Chapter 1
Conceptual and Case Analysis
Frameworks for Financial Reporting
Copyright 2025 McGraw Hill LLC. All rights reserved.
Solutions Manual, Chapter 1 1
,A brief description of the major points covered in each case and problem.
CASES
Case 1-1
Students are asked to determine the impact of adopting the future tax method on key ratios and
to provide supporting arguments for the two different methods of accounting for income taxes.
Case 1-2 (adapted from a case prepared by Peter Secord, Saint Mary’s University)
In this real-life case, students are asked to discuss the merits of historical costs vs. replacement
costs. Actual note disclosure from a company’s financial statements is provided as background
material.
Case 1-3 (adapted from a case prepared by Peter Secord, Saint Mary’s University)
A Canadian company has just acquired a noncontrolling interest in a U.S. public company. It must
decide whether to use IFRS or U.S. GAAP for the U.S. subsidiary. Financial statement information
is provided under IFRS and U.S. GAAP. The reasons for some of the differences in numbers must
be explained and an opinion provided as to which method best reflects economic reality.
Case 1-4
This case concerns a private company that wants to know the impact of transitioning from ASPE to
IFRS will have on its financials. Analysis and recommendations are required for accounting issues
related to leases, inventory, intangible assets and goodwill impairment.
Case 1-5
This case is a mid-sized company that is publicly traded but whose management is entertaining a
bid from a venture capital firm to take them private. Accounting issues need to be considered to
determine their impact on the financial position of the company.
PROBLEMS
Problem 1-1 (20 min.)
A short problem to determine the inputs for, calculate, and interpret three key ratios for three years
and also to show the DuPont decomposition.
Problem 1-2 (20 min.)
Copyright 2025 McGraw Hill LLC. All rights reserved.
2 Modern Advanced Accounting in Canada, Eleventh Edition
,A short problem to use horizontal and vertical analysis to identify unusual trends in financial
performance over two years.
Problem 1-3 (30 min.)
A single asset is acquired. Students are asked to prepare and compare financial statement
numbers during the life of the asset using both a historical cost and a current value model.
Problem 1-4 (40 min.)
Financial statements for two companies, Lowes and Home Depot, are provided. Students are
required to perform common-size analysis of both the income statement and the balance sheet
Problem 1-5 (30 min.)
A private company plans to convert from IFRS to ASPE and wants to know the impact on three key
ratios if it converts from IFRS to ASPE for impairment losses, convertible bonds, and income
taxes.
Problem 1-6 (40 min.)
A private company plans to convert to IFRS but has an objective to minimize the impact on net
income. Also, a reconciliation to net income is required from IFRS to ASPE.
Problem 1-7 (40 min.)
A private company is considering converting to IFRS. It wants to know the impact on three key
ratios if it converts from ASPE to IFRS for impaired loans, capitalization of interest, and actuarial
losses.
Problem 1-8 (50 min.)
While taking the role of a financial analyst, the student uses vertical and horizontal analysis and
ratios to analyze and interpret the profitability, solvency, and liquidity of a private company.
Problem 1-9 (50 min.)
Copyright 2025 McGraw Hill LLC. All rights reserved.
Solutions Manual, Chapter 1 3
, A private company plans to convert to IFRS and go public within five years. It wants to know the
impact on net income and shareholders’ equity if it converts from ASPE to IFRS for impaired
loans, interest costs, actuarial gains, a compound financial instrument, and income taxes.
SOLUTIONS TO REVIEW QUESTIONS
1. The Conceptual Framework is a set of comprehensive concepts for financial reporting that
describe the objectives of financial reporting. The framework has two objectives: To assist
Standards setters to develop Standards that are based on consistent concepts or principles,
and to assist preparers of financial statements in developing consistent accounting policies
when no particular Standard applies to a particular transaction or when a Standard gives a
choice between alternatives.
2. There are times when external users may want financial reports that do not follow GAAP. For
example, users may need financial statements using non-GAAP accounting policies required
for legislative or regulatory purposes, or for contract compliance. A prospective lender may
want to receive a balance sheet with assets reported at fair value rather than historical cost.
Accountants have the skills and abilities to provide financial information in a variety of formats
or using a variety of accounting policies. When the financial statements use non-GAAP
accounting policies, the accounting policies must be disclosed in the notes to the financial
statements. The accountant’s report would refer to these accounting policies.
3. The three main areas where judgment needs to be applied are as follows:
- Choosing accounting policies that are appropriate for the company’s situation
- Making estimates to accurately reflect the company’s financial position and results of
operations
- Deciding what to disclose and how to disclose it in the notes to the financial statements.
4. The GAAP-based financial statements are prepared primarily for the benefit of external users.
The financial statements provide a summary of the financial position and results of operations
for the company. Management has access to the detailed information available within the
company. Therefore, the formal financial statements should give priority to the needs of the
external users.
5. The main reason the Accounting Standards Board decided to create a separate section of the
CPA Canada Handbook for private enterprises was to address the cost/benefit discrepancy
with respect to smaller private companies’ ability to comply with GAAP. GAAP has become
Copyright 2025 McGraw Hill LLC. All rights reserved.
4 Modern Advanced Accounting in Canada, Eleventh Edition
Conceptual and Case Analysis
Frameworks for Financial Reporting
Copyright 2025 McGraw Hill LLC. All rights reserved.
Solutions Manual, Chapter 1 1
,A brief description of the major points covered in each case and problem.
CASES
Case 1-1
Students are asked to determine the impact of adopting the future tax method on key ratios and
to provide supporting arguments for the two different methods of accounting for income taxes.
Case 1-2 (adapted from a case prepared by Peter Secord, Saint Mary’s University)
In this real-life case, students are asked to discuss the merits of historical costs vs. replacement
costs. Actual note disclosure from a company’s financial statements is provided as background
material.
Case 1-3 (adapted from a case prepared by Peter Secord, Saint Mary’s University)
A Canadian company has just acquired a noncontrolling interest in a U.S. public company. It must
decide whether to use IFRS or U.S. GAAP for the U.S. subsidiary. Financial statement information
is provided under IFRS and U.S. GAAP. The reasons for some of the differences in numbers must
be explained and an opinion provided as to which method best reflects economic reality.
Case 1-4
This case concerns a private company that wants to know the impact of transitioning from ASPE to
IFRS will have on its financials. Analysis and recommendations are required for accounting issues
related to leases, inventory, intangible assets and goodwill impairment.
Case 1-5
This case is a mid-sized company that is publicly traded but whose management is entertaining a
bid from a venture capital firm to take them private. Accounting issues need to be considered to
determine their impact on the financial position of the company.
PROBLEMS
Problem 1-1 (20 min.)
A short problem to determine the inputs for, calculate, and interpret three key ratios for three years
and also to show the DuPont decomposition.
Problem 1-2 (20 min.)
Copyright 2025 McGraw Hill LLC. All rights reserved.
2 Modern Advanced Accounting in Canada, Eleventh Edition
,A short problem to use horizontal and vertical analysis to identify unusual trends in financial
performance over two years.
Problem 1-3 (30 min.)
A single asset is acquired. Students are asked to prepare and compare financial statement
numbers during the life of the asset using both a historical cost and a current value model.
Problem 1-4 (40 min.)
Financial statements for two companies, Lowes and Home Depot, are provided. Students are
required to perform common-size analysis of both the income statement and the balance sheet
Problem 1-5 (30 min.)
A private company plans to convert from IFRS to ASPE and wants to know the impact on three key
ratios if it converts from IFRS to ASPE for impairment losses, convertible bonds, and income
taxes.
Problem 1-6 (40 min.)
A private company plans to convert to IFRS but has an objective to minimize the impact on net
income. Also, a reconciliation to net income is required from IFRS to ASPE.
Problem 1-7 (40 min.)
A private company is considering converting to IFRS. It wants to know the impact on three key
ratios if it converts from ASPE to IFRS for impaired loans, capitalization of interest, and actuarial
losses.
Problem 1-8 (50 min.)
While taking the role of a financial analyst, the student uses vertical and horizontal analysis and
ratios to analyze and interpret the profitability, solvency, and liquidity of a private company.
Problem 1-9 (50 min.)
Copyright 2025 McGraw Hill LLC. All rights reserved.
Solutions Manual, Chapter 1 3
, A private company plans to convert to IFRS and go public within five years. It wants to know the
impact on net income and shareholders’ equity if it converts from ASPE to IFRS for impaired
loans, interest costs, actuarial gains, a compound financial instrument, and income taxes.
SOLUTIONS TO REVIEW QUESTIONS
1. The Conceptual Framework is a set of comprehensive concepts for financial reporting that
describe the objectives of financial reporting. The framework has two objectives: To assist
Standards setters to develop Standards that are based on consistent concepts or principles,
and to assist preparers of financial statements in developing consistent accounting policies
when no particular Standard applies to a particular transaction or when a Standard gives a
choice between alternatives.
2. There are times when external users may want financial reports that do not follow GAAP. For
example, users may need financial statements using non-GAAP accounting policies required
for legislative or regulatory purposes, or for contract compliance. A prospective lender may
want to receive a balance sheet with assets reported at fair value rather than historical cost.
Accountants have the skills and abilities to provide financial information in a variety of formats
or using a variety of accounting policies. When the financial statements use non-GAAP
accounting policies, the accounting policies must be disclosed in the notes to the financial
statements. The accountant’s report would refer to these accounting policies.
3. The three main areas where judgment needs to be applied are as follows:
- Choosing accounting policies that are appropriate for the company’s situation
- Making estimates to accurately reflect the company’s financial position and results of
operations
- Deciding what to disclose and how to disclose it in the notes to the financial statements.
4. The GAAP-based financial statements are prepared primarily for the benefit of external users.
The financial statements provide a summary of the financial position and results of operations
for the company. Management has access to the detailed information available within the
company. Therefore, the formal financial statements should give priority to the needs of the
external users.
5. The main reason the Accounting Standards Board decided to create a separate section of the
CPA Canada Handbook for private enterprises was to address the cost/benefit discrepancy
with respect to smaller private companies’ ability to comply with GAAP. GAAP has become
Copyright 2025 McGraw Hill LLC. All rights reserved.
4 Modern Advanced Accounting in Canada, Eleventh Edition
