s abil abilit ity y to to se servic rvice e a loa loan The The bank bank will will use use the the fina financ ncia iall stat statem emen ents ts to dete determ rmin ine e if 5nticing has the earnings and cash flow to service the loan !i.e. pay interest on the loan and repay the loan principal". 'pecifically, the bank will review the statement of income to assess assess the profitab profitabilit ility y of the company’ company’s s operati operations ons.. If the company company does not have a track record of profits, then it unlikely a loan will be granted. granted. If the company is not profitable, it will not be able to pay interest or repay loan principal. The bank will use the statement of cash flows to evaluate the amount of cash the company is generating from its operating activities. activities. It will be these cash flows flows that 5nticing will use to pay interest interest and repay repay principal. principal. 0hile it will look at the company’s company’s financing and investing cash flows, the bank’s primary focus will be on those generated from operations.

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C*"* ,Continued-

!ii" !ii"

The The e%te e%tent nt of of asse assets ts tha thatt the the comp compan any y has has avai availa labl ble e that that cou could ld be provided as security in the event of loan default The bank will also want to ensure that it has adequate loan security security. This will normally normally involve them them taking a charge over over some of the borrower’ borrower’s s assets. >or e%ample, e%ample, they they may want want a charge over the 5nticing’s 5nticing’s accounts accounts receivable receivable and inventory inventory,, meaning these assets would revert to the bank for collection or sale to repay repay the loan in the event that 5nticing defaulted. They may also wish to use the property, plant and equipment of the company company as securi security ty.. This would would involve involve the bank having having a charge charge over over 5nticing’ 5nticing’s s equipment equipment,, buildings buildings,, land, etc. The bank could then sei4e and sell these assets to repay the loan in the event of default. The The bank bank will will use use the the stat statem emen entt of fin financi ancial al posi positi tion on to determine what assets the company could provide as security. The bank would be aware of the fact that, for many assets, the values values on the stateme statement nt of financi financial al positio position n repres represent ent their their historic cost rather than their fair values. As such, the bank may ask ask 5nti 5ntici cing ng to obta obtain in appr apprai aisa sals ls for for thes these e asse assets ts prio priorr to agreeing to accept the assets as loan security. security. I hope that this enhances your understanding of how the bank may may use use 5nti 5ntici cing ng’’s fina financ ncia iall stat state ement ments s in the the con conte%t te%t of approving the company’s loan application. lease don’t hesitate to contact me if you wish to discuss this matter in greater detail. 'incerely, A""ountant

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$egal 'otice Copyright

$opyright + -) by /ohn 0iley 1 'ons $anada, 2td. or related companies. All rights reserved. The data contained in these files are protected by copyright. This manu manua al is furnishe shed under lice icence and may may be used only nly in accordance with the terms of such licence. The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified, made available on a network, used to create derivative works, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of /ohn 0iley 1 'ons $anada, 2td. ((PIK %ii >)

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Solution Manual for Understanding Financial Accounting Canadian Edition by Burnley

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