SOLUTIONS MANUAL
UNDERSTANDING FINANCIAL ACCOUNTING
3RD CANADIAN EDITION
CHAPTER 1: OVERVIEW OF CORPORATE FINANCIAL
REPORTING
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 financing.
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 owner (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 personal 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 taxation 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
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 business, 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 shares 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 performance 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 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 the debt
(i.e. pay interest and repay principal).
Taxing Authorities – These users establish the rules for how taxable
income will be measured. They are interested in the fair measurement
of the financial performance of the company so that the appropriate tax
will be paid. Note, however, that 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 want 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 Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
UNDERSTANDING FINANCIAL ACCOUNTING
3RD CANADIAN EDITION
CHAPTER 1: OVERVIEW OF CORPORATE FINANCIAL
REPORTING
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 financing.
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 owner (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 personal 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 taxation 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
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 business, 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 shares 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 performance 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 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 the debt
(i.e. pay interest and repay principal).
Taxing Authorities – These users establish the rules for how taxable
income will be measured. They are interested in the fair measurement
of the financial performance of the company so that the appropriate tax
will be paid. Note, however, that 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 want 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 Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
