SOLUTIONS MANUAL
FINANCIAL ACCOUNTING TOOLS FOR BUSINESS
DECISION-MAKING
9TH CANADIAN EDITION
CHAPTER 1: THE PURPOSE AND USE OF FINANCIAL
STATEMENTS
ANSWERS TO QUESTIONS
1. Accounting is the information system that identifies and records the
economic events of an organization, and then communicates them to a
wide variety of interested users.
LO 1 BT: K Difficulty: S TIME: 3 min. AACSB: None CPA: cpa-t001 CM: Reporting
2. (a) Internal users of accounting information work for the company and
include finance directors, marketing managers, human resource
personnel, production supervisors, and company officers. Internal
users have access to company information that is not available to
external users.
(b) Some external users may be individuals who are employees of the
company but are not directly involved in managing the company. As
a result, they do not have access to much information. External users
of accounting information generally do not work for the company. The
primary external users are investors and creditors. Other external
users include labour unions, customers, the Canada Revenue
Agency (CRA), and securities commissions.
LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
,3. Internal users may want the following questions answered:
• Is there enough cash to purchase a new piece of equipment?
• What price should we sell our product for to cover costs and to
maximize net income?
• How many employees can we afford to hire this year?
• Which product line is the most profitable?
• How much of a pay raise can the company afford to give me?
External users may want the following questions answered:
• Is the company earning enough to give me my required return on
investment?
• Will the company be able to repay its debts as the debts come due?
• Will the company stay in business long enough to service the products
I buy from it?
LO 1 BT: K Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
4. Primary users of accounting information include investors and creditors.
These external users need to make decisions concerning their ongoing
business relationship with the company. They need to be able to assess
the company’s performance and financial health because they intend to
start, continue, or discontinue having transactions with the company. Other
decision makers who have specific needs for certain financial information,
such as the amount of taxes paid by the company, are not considered
primary users.
LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
5. Decision makers rely on financial statement information and expect the
accounting information to have been prepared ethically. Without the
expectation of ethical behaviour, the information presented in the financial
statements would have no credibility for the users of the accounting
information. Without credibility, financial statement information would be
useless to financial statement users.
,LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None Ethics CPA: cpa-t001 CM: Reporting and Ethics
6. Descriptive data analytic provides information about what happened. On
the other hand, predictive data analytics helps the organization look into
the future and gives some visibility into what is likely to happen. Predictive
data analytics is of the most use to management
LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None Ethics CPA: cpa-t001 CM: Reporting and Ethics
7. (a) Proprietorship: Proprietorships are easier to form (and dissolve) than other
types of business organizations. They are not taxed as separate entities;
rather, the proprietor pays personal income tax on the company’s net
income. Depending on the circumstances, this may be an advantage or
disadvantage.
Disadvantages of a proprietorship include unlimited liability (proprietors are
personally liable for all debts of the business) and difficulty in obtaining
financing compared to other forms of organization. In addition, the life of
the proprietorship is limited as it is dependent on the willingness and
capability of the proprietor to continue operations.
(b) Partnership: Partnerships are easier to form (and dissolve) than a
corporation, although not as easy as a proprietorship. Similar to
proprietorships, partnerships are not taxed as separate entities. Instead,
the partners pay personal income tax on their share of income. Depending
on the circumstances, this may be an advantage or disadvantage.
Disadvantages of partnerships include unlimited liability (partners are
jointly and severally liable for all debts of the business) and difficulty in
obtaining financing compared to corporations. In addition, the life of a
partnership can be limited depending on the terms of the partnership
agreement and actions of the other partners.
, (c) Private corporation: Advantages of a private corporation include limited
liability (shareholders not being personally liable for corporate debts),
indefinite life, and transferability of ownership. In many cases, depending
on the size of the corporation, a creditor such as a bank will ask for a
personal guarantee which will void the limited liability advantage. In
addition, transferability of ownership may be limited since shares are not
publicly traded.
Disadvantages of a private corporation include increased government
regulations and paperwork. The fact that corporations are taxed as a
separate legal entity may be an advantage or a disadvantage. Corporations
often receive more favourable income tax treatment than other forms of
business organizations. As mentioned above, depending on the size of the
corporation, many of the advantages of the corporate form are not available
to a small private corporation.
(d) Public corporation: The advantages of a public corporation include limited
liability, indefinite life, and transferability of ownership. These features
make it easier for publicly traded corporations to raise financing compared
to other forms of business organizations. Corporations often receive more
favourable income tax treatment than other forms of business
organizations.
Disadvantages include increased government regulations and paperwork.
In addition, because the shares of public companies are listed and traded
on Canadian or other exchanges such as the Toronto Stock Exchange
(TSX), these corporations are required to distribute their financial
statements to investors, creditors and other interested parties, and the
general public. This requirement involves greater costs to the corporation.
LO 2 BT: C Difficulty: M TIME: 20 min. AACSB: None CPA: cpa-t001, cpa-t006 CM: Reporting and Tax
FINANCIAL ACCOUNTING TOOLS FOR BUSINESS
DECISION-MAKING
9TH CANADIAN EDITION
CHAPTER 1: THE PURPOSE AND USE OF FINANCIAL
STATEMENTS
ANSWERS TO QUESTIONS
1. Accounting is the information system that identifies and records the
economic events of an organization, and then communicates them to a
wide variety of interested users.
LO 1 BT: K Difficulty: S TIME: 3 min. AACSB: None CPA: cpa-t001 CM: Reporting
2. (a) Internal users of accounting information work for the company and
include finance directors, marketing managers, human resource
personnel, production supervisors, and company officers. Internal
users have access to company information that is not available to
external users.
(b) Some external users may be individuals who are employees of the
company but are not directly involved in managing the company. As
a result, they do not have access to much information. External users
of accounting information generally do not work for the company. The
primary external users are investors and creditors. Other external
users include labour unions, customers, the Canada Revenue
Agency (CRA), and securities commissions.
LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
,3. Internal users may want the following questions answered:
• Is there enough cash to purchase a new piece of equipment?
• What price should we sell our product for to cover costs and to
maximize net income?
• How many employees can we afford to hire this year?
• Which product line is the most profitable?
• How much of a pay raise can the company afford to give me?
External users may want the following questions answered:
• Is the company earning enough to give me my required return on
investment?
• Will the company be able to repay its debts as the debts come due?
• Will the company stay in business long enough to service the products
I buy from it?
LO 1 BT: K Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
4. Primary users of accounting information include investors and creditors.
These external users need to make decisions concerning their ongoing
business relationship with the company. They need to be able to assess
the company’s performance and financial health because they intend to
start, continue, or discontinue having transactions with the company. Other
decision makers who have specific needs for certain financial information,
such as the amount of taxes paid by the company, are not considered
primary users.
LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
5. Decision makers rely on financial statement information and expect the
accounting information to have been prepared ethically. Without the
expectation of ethical behaviour, the information presented in the financial
statements would have no credibility for the users of the accounting
information. Without credibility, financial statement information would be
useless to financial statement users.
,LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None Ethics CPA: cpa-t001 CM: Reporting and Ethics
6. Descriptive data analytic provides information about what happened. On
the other hand, predictive data analytics helps the organization look into
the future and gives some visibility into what is likely to happen. Predictive
data analytics is of the most use to management
LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None Ethics CPA: cpa-t001 CM: Reporting and Ethics
7. (a) Proprietorship: Proprietorships are easier to form (and dissolve) than other
types of business organizations. They are not taxed as separate entities;
rather, the proprietor pays personal income tax on the company’s net
income. Depending on the circumstances, this may be an advantage or
disadvantage.
Disadvantages of a proprietorship include unlimited liability (proprietors are
personally liable for all debts of the business) and difficulty in obtaining
financing compared to other forms of organization. In addition, the life of
the proprietorship is limited as it is dependent on the willingness and
capability of the proprietor to continue operations.
(b) Partnership: Partnerships are easier to form (and dissolve) than a
corporation, although not as easy as a proprietorship. Similar to
proprietorships, partnerships are not taxed as separate entities. Instead,
the partners pay personal income tax on their share of income. Depending
on the circumstances, this may be an advantage or disadvantage.
Disadvantages of partnerships include unlimited liability (partners are
jointly and severally liable for all debts of the business) and difficulty in
obtaining financing compared to corporations. In addition, the life of a
partnership can be limited depending on the terms of the partnership
agreement and actions of the other partners.
, (c) Private corporation: Advantages of a private corporation include limited
liability (shareholders not being personally liable for corporate debts),
indefinite life, and transferability of ownership. In many cases, depending
on the size of the corporation, a creditor such as a bank will ask for a
personal guarantee which will void the limited liability advantage. In
addition, transferability of ownership may be limited since shares are not
publicly traded.
Disadvantages of a private corporation include increased government
regulations and paperwork. The fact that corporations are taxed as a
separate legal entity may be an advantage or a disadvantage. Corporations
often receive more favourable income tax treatment than other forms of
business organizations. As mentioned above, depending on the size of the
corporation, many of the advantages of the corporate form are not available
to a small private corporation.
(d) Public corporation: The advantages of a public corporation include limited
liability, indefinite life, and transferability of ownership. These features
make it easier for publicly traded corporations to raise financing compared
to other forms of business organizations. Corporations often receive more
favourable income tax treatment than other forms of business
organizations.
Disadvantages include increased government regulations and paperwork.
In addition, because the shares of public companies are listed and traded
on Canadian or other exchanges such as the Toronto Stock Exchange
(TSX), these corporations are required to distribute their financial
statements to investors, creditors and other interested parties, and the
general public. This requirement involves greater costs to the corporation.
LO 2 BT: C Difficulty: M TIME: 20 min. AACSB: None CPA: cpa-t001, cpa-t006 CM: Reporting and Tax
