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,Test Bank for Accounting Principles, Ninth Canadian Edition
CHAPTER 1
ACCOUNTING IN ACTION
CHAPTER LEARNING OBJECTIVES
1. Identify the uses and users of accounting and the objective of financial reporting.
Accounting is the information system that identifies, records, and communicates the economic
events of an organization to a wide variety of interested users. Good accounting is important to
people both inside and outside the organization. Internal users, such as management, use
accounting information to plan, control, and evaluate business operations. External users include
investors and creditors, among others. Accounting data are used by investors (owners or potential
owners) to decide whether to buy, hold, or sell their financial interests. Creditors (suppliers and
bankers) evaluate the risks of granting credit or lending money based on the accounting
information. The objective of financial reporting is to provide useful information to investors and
creditors to make these decisions. Users need information about the business’s ability to earn a
profit and generate cash. For our economic system to function smoothly, reliable and ethical
accounting and financial reporting are critical.
2. Compare the different forms of business organization. The most common examples of
business organization are proprietorships, partnerships, and corporations. Proprietorships and
partnerships are not separate legal entities but are separate entities for accounting purposes;
income taxes are paid by the owners and owners have unlimited liability. Corporations are
separate legal entities as well as separate entities for accounting purposes; income taxes are paid
by the corporation and owners of the corporation have limited liability.
3. Explain the building blocks of accounting: ethics and the concepts included in the
conceptual framework. Generally accepted accounting principles are a common set of guidelines
that are used to prepare and report accounting information. The conceptual framework outlines
some of the body of theory used by accountants to fulfill their goal of providing useful accounting
information to users. Ethical behaviour is fundamental to fulfilling the objective of financial
accounting. The reporting entity concept requires the business activities of each reporting entity to
be kept separate from the activities of its owner and other economic entities. The going concern
assumption presumes that a business will continue operations for enough time to use its assets for
their intended purpose and to fulfill its commitments. The periodicity concept requires businesses
to divide up economic activities into distinct periods of time. Qualitative characteristics include
fundamental and enhancing characteristics that help to ensure accounting information is useful.
Only events that cause changes in the business’s economic resources or changes in the claims on
those resources are recorded. Recognition is the process of recording transactions and
measurement is the process of determining the amount that should be recognized. The historical
cost concept states that economic resources should be recorded at their historical (original) cost.
Fair value may be a more appropriate measure for certain types of resources. Generally, fair value
is the amount the resource could be sold for in the market. The monetary unit concept requires that
only transactions that can be expressed as an amount of money be included in the accounting
records, and it assumes that the monetary unit is stable.
The revenue recognition principle requires companies to recognize revenue when a performance
obligation(s) is satisfied. The matching concept requires that costs be recognized as expenses in
the same period as revenue is recognized when there is a direct association between the cost
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,Test Bank for Accounting Principles, Ninth Canadian Edition
incurred and revenue recognized.
In Canada, there are two sets of standards for profit-oriented businesses. Publicly accountable
enterprises must follow International Financial Reporting Standards (IFRS) and private enterprises
have the choice of following IFRS or Accounting Standards for Private Enterprises (ASPE).
4. Describe the elements of the financial statements and explain the accounting equation.
Assets, liabilities, and owner’s equity are reported on the balance sheet. Assets are present
economic resources controlled by the business as a result of past events and have the potential to
produce economic benefits. Liabilities are present obligations of a business to transfer an
economic resource as a result of past events. Owner’s equity is the owner’s claim on the
company’s assets and is equal to total assets minus total liabilities. The balance sheet is based on
the accounting equation: Assets = Liabilities + Owner’s equity.
The Income statement reports the profit or loss for a specified period of time. Profit is equal to
revenues minus expenses. Revenues are the increases in assets, or decreases in liabilities, that
result from business activities that are undertaken to earn profit. Expenses are the cost of assets
consumed or services used in a company’s business activities. They are decreases in assets or
increases in liabilities, excluding withdrawals made by the owners, and result in a decrease to
owner’s equity.
The statement of owner’s equity summarizes the changes in owner’s equity during the period.
Owner’s equity is increased by investments by the owner and profits. It is decreased by drawings
and losses. Investments are contributions of cash or other assets by owners. Drawings are
withdrawals of cash or other assets from the business for the owner’s personal use. Owner’s equity
in a partnership is referred to as partners’ equity and in a corporation as shareholders’ equity.
A cash flow statement summarizes information about the cash inflows (receipts) and outflows
(payments) for a specific period of time.
5. Analyze the effects of business transactions on the accounting equation. Each business
transaction must have a dual effect on the accounting equation. For example, if an individual asset
is increased, there must be a corresponding (1) decrease in another asset, (2) increase in a
liability, and/or (3) increase in owner’s equity.
6. Prepare financial statements. The income statement is prepared first. Expenses are deducted
from revenues to calculate the profit or loss for a specific period of time. Then the statement of
owner’s equity is prepared using the profit or loss reported in the income statement. The profit is
added to (losses are deducted from) the owner’s equity at the beginning of the period. Drawings
are then deducted to calculate owner’s equity at the end of the period. A balance sheet reports the
assets, liabilities, and owner’s equity of a business as at the end of the accounting period. The
owner’s equity at the end of the period, as calculated in the statement of owner’s equity, is reported
on the balance sheet in the owner’s equity section.
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,Test Bank for Accounting Principles, Ninth Canadian Edition
EXERCISES
Exercise 1
Mike Homes is a business owned by Mike Smith. The accounting for this business is done by
Mike’s sister Leigh. Leigh is currently preparing the 2024 year-end financial statements that Mike
will use for three purposes:
1. to submit with his tax returns;
2. to support a loan application; and
3. to help him evaluate the success of the business.
Instructions
a) For each of the three purposes identified, describe the information needs the user will fulfill
based on Mike Homes’ financial statements.
b) Leigh has suggested that she can help Mike out by recording some January 2025 revenue in
December 2024. She feels this is reasonable because it is just a slight timing difference and so
“not really dishonest.” Comment on the ethical implications of this suggestion and explain how
each of the three users’ needs may be affected if Leigh implements her suggestion.
Solution Exercise 1 (10 min.)
a) Information needs for each of the three users:
1. The tax department will want to know whether the company respects the tax laws.
2. The bank’s loans officer will evaluate the risk of granting credit or lending money.
3. Mike will be able to assess whether the business is earning him the amount of profit he is
expecting in comparison with other similar businesses.
b) Leigh’s action would be unethical because it would be misrepresenting the true results of the
business operations for 2024. It would violate the trust each financial statement user places in
the accounting information. The effect on each of the needs identified in part a) would be:
1. The tax department might assess higher taxes than are warranted.
2. The bank might lend more money to Mike than they would otherwise, based on
expectations of higher future profits than can actually be achieved because the bank’s
projections are based on incorrect historical information.
3. Mike might assume that past projects were more profitable than they really were. He might
therefore reject new projects based on the assumption that he does not need to increase
his sales above current levels in order to earn target profit levels.
Bloomcode: Comprehension
Difficulty: Easy
Learning Objective: Identify the uses and users of accounting and the objective of financial
reporting.
Section Reference: Why Is Accounting Important?
CPA: Financial Reporting
CPA: Problem-Solving and Decision-Making
CPA: Professional and Ethical Behaviour
AACSB: Ethics
Exercise 2
The following are six questions that users of accounting information might ask about Agusta Auto
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,Test Bank for Accounting Principles, Ninth Canadian Edition
Towing.
Instructions
For each question, indicate who the decision maker is and whether it is an external or internal user.
Decision Decision External or
maker internal
a) Can Agusta’s operations generate sufficient cash
to make payments on a term loan?
b) Does Agusta have sufficient assets to provide
security for a mortgage loan?
c) Should Agusta continue its current business, or
look for more profitable opportunities in a different
line of business?
d) Were the profit-sharing bonuses paid to unionized
employees equal to the percentage of profit stated
in the employment contract?
e) Was the amount of harmonized sales taxes (HST)
that Agusta remitted to the tax department equal to
13% of its revenue, as required by law?
f) Does Agusta have enough money in the bank to
provide drawings to the owner?
Solution Exercise 2 (10 min.)
Decision Decision maker External or
internal
a) Can Agusta’s operations generate sufficient cash Banker External
to make payments on a term loan?
b) Does Agusta have sufficient assets to provide Banker/lender External
security for a mortgage loan?
c) Should Agusta continue its current business, or Management Internal
look for more profitable opportunities in a different
line of business?
d) Were the profit-sharing bonuses paid to unionized Employee union External
employees equal to the percentage of profit stated
in the employment contract?
e) Was the amount of harmonized sales taxes (HST) Tax assessor External
that Agusta remitted to the tax department equal (Canada
to 13% of its revenue, as required by law? Revenue
Agency)
f) Does Agusta have enough money in the bank to Owner Internal
provide drawings to the owner?
Bloomcode: Comprehension
Difficulty: Easy
Learning Objective: Identify the uses and users of accounting and the objective of financial
reporting.
Section Reference: Why Is Accounting Important?
CPA: Financial Reporting
AACSB: Analytic
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,Test Bank for Accounting Principles, Ninth Canadian Edition
Exercise 3
MGS Company recently released its first set of financial statements. Below is a list of potential
users of the financial statements:
1. Labour union
2. Customers
3. Canadian Imperial Bank of Commerce
4. Canada Revenue Agency
5. Potential shareholders/investors
6. Sales Manager
7. Marketing Manager
8. Economic planners
9. Provincial securities commission
10. Human Resources Director
Instructions
a) For each user, identify whether the user is an external or internal user.
b) Provide a brief explanation as to the difference between external and internal users.
Solution Exercise 3 (15 min.)
a)
1. external
2. external
3. external
4. external
5. external
6. internal
7. internal
8. external
9. external
10. internal
b) External users do not work for the company and may use the information to base future
decisions about the company (i.e., loans, invest, or future profitability) or in the case of
governments and regulators, whether the company is respecting laws and regulations.
Internal users plan, organize, and run the company. They use the information to create or alter
future budgets, projects, or for detailed comparisons.
Bloomcode: Knowledge
Difficulty: Easy
1-5
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,Test Bank for Accounting Principles, Ninth Canadian Edition
Learning Objective: Identify the uses and users of accounting and the objective of financial
reporting.
Section Reference: Why Is Accounting Important?
CPA: Financial Reporting
AACSB: Analytic
Exercise 4
The following is a list of users of accounting information:
A) Managers
B) Regulators
C) Employees
D) Shareholders
E) Lenders
F) Suppliers
G) External auditors
Instructions
Match the most appropriate user to the following user objectives. (Note: Each user should only be
applied once.)
_______(1) The accuracy of the internal budgeted financial information
_______(2) Verification that the financial statements are fairly presented
_______(3) Compliance with income tax laws
_______(4) The company’s ability to repay its loans
_______(5) Fairness of wages
_______(6) The company’s ability to pay for its inventory
_______(7) The company’s ability to generate profits and provide a return on investment
Solution Exercise 4 (5 min.)
___A___(1) The accuracy of the internal budgeted financial information
___G___(2) Verification that the financial statements are fairly presented
___B___(3) Compliance with income tax laws
___E___(4) The ability of a company to repay its loans
___C___(5) Fairness of wages
___F___(6) The company’s ability to pay for its inventory
___D___(7) The company’s ability to generate profits and provide a return on investment
Bloomcode: Comprehension
Difficulty: Easy
Learning Objective: Identify the uses and users of accounting and the objective of financial
reporting.
Section Reference: Why Is Accounting Important?
CPA: Financial Reporting
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,Test Bank for Accounting Principles, Ninth Canadian Edition
AACSB: Analytic
Exercise 5
The following is a list of users of accounting information:
a) Managers
b) Regulators
c) Employees
d) Shareholders
e) Lenders
f) Suppliers
Instructions
Identify the above users as internal (I) or external (E) using the following format:
_______(a) Managers
_______(b) Regulators
_______(c) External auditors
_______(d) Shareholders
_______(e) Lenders
_______(f) Suppliers
Solution Exercise 5 (5 min.)
___I___(a) Managers
___E__ (b) Regulators
___E___(c) External auditors
___E__ (d) Shareholders
___E__ (e) Lenders
___E__ (f) Suppliers
Bloomcode: Comprehension
Difficulty: Easy
Learning Objective: Identify the uses and users of accounting and the objective of financial
reporting.
Section Reference: Why Is Accounting Important?
CPA: Financial Reporting
AACSB: Analytic
Exercise 6
Listed below are various types of business organizations:
1. Three individuals created a law practice. The law practice does not pay its own taxes.
2. Two individuals bought shares of a company as an investment.
3. A single mother opens her own hair salon. The hair salon pays its own taxes.
4. Husband and wife decide to open a daycare business. The wife will operate and maintain the
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,Test Bank for Accounting Principles, Ninth Canadian Edition
daycare while the husband works his normal full-time job. The daycare income will be reported
solely on the wife’s personal tax return.
5. A public company with 100 shareholders.
6. Two friends create a chocolate company business. All profits will be on their personal returns.
Instructions
a) For each of the six situations, identify the type of business organization.
b) For each of the six situations, identify the owner’s liability.
Solution Exercise 6 (10 min.)
a) b)
1. Partnership Unlimited
2. Corporation Limited
3. Corporation Limited
4. Proprietorship Unlimited
5. Corporation Limited
6. Partnership Unlimited
Bloomcode: Comprehension
Difficulty: Easy
Learning Objective: Compare the different forms of business organization.
Section Reference: Forms of Business Organization
CPA: Financial Reporting
AACSB: Analytic
Exercise 7
Listed below are various situations relating to business organizations:
1. Paul’s Woodworking does not have a separate legal existence apart from the one person who
owns it.
2. Luke and Sheri own Wise Financial Inc., a financial and personal taxation services provider.
Neither Luke nor Sheri has personal responsibility of the debts of Wise Financial Inc.
3. Lucky Snacks is owned by Ray Umber, who is personally liable for the debts of the business.
4. Ownership of Tractor and Wheels Corporation is divided into thousands of shares.
5. Chris and Melissa own Chris’ Curiosity, a restaurant. Both Chris and Melissa are personally
liable for the debts of the business.
6. Torby Technologies has two owners and does not pay income taxes.
Instructions
Determine whether the situation described above refers to a proprietorship, partnership, or
corporation.
Solution Exercise 7 (5 min.)
1. Proprietorship
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, Test Bank for Accounting Principles, Ninth Canadian Edition
2. Corporation
3. Proprietorship
4. Corporation
5. Partnership
6. Partnership
Bloomcode: Application
Difficulty: Medium
Learning Objective: Compare the different forms of business organization.
Section Reference: Forms of Business Organization
CPA: Financial Reporting
AACSB: Analytic
Exercise 8
Each of the following independent situations represents a violation of accounting principles:
1. It is now the end of 2024 and Stella Corp. is preparing its annual financial statements. The
company has been experiencing severe financial difficulties and management anticipates that
the company will cease operations in 2025, but this is not disclosed in the financial statements.
2. Fritz Schmitz runs a small business. All receipts from the business are deposited into Fritz’s
personal bank account and all Fritz’s expenses, both personal and business, are paid out of
this same account. Fritz makes no attempt to maintain separate records for the business.
3. Dean has a mining company that is very profitable. Over the past few years, Dean has been
very good at maintaining his business records and books. However, Dean’s wife has recently
been using the company account to pay for her personal expenses. She informed Dean that
since he owns the company all the money earned will go to him anyway and therefore using
either the company account or their personal bank account makes no difference.
Instructions
For each of the situations listed above, fill in the appropriate letter to indicate which of the following
accounting principles has been violated:
a) Going concern assumption
b) Reporting entity concept
Solution Exercise 8 (5 min.)
1. a
2. b
3. b
Bloomcode: Analysis
Difficulty: Medium
Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in
the conceptual framework.
Section Reference: Generally Accepted Accounting Principles
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,Test Bank for Accounting Principles, Ninth Canadian Edition
CHAPTER 1
ACCOUNTING IN ACTION
CHAPTER LEARNING OBJECTIVES
1. Identify the uses and users of accounting and the objective of financial reporting.
Accounting is the information system that identifies, records, and communicates the economic
events of an organization to a wide variety of interested users. Good accounting is important to
people both inside and outside the organization. Internal users, such as management, use
accounting information to plan, control, and evaluate business operations. External users include
investors and creditors, among others. Accounting data are used by investors (owners or potential
owners) to decide whether to buy, hold, or sell their financial interests. Creditors (suppliers and
bankers) evaluate the risks of granting credit or lending money based on the accounting
information. The objective of financial reporting is to provide useful information to investors and
creditors to make these decisions. Users need information about the business’s ability to earn a
profit and generate cash. For our economic system to function smoothly, reliable and ethical
accounting and financial reporting are critical.
2. Compare the different forms of business organization. The most common examples of
business organization are proprietorships, partnerships, and corporations. Proprietorships and
partnerships are not separate legal entities but are separate entities for accounting purposes;
income taxes are paid by the owners and owners have unlimited liability. Corporations are
separate legal entities as well as separate entities for accounting purposes; income taxes are paid
by the corporation and owners of the corporation have limited liability.
3. Explain the building blocks of accounting: ethics and the concepts included in the
conceptual framework. Generally accepted accounting principles are a common set of guidelines
that are used to prepare and report accounting information. The conceptual framework outlines
some of the body of theory used by accountants to fulfill their goal of providing useful accounting
information to users. Ethical behaviour is fundamental to fulfilling the objective of financial
accounting. The reporting entity concept requires the business activities of each reporting entity to
be kept separate from the activities of its owner and other economic entities. The going concern
assumption presumes that a business will continue operations for enough time to use its assets for
their intended purpose and to fulfill its commitments. The periodicity concept requires businesses
to divide up economic activities into distinct periods of time. Qualitative characteristics include
fundamental and enhancing characteristics that help to ensure accounting information is useful.
Only events that cause changes in the business’s economic resources or changes in the claims on
those resources are recorded. Recognition is the process of recording transactions and
measurement is the process of determining the amount that should be recognized. The historical
cost concept states that economic resources should be recorded at their historical (original) cost.
Fair value may be a more appropriate measure for certain types of resources. Generally, fair value
is the amount the resource could be sold for in the market. The monetary unit concept requires that
only transactions that can be expressed as an amount of money be included in the accounting
records, and it assumes that the monetary unit is stable.
The revenue recognition principle requires companies to recognize revenue when a performance
obligation(s) is satisfied. The matching concept requires that costs be recognized as expenses in
the same period as revenue is recognized when there is a direct association between the cost
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,Test Bank for Accounting Principles, Ninth Canadian Edition
incurred and revenue recognized.
In Canada, there are two sets of standards for profit-oriented businesses. Publicly accountable
enterprises must follow International Financial Reporting Standards (IFRS) and private enterprises
have the choice of following IFRS or Accounting Standards for Private Enterprises (ASPE).
4. Describe the elements of the financial statements and explain the accounting equation.
Assets, liabilities, and owner’s equity are reported on the balance sheet. Assets are present
economic resources controlled by the business as a result of past events and have the potential to
produce economic benefits. Liabilities are present obligations of a business to transfer an
economic resource as a result of past events. Owner’s equity is the owner’s claim on the
company’s assets and is equal to total assets minus total liabilities. The balance sheet is based on
the accounting equation: Assets = Liabilities + Owner’s equity.
The Income statement reports the profit or loss for a specified period of time. Profit is equal to
revenues minus expenses. Revenues are the increases in assets, or decreases in liabilities, that
result from business activities that are undertaken to earn profit. Expenses are the cost of assets
consumed or services used in a company’s business activities. They are decreases in assets or
increases in liabilities, excluding withdrawals made by the owners, and result in a decrease to
owner’s equity.
The statement of owner’s equity summarizes the changes in owner’s equity during the period.
Owner’s equity is increased by investments by the owner and profits. It is decreased by drawings
and losses. Investments are contributions of cash or other assets by owners. Drawings are
withdrawals of cash or other assets from the business for the owner’s personal use. Owner’s equity
in a partnership is referred to as partners’ equity and in a corporation as shareholders’ equity.
A cash flow statement summarizes information about the cash inflows (receipts) and outflows
(payments) for a specific period of time.
5. Analyze the effects of business transactions on the accounting equation. Each business
transaction must have a dual effect on the accounting equation. For example, if an individual asset
is increased, there must be a corresponding (1) decrease in another asset, (2) increase in a
liability, and/or (3) increase in owner’s equity.
6. Prepare financial statements. The income statement is prepared first. Expenses are deducted
from revenues to calculate the profit or loss for a specific period of time. Then the statement of
owner’s equity is prepared using the profit or loss reported in the income statement. The profit is
added to (losses are deducted from) the owner’s equity at the beginning of the period. Drawings
are then deducted to calculate owner’s equity at the end of the period. A balance sheet reports the
assets, liabilities, and owner’s equity of a business as at the end of the accounting period. The
owner’s equity at the end of the period, as calculated in the statement of owner’s equity, is reported
on the balance sheet in the owner’s equity section.
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,Test Bank for Accounting Principles, Ninth Canadian Edition
EXERCISES
Exercise 1
Mike Homes is a business owned by Mike Smith. The accounting for this business is done by
Mike’s sister Leigh. Leigh is currently preparing the 2024 year-end financial statements that Mike
will use for three purposes:
1. to submit with his tax returns;
2. to support a loan application; and
3. to help him evaluate the success of the business.
Instructions
a) For each of the three purposes identified, describe the information needs the user will fulfill
based on Mike Homes’ financial statements.
b) Leigh has suggested that she can help Mike out by recording some January 2025 revenue in
December 2024. She feels this is reasonable because it is just a slight timing difference and so
“not really dishonest.” Comment on the ethical implications of this suggestion and explain how
each of the three users’ needs may be affected if Leigh implements her suggestion.
Solution Exercise 1 (10 min.)
a) Information needs for each of the three users:
1. The tax department will want to know whether the company respects the tax laws.
2. The bank’s loans officer will evaluate the risk of granting credit or lending money.
3. Mike will be able to assess whether the business is earning him the amount of profit he is
expecting in comparison with other similar businesses.
b) Leigh’s action would be unethical because it would be misrepresenting the true results of the
business operations for 2024. It would violate the trust each financial statement user places in
the accounting information. The effect on each of the needs identified in part a) would be:
1. The tax department might assess higher taxes than are warranted.
2. The bank might lend more money to Mike than they would otherwise, based on
expectations of higher future profits than can actually be achieved because the bank’s
projections are based on incorrect historical information.
3. Mike might assume that past projects were more profitable than they really were. He might
therefore reject new projects based on the assumption that he does not need to increase
his sales above current levels in order to earn target profit levels.
Bloomcode: Comprehension
Difficulty: Easy
Learning Objective: Identify the uses and users of accounting and the objective of financial
reporting.
Section Reference: Why Is Accounting Important?
CPA: Financial Reporting
CPA: Problem-Solving and Decision-Making
CPA: Professional and Ethical Behaviour
AACSB: Ethics
Exercise 2
The following are six questions that users of accounting information might ask about Agusta Auto
1-3
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,Test Bank for Accounting Principles, Ninth Canadian Edition
Towing.
Instructions
For each question, indicate who the decision maker is and whether it is an external or internal user.
Decision Decision External or
maker internal
a) Can Agusta’s operations generate sufficient cash
to make payments on a term loan?
b) Does Agusta have sufficient assets to provide
security for a mortgage loan?
c) Should Agusta continue its current business, or
look for more profitable opportunities in a different
line of business?
d) Were the profit-sharing bonuses paid to unionized
employees equal to the percentage of profit stated
in the employment contract?
e) Was the amount of harmonized sales taxes (HST)
that Agusta remitted to the tax department equal to
13% of its revenue, as required by law?
f) Does Agusta have enough money in the bank to
provide drawings to the owner?
Solution Exercise 2 (10 min.)
Decision Decision maker External or
internal
a) Can Agusta’s operations generate sufficient cash Banker External
to make payments on a term loan?
b) Does Agusta have sufficient assets to provide Banker/lender External
security for a mortgage loan?
c) Should Agusta continue its current business, or Management Internal
look for more profitable opportunities in a different
line of business?
d) Were the profit-sharing bonuses paid to unionized Employee union External
employees equal to the percentage of profit stated
in the employment contract?
e) Was the amount of harmonized sales taxes (HST) Tax assessor External
that Agusta remitted to the tax department equal (Canada
to 13% of its revenue, as required by law? Revenue
Agency)
f) Does Agusta have enough money in the bank to Owner Internal
provide drawings to the owner?
Bloomcode: Comprehension
Difficulty: Easy
Learning Objective: Identify the uses and users of accounting and the objective of financial
reporting.
Section Reference: Why Is Accounting Important?
CPA: Financial Reporting
AACSB: Analytic
1-4
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,Test Bank for Accounting Principles, Ninth Canadian Edition
Exercise 3
MGS Company recently released its first set of financial statements. Below is a list of potential
users of the financial statements:
1. Labour union
2. Customers
3. Canadian Imperial Bank of Commerce
4. Canada Revenue Agency
5. Potential shareholders/investors
6. Sales Manager
7. Marketing Manager
8. Economic planners
9. Provincial securities commission
10. Human Resources Director
Instructions
a) For each user, identify whether the user is an external or internal user.
b) Provide a brief explanation as to the difference between external and internal users.
Solution Exercise 3 (15 min.)
a)
1. external
2. external
3. external
4. external
5. external
6. internal
7. internal
8. external
9. external
10. internal
b) External users do not work for the company and may use the information to base future
decisions about the company (i.e., loans, invest, or future profitability) or in the case of
governments and regulators, whether the company is respecting laws and regulations.
Internal users plan, organize, and run the company. They use the information to create or alter
future budgets, projects, or for detailed comparisons.
Bloomcode: Knowledge
Difficulty: Easy
1-5
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,Test Bank for Accounting Principles, Ninth Canadian Edition
Learning Objective: Identify the uses and users of accounting and the objective of financial
reporting.
Section Reference: Why Is Accounting Important?
CPA: Financial Reporting
AACSB: Analytic
Exercise 4
The following is a list of users of accounting information:
A) Managers
B) Regulators
C) Employees
D) Shareholders
E) Lenders
F) Suppliers
G) External auditors
Instructions
Match the most appropriate user to the following user objectives. (Note: Each user should only be
applied once.)
_______(1) The accuracy of the internal budgeted financial information
_______(2) Verification that the financial statements are fairly presented
_______(3) Compliance with income tax laws
_______(4) The company’s ability to repay its loans
_______(5) Fairness of wages
_______(6) The company’s ability to pay for its inventory
_______(7) The company’s ability to generate profits and provide a return on investment
Solution Exercise 4 (5 min.)
___A___(1) The accuracy of the internal budgeted financial information
___G___(2) Verification that the financial statements are fairly presented
___B___(3) Compliance with income tax laws
___E___(4) The ability of a company to repay its loans
___C___(5) Fairness of wages
___F___(6) The company’s ability to pay for its inventory
___D___(7) The company’s ability to generate profits and provide a return on investment
Bloomcode: Comprehension
Difficulty: Easy
Learning Objective: Identify the uses and users of accounting and the objective of financial
reporting.
Section Reference: Why Is Accounting Important?
CPA: Financial Reporting
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AACSB: Analytic
Exercise 5
The following is a list of users of accounting information:
a) Managers
b) Regulators
c) Employees
d) Shareholders
e) Lenders
f) Suppliers
Instructions
Identify the above users as internal (I) or external (E) using the following format:
_______(a) Managers
_______(b) Regulators
_______(c) External auditors
_______(d) Shareholders
_______(e) Lenders
_______(f) Suppliers
Solution Exercise 5 (5 min.)
___I___(a) Managers
___E__ (b) Regulators
___E___(c) External auditors
___E__ (d) Shareholders
___E__ (e) Lenders
___E__ (f) Suppliers
Bloomcode: Comprehension
Difficulty: Easy
Learning Objective: Identify the uses and users of accounting and the objective of financial
reporting.
Section Reference: Why Is Accounting Important?
CPA: Financial Reporting
AACSB: Analytic
Exercise 6
Listed below are various types of business organizations:
1. Three individuals created a law practice. The law practice does not pay its own taxes.
2. Two individuals bought shares of a company as an investment.
3. A single mother opens her own hair salon. The hair salon pays its own taxes.
4. Husband and wife decide to open a daycare business. The wife will operate and maintain the
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,Test Bank for Accounting Principles, Ninth Canadian Edition
daycare while the husband works his normal full-time job. The daycare income will be reported
solely on the wife’s personal tax return.
5. A public company with 100 shareholders.
6. Two friends create a chocolate company business. All profits will be on their personal returns.
Instructions
a) For each of the six situations, identify the type of business organization.
b) For each of the six situations, identify the owner’s liability.
Solution Exercise 6 (10 min.)
a) b)
1. Partnership Unlimited
2. Corporation Limited
3. Corporation Limited
4. Proprietorship Unlimited
5. Corporation Limited
6. Partnership Unlimited
Bloomcode: Comprehension
Difficulty: Easy
Learning Objective: Compare the different forms of business organization.
Section Reference: Forms of Business Organization
CPA: Financial Reporting
AACSB: Analytic
Exercise 7
Listed below are various situations relating to business organizations:
1. Paul’s Woodworking does not have a separate legal existence apart from the one person who
owns it.
2. Luke and Sheri own Wise Financial Inc., a financial and personal taxation services provider.
Neither Luke nor Sheri has personal responsibility of the debts of Wise Financial Inc.
3. Lucky Snacks is owned by Ray Umber, who is personally liable for the debts of the business.
4. Ownership of Tractor and Wheels Corporation is divided into thousands of shares.
5. Chris and Melissa own Chris’ Curiosity, a restaurant. Both Chris and Melissa are personally
liable for the debts of the business.
6. Torby Technologies has two owners and does not pay income taxes.
Instructions
Determine whether the situation described above refers to a proprietorship, partnership, or
corporation.
Solution Exercise 7 (5 min.)
1. Proprietorship
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, Test Bank for Accounting Principles, Ninth Canadian Edition
2. Corporation
3. Proprietorship
4. Corporation
5. Partnership
6. Partnership
Bloomcode: Application
Difficulty: Medium
Learning Objective: Compare the different forms of business organization.
Section Reference: Forms of Business Organization
CPA: Financial Reporting
AACSB: Analytic
Exercise 8
Each of the following independent situations represents a violation of accounting principles:
1. It is now the end of 2024 and Stella Corp. is preparing its annual financial statements. The
company has been experiencing severe financial difficulties and management anticipates that
the company will cease operations in 2025, but this is not disclosed in the financial statements.
2. Fritz Schmitz runs a small business. All receipts from the business are deposited into Fritz’s
personal bank account and all Fritz’s expenses, both personal and business, are paid out of
this same account. Fritz makes no attempt to maintain separate records for the business.
3. Dean has a mining company that is very profitable. Over the past few years, Dean has been
very good at maintaining his business records and books. However, Dean’s wife has recently
been using the company account to pay for her personal expenses. She informed Dean that
since he owns the company all the money earned will go to him anyway and therefore using
either the company account or their personal bank account makes no difference.
Instructions
For each of the situations listed above, fill in the appropriate letter to indicate which of the following
accounting principles has been violated:
a) Going concern assumption
b) Reporting entity concept
Solution Exercise 8 (5 min.)
1. a
2. b
3. b
Bloomcode: Analysis
Difficulty: Medium
Learning Objective: Explain the building blocks of accounting: ethics and the concepts included in
the conceptual framework.
Section Reference: Generally Accepted Accounting Principles
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