Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
CHAPTER 1
Introduction to Financial Statements
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Questions
Brief
Exercises
Exercises
A Problems B Problems
1. Describe the primary
forms of business
organization.
1, 2
1
1
1A
1B
2. Identify the users and
uses of accounting.
3, 4, 5, 6
2, 3
1
4A
4B
3. Explain the three
principal types of
business activity.
7, 8
4
1
2A, 3A
2B, 3B
4. Describe the content
and purpose of each of
the financial statements.
9, 10, 11,
12, 13
5, 6
1, 2, 3, 4, 3A, 4A, 5A, 3B, 4B, 5B,
5, 6, 7, 8, 6A, 7A, 8A 6B, 7B, 8B
9, 10
5. Explain the meaning of
assets, liabilities, and
shareholders’ equity and
state the basic
accounting equation.
14, 15, 16,
17, 18, 19
7, 8, 9, 10,
11
10, 11
8A
8B
6. Explain the basic
assumptions and
principles underlying
financial statements.
20, 21
12, 13
9A
9B
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
Moderate
25-30
Simple
25-30
1A
Determine forms of business organization.
2A
Identify business activities.
3A
Classify accounts.
Moderate
25-30
4A
Identify users and uses of financial statements.
Complex
40-50
5A
Prepare statements of earnings and retained
earnings and balance sheet.
Moderate
40-50
6A
Prepare cash flow statement.
Moderate
30-40
7A
Comment on proper accounting treatment and
prepare a corrected statement of earnings.
Moderate
40-50
8A
Use financial statement relationships to calculate
missing amounts.
Moderate
20-30
9A
Identify the assumption or principle violated.
Moderate
20-30
1B
Determine forms of business organization.
Moderate
25-30
2B
Identify business activities.
Simple
25-30
3B
Classify accounts.
Moderate
25-30
4B
Identify users and uses of financial statements.
Complex
40-50
5B
Prepare statements of earnings and retained
earnings and balance sheet.
Moderate
40-50
6B
Prepare cash flow statement.
Moderate
30-40
7B
Comment on proper accounting treatment and
prepare corrected balance sheet.
Moderate
40-50
8B
Use financial statement relationships to calculate
missing amounts.
Moderate
20-30
9B
Identify the assumption or principle violated.
Moderate
20-30
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
ANSWERS TO QUESTIONS
1.
The three basic forms of business organizations are (1) proprietorship, (2) partnership,
and (3) corporation.
2.
Advantages of a corporation are limited liability (shareholders not being personally liable
for corporate debts) and easy transferability of ownership. Disadvantages of a
corporation are increased government regulations and the fact that corporations are
taxed as a separate legal entity. Corporations may receive more favourable tax
treatment than other forms of business organizations. Partnerships and proprietorships
are easier to form (and dissolve) than corporations. Proprietorships and partnerships are
not taxed as separate entities. The partners and proprietors pay personal income tax on
their share of profits. Depending on the circumstances this may be an advantage or
disadvantage. Disadvantages of proprietorships and partnerships are unlimited liability
(proprietors/partners are personally liable for all debts) and difficulty in obtaining
financing compared to corporations.
3.
A person cannot earn a living, spend money, buy on credit, make an investment, or pay
taxes without receiving, using, or dispensing financial information. Accounting provides
financial information to interested users through the preparation and distribution of
financial statements.
4.
Internal users are those who manage the business and therefore are officers and other
decision-makers. To assist management, accounting provides internal reports.
Examples include financial comparisons of operating alternatives, projections of
earnings from new sales campaigns, and forecasts of cash needs for the next year.
5.
External users are those outside the business who have either a present or potential
direct financial interest (investors and creditors) or an indirect financial interest (taxing
authorities, regulatory agencies, labour unions, customers, and economic planners).
6.
Ethics are important because without the expectation of ethical behaviour, the
information presented in the financial statements would have no credibility for the
accounting profession. It would therefore be useless to financial statement users.
7.
Two primary kinds of financing activities for a corporation are borrowing money (debt)
and selling shares (equity).
8.
A bank would want to ensure that the company has sufficient cash available to repay
any loans owed to the bank. If the company paid out all its cash in the form of dividends
there would be no funds available to repay this debt.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
Questions (Continued)
9.
The balance sheet is prepared as at a specific point in time because it shows what the
business owns (its assets) and what it owes (its liabilities). These items are constantly
changing. In order to present them it is necessary to select one point in time. The other
statements (earnings, retained earnings and cash flow) cover a period of time as they
report activities and measure performance that takes place over time.
10.
Retained earnings are the cumulative earnings retained in a corporation. Retained
earnings are increased by net earnings and are decreased by dividends and a net loss.
11.
The primary purpose of the cash flow statement is to provide financial information about
the cash receipts and cash payments of an enterprise for a specific period of time.
12.
The three categories of the cash flow statement are operating activities, investing
activities, and financing activities. The categories were chosen because they represent
the three principal types of business activity.
13.
(a)
(b)
(c)
The statement of earnings reports net earnings for the period. The net earnings
figure from the statement of earnings is shown on the statement of retained
earnings as an addition to beginning retained earnings. If there is a loss it is
deducted from the opening balance in retained earnings.
The statement of retained earnings explains the change in the retained earnings
section of the balance sheet from one period to the next.
The cash flow statement explains the change in the cash balance from one
balance sheet to the next.
14.
The basic accounting equation is Assets = Liabilities + Shareholders’ Equity.
15.
Cost is used as a basis for accounting treatment and reporting because it is both
relevant and reliable. Cost is relevant because it represents the price paid, the assets
sacrificed, or the commitment made at the date of acquisition. It is the amount for which
someone or some entity should be accountable. Cost is reliable because it is objectively
measurable, factual, and verifiable. It is the result of an arm's-length exchange
transaction. As a result, cost is the basis used in preparing financial statements.
16.
(a)
(b)
Solutions Manual
Assets are resources owned by a business. Liabilities are claims of creditors
against assets. Put more simply, liabilities are existing debts and obligations.
Shareholders’ equity is the ownership claim on total assets.
The items that affect shareholders’ equity are common shares (investment by
shareholders) and retained earnings (through dividends, revenues, and
expenses).
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
Questions (Continued)
17.
The liabilities are (b) Accounts payable and (g) Salaries payable.
18.
(a)
(b)
(c)
(d)
19.
One possible complication is that the number of days included in each fiscal year will
vary, thus causing reported sales to vary from year to year simply because the number
of days varies.
20.
The economic entity assumption states the economic events can be identified with a
particular unit of accountability. This assumption requires that the activities of the entity
be kept separate and distinct from (1) the activities of its owners (the shareholders) and
(2) all other economic entities. A shareholder of a company charging personal living
costs as expenses of the company is an example of a violation of the economic entity
assumption.
21.
The going concern assumption lends credibility to the cost principle because it is
assumed that the assets will be used in the business and what you gave up to acquire
these assets is more relevant than what the assets could be sold for. If the company
was not a going concern, items would be reported at liquidation value.
Solutions Manual
Statement of earnings
Balance sheet (assets)
Statement of earnings
Balance sheet (assets)
(e)
(f)
(g)
(h)
1-5
Balance sheet (shareholders’ equity)
Balance sheet (liabilities)
Cash flow statement
Statement of retained earnings
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 1-1
BRIEF EXERCISE 1-2
(a)
(b)
(c)
(a)
(b)
(c)
(d)
(e)
P
PP
C
4
3
2
5
1
BRIEF EXERCISE 1-3
(a) The accountant’s behaviour is very unethical. The correct action would have been to adjust
the accounting records so that they agreed to the physical inventory count. Taking home
the extra supplies is theft. If the company accountant feels that she should be
compensated for her extra work, she should address her concerns by discussing the
matter with her employer.
(b) To ensure all employees adhere to appropriate ethical behaviour, the company should
implement clear policies outlining expectations of ethical behaviour. As well, top
management must illustrate, through their own actions, that ethical behaviour is expected
of all employees.
BRIEF EXERCISE 1-4
(a)
(b)
(c)
(d)
(e)
O
F
F
F
I
BRIEF EXERCISE 1-5
(a)
(b)
(c)
(d)
(e)
(f)
BS
BS
SE
BS
BS
SE
Solutions Manual
(g)
(h)
(i)
(j)
(k)
(l)
SE
BS
BS
SE
SE
BS
1-6
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BRIEF EXERCISE 1-6
SE
BS
CF
BS
(a)
(b)
(c)
(d)
Revenue during the period
Supplies on hand at the end of the year
Cash received from borrowing money during the period
Total debt at the end of the period
BRIEF EXERCISE 1-7
(a)
(b)
(c)
$90,000 – $50,000 = $40,000 (Shareholders’ equity)
$48,000 + $70,000 = $118,000 (Assets)
$94,000 – $72,000 = $22,000 (Liabilities)
BRIEF EXERCISE 1-8
(a)
Total assets
=
=
=
Total liabilities + Shareholders’ equity
$100,000 + $240,000
$340,000
(b)
Total liabilities
=
=
=
Total assets – Shareholders’ equity
$170,000 – $100,000
$70,000
(c)
Shareholders’ equity
=
=
=
Total assets – Total liabilities
$700,000 – ($700,000/2)
$350,000
BRIEF EXERCISE 1-9
(a)
($800,000 + $150,000) – ($500,000 – $80,000) = $530,000
(Shareholders’ equity)
(b)
($500,000 + $100,000) + ($800,000 – $500,000 – $70,000) = $830,000
(Assets)
(c)
($800,000 – $90,000) – ($800,000 – $500,000 + $110,000) = $300,000
(Liabilities)
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BRIEF EXERCISE 1-10
(a)
(b)
(c)
A
L
A
(d)
(e)
(f)
A
SE
L
BRIEF EXERCISE 1-11
(a)
(b)
(c)
(d)
(e)
(f)
(g)
NE
C
R
E
E
D
R
SOLUTIONS TO EXERCISES
EXERCISE 1-1
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
8
5
6
1
7
2
3
4
Ethics
Corporation
Common shares
Accounts payable
Accounts receivable
Creditor
Financing activities
Retained earnings
EXERCISE 1-2
KON INC.
Statement of Earnings
Year Ended December 31, 2004
Revenues
Service revenue
Expenses
Salaries expense
Rent expense
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1-8
$61,000
$28,000
10,400
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
Utilities expense
Advertising expense
Total expenses0
Earnings before income tax
Income tax expense
Net earnings
2,400
1,800
42,600
18,400
6,000
$12,400
KON INC.
Statement of Retained Earnings
Year Ended December 31, 2004
Retained earnings, January 1
Add: Net earnings
Less: Dividends
Retained earnings, December 31
Solutions Manual
1-9
$57,000
12,400
69,400
7,000
$62,400
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
EXERCISE 1-3
AURORA LTD.
Balance Sheet
December 31, 2004
Assets
Cash
Accounts receivable
Supplies
Equipment
Total assets
$18,500
10,000
8,000
0 44,000
$80,500
Liabilities and Shareholders’ Equity
Liabilities
Accounts payable
Shareholders’ equity
Common shares
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
$20,000
40,000
20,500*
60,500
$80,500
*$27,500 – $7,000 = $20,500
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Financial Accounting, Second Canadian Edition
EXERCISE 1-4
(a)
Camping fee revenue
General store revenue
Total revenue
Expenses ($142,000 + $6,000)
Net earnings
$137,000
20,000
157,000
148,000
$ 9,000
(b)
SEA SURF CAMPGROUND, INC.
Statement of Retained Earnings
Year Ended December 31, 2004
Retained earnings, January 1
Add: Net earnings
Less: Dividends
Retained earnings, December 31
$17,000
9,000
26,000
4,000
$22,000
SEA SURF CAMPGROUND, INC.
Balance Sheet
December 31, 2004
Assets
Cash
Supplies
Equipment
Total assets
$ 10,500
2,500
0 110,000
$123,000
Liabilities and Shareholders’ Equity
Liabilities
Accounts payable
Notes payable
Total liabilities
Shareholders’ equity
Common shares
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
Solutions Manual
1-11
$ 11,000
50,000
61,000
40,000
22,000
62,000
$123,000
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
EXERCISE 1-5
LANGILLE PROFESSIONAL CORPORATION
Statement of Retained Earnings
Year Ended December 31, 2004
Retained earnings, January 1
Add: Net earnings
Less: Dividends
Retained earnings, December 31
*Total revenue
Total expenses
Net earnings
Solutions Manual
$150,000
190,000*
340,000
76,000
$264,000
$395,000
205,000
$190,000
1-12
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
EXERCISE 1-6
(a)
Assets - Liabilities = Shareholders’ equity
$90,000 - $80,000 = $10,000
(b)
Total liabilities + Shareholders’ equity = Total assets
$120,000 + $40,000 = $160,000
(c)
Ending balance – Beginning balance = Change in shareholders’ equity
$40,000 - $10,000 = $30,000
Revenue – Expenses = Net earnings
$215,000 - $165,000 = $50,000
Total change in shareholders’ equity – Net earnings = Dividends
$30,000 - $50,000 = $20,000
(d)
Total Assets - Shareholders’ equity = Total liabilities
$130,000 - $95,000 = $35,000
(e)
Assets - Liabilities = Shareholders’ equity
$180,000 - $55,000 = $125,000
(f)
Ending balance - Beginning balance = Change in shareholders’ equity
$125,000 - $95,000 = $30,000
Change in shareholders’ equity + Dividends = Net earnings
$30,000 + $5,000 = $35,000
Net earnings + Expenses = Revenue
$35,000 + $80,000 = $115,000
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
EXERCISE 1-7
(a)
Yu Corporation is distributing nearly all of this year's net earnings as dividends. This
suggests that Yu is not pursuing rapid growth. Companies that have a lot of
opportunities for growth normally retain their earnings and pay low dividends.
(b)
Surya Corporation is not generating sufficient cash from operating activities to fund its
investing activities. This is common for companies in their early years of existence.
(c)
Naguib is financing its assets mainly through equity. The company has $400,000
($150,000 + $250,000) of total assets, which are funded 37.5% ($150,000/$400,000) by
liabilities and 62.5% ($250,000/$400,000) by equity. Since equity does not have to be
repaid and does not require interest payments, the company appears to be in a healthy
financial position.
EXERCISE 1-8
VAN TRAN CORPORATION
Cash Flow Statement
Year Ended December 31, 2004
Operating activities
Cash received from customers
Cash paid to suppliers
Cash provided by operating activities
Investing activities
Cash paid for new equipment
Cash used by investing activities
Financing activities
Cash received from lenders
Cash dividends paid
Cash provided by financing activities
Net increase in cash
Cash, January 1, 2004
Cash, December 31, 2004
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1-14
$50,000
(30,000)
$20,000
$(25,000)
(25,000)
$20,000
(6,000)
14,000
9,000
10,000
$19,000
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
EXERCISE 1-9
LANDS’ END
Cash Flow Statement
Year Ended February 1, 2002
Operating activities
Cash received from customers
Cash paid for goods and services
Cash provided by operating activities
Investing activities
Cash paid for new buildings and equipment
Cash used by investing activities
Financing activities
Cash paid for repayment of debt
Cash received from issue of common shares
Cash provided by financing activities
Net increase in cash
Cash, January 27, 2001
Cash, February 1, 2002
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1-15
$1,575,573
(1,502,068)
$ 73,505
$(40,514)
(40,514)
$ (771)
14,520
13,749
46,740
75,351
$122,091
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
EXERCISE 1-10
(a)
A
SE
E
E
A
A
A
Cash and short-term investments
Retained earnings
Cost of goods sold
Selling, general and administrative expenses
Prepaid expenses
Inventories
Receivables
E
R
L
L
R
R
E
Income tax expense
Sales
Income taxes payable
Accounts payable
Franchising revenues
Rental and other income
Interest expense
(b)
COOLBRANDS INTERNATIONAL INC.
Statement of Earnings
Year Ended August 31, 2002
Revenues
Sales
Franchising revenues
Rental and other income
Total revenues
Expenses
Cost of goods sold
Selling, general and administrative expenses
Interest expense
Total expenses
Earnings before income tax
Income tax expense
Net earnings
Solutions Manual
1-16
$236,028
5,187
1,007
242,222
129,246
77,558
2,544
209,348
32,874
11,890
$ 20,984
Chapter 1
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
EXERCISE 1-11
(a)
L
A
A
A
A
A
L
A
L
A
SE
SE
Accounts payable and accrued liabilities
Accounts receivable
Capital assets
Cash
Goodwill and other intangibles
Inventory
Long-term debt
Other assets
Other liabilities
Prepaid and other expenses
Retained earnings
Share capital
(b)
Assets
Cash
Accounts receivable
Inventory
Prepaid and other expenses
Capital assets
Goodwill and other intangibles
Other assets
Total assets
$
523
38,275
268,519
11,123
142,236
38,684
7,452
$506,812
Liabilities
Accounts payable and accrued liabilities
Other liabilities
Long-term debt
Total liabilities
$209,873
57,516
35,700
$303,089
Shareholders’ equity
Share capital
Retained earnings
Total shareholders’ equity
$124,866
78,857
$203,723
0
Total assets = Total liabilities + Shareholders’ equity
$506,812
= $303,089 + $203,723
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
EXERCISE 1-12
(a)
(b)
(c)
(d)
(e)
(f)
5
6
3
4
2
1
Going concern assumption
Economic entity assumption
Monetary unit assumption
Time period assumption
Cost principle
Full disclosure principle
EXERCISE 1-13
(a)
This is a violation of the cost principle. The inventory was written up to its market value
when it should have remained at cost.
(b)
This is a violation of the economic entity assumption. The treatment of the transaction
treats Deanna Durnford and Marietta Corp. as one entity when they are two separate
entities.
(c)
This is a violation of the time period assumption. This assumption states that the
economic life of a business can be divided into artificial time periods (months, quarters
or a year). By adding two more weeks to the year, Marietta Corp. would be misleading
financial statement readers. In addition, 2004 results would not be comparable to
previous years' results.
SOLUTIONS TO PROBLEMS
PROBLEM 1-1A
(a)
Dawn will likely operate her vegetable stand as a proprietorship because
she is planning on operating it for a short time period and a proprietorship is
the simplest and least costly to form and dissolve.
(b)
Joseph and Sabra should form a corporation when they combine their
operations. This is the best form of business for them to choose because
they expect to raise significant funds in the coming year. It is easier to raise
funds in a corporation. A corporation may also receive more favourable tax
treatment.
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Financial Accounting, Second Canadian Edition
(c)
The professors should incorporate their business because of their concerns
about the legal liabilities. A corporation is the only form of business that
provides limited liability to its owners.
(d)
Abdur would likely form a corporation because he needs to raise funds to
invest in inventories and property, plant, and equipment. He has no savings
or personal assets and it is normally easier to raise funds through a
corporation.
(e)
A partnership would be the most likely form of business for Mary and
Richard to choose. It is simpler to form than a corporation and less costly.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 1-2A
(a)
Abitibi
Consolidated Inc.
Students’ Society
of McGill
University
Corel Corporation
Sportsco
Investments
Grant Thornton
LLP
WestJet Airlines
Ltd.
Financing
Sale of shares
Borrow money
from a bank
Sale of bonds
Investing
Purchase longterm investments
Purchase office
equipment
Operating
Sale of newsprint
Purchase other
companies
Purchase hockey
equipment
Payment of
research expenses
Payment for rink
rentals
Purchase
airplanes
Bill clients for
professional
services
Payment for jet
fuel
Payment of
dividends to
shareholders
Distribute earnings Purchase
to partners
computers
Sale of shares
Payment of wages
and benefits
(b)
Financing
Sale of shares is common to all corporations. Borrowing from a bank is common
to all businesses. Payment of dividends is common to all corporations. Sale of
bonds is common to large corporations.
Investing
Purchase and sale of property, plant, and equipment would be common to all
businesses—the types of assets would vary according to the type of business
and some types of businesses require a larger investment in long-lived assets. A
new business or expanding business would be more apt to acquire assets.
Operating
The general activities identified would be common to most businesses, although
the service or product might change.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 1-3A
Accounts payable and accrued liabilities
Accounts receivable
Bank overdraft
Capital assets
Food and beverage operations revenue
Golf course operations revenue
Inventory
Long-term debt
Office and general expense
Professional fees expense
Wage and benefits expense
(a)
L
A
L
A
R
R
A
L
E
E
E
(b)
O
O
*
I
O
O
O
F
O
O
O
* Bank overdrafts are usually considered to be part of the cash balance on
the cash flow statement.
PROBLEM 1-4A
(a)
In making an investment in common shares the Ontario investor is
becoming a partial owner of the company. In this case, the investment will
be held for three years. The information that will be most relevant to him will
be on the statement of earnings. The statement of earnings reports the past
performance of the company in terms of its revenue, expenses and net
earnings. This is the best indicator of the company’s future potential.
(b)
In deciding to extend credit to a new customer, Comeau Ltée would focus
its attention on the balance sheet. The terms of credit they are extending
require repayment in a short period of time. Funds to repay the credit would
come from cash on hand. The balance sheet will show if the company has
enough cash to meet its obligations.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
(c)
In order to determine whether the company is generating enough cash to
increase the amount of dividends paid to investors, the CEO of Hilfiger
Corporation needs information on the amount of cash generated and used
in various activities of his business. The cash flow statement is the most
useful statement for this purpose. This statement presents the amount of
cash flow at the beginning and end of the period as well as the details of
the amount of cash generated by operating activities and the amount spent
on expanding operations (investment activities).
(d)
In deciding whether to extend a loan, the Laurentian Bank is interested in
two things: the ability of the company to make interest payments on an
annual basis for the next five years and the ability to repay the principal
amount at the end of five years. In order to evaluate both of these factors
the focus should be on the cash flow statement. This statement provides
information on the cash the company generates from its operating activities
on an ongoing basis. This will be the most important factor in determining if
the company will survive and be able to repay the loan.
Note to instructor: Other answers may be valid provided they are properly
supported.
PROBLEM 1-5A
AERO FLYING SCHOOL LTD.
Statement of Earnings
Month Ended May 31, 2004
Revenues
Service revenue
Expenses
Fuel expense
Rent expense
Advertising expense
Insurance expense
Repair expense
Total expenses
Earnings before income tax
Income tax expense
Solutions Manual
$9,600
3,400
1,200
900
400
700
0 6,600
3,000
1,100
1-22
Chapter 1
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
Net earnings
$1,900
AERO FLYING SCHOOL LTD.
Statement of Retained Earnings
Month Ended May 31, 2004
Retained earnings, May 1
Add: Net earnings
$0,000
0 1,900
1,900
1,000
$ 900
Less: Dividends
Retained earnings, May 31
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Chapter 1
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 1-5A (Continued)
AERO FLYING SCHOOL LTD.
Balance Sheet
May 31, 2004
Assets
Cash
Accounts receivable
Equipment
Total assets
$07,800
11,200
60,300
$79,300
Liabilities and Shareholders’ Equity
Liabilities
Notes payable
Accounts payable
Total liabilities
Shareholders’ equity
Common shares
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
$29,200
2,400
31,600
46,800*
900
47,700
$79,300
* $45,000 + $1,800 = $46,800
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 1-6A
Frenette Corporation should include the following items in its cash flow
statement:
Cash, July 1, 2003
Cash paid to suppliers
Cash paid for income tax
Cash dividends paid
Cash paid to buy equipment
Cash received from customers
FRENETTE CORPORATION
Cash Flow Statement
Year Ended June 30, 2004
Operating activities
Cash received from customers
$165,000
Cash paid to suppliers
(95,000)
Cash paid for income tax
(20,000)
Cash provided by operating activities
50,000
Investing activities
Cash paid to purchase equipment
(15,000)
Financing activities
Cash dividends paid
(8,000)
Increase in cash
27,000
Cash, July 1, 2003
30,000
Cash, June 30, 2004
$ 57,000
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 1-7A
(a)
1.
The $7,000 of revenue that the company earned in 2003 should not
be included in the 2004 revenues. Including the $7,000 in the current
year's statement of earnings would violate the time period
assumption. Instead, the $7,000 should be added to the beginning
balance of retained earnings.
2.
In order to properly calculate the net earnings for the year all
expenses must be included in the statement of earnings. Although
payment is not due until 2005, the expense relates to 2004.
3.
Since the corporation did not incur or pay the $15,000 of rent
expense, it should not be included in the statement of earnings.
Including the $15,000 as an expense misstates the corporation's net
earnings and presents misleading results.
4.
Including the $2,000 as vacation expense misstates the corporation's
net earnings. It would also be a violation of the economic entity
assumption.
(b)
KETTLE CORPORATION
Statement of Earnings
Year Ended December 31, 2004
Revenue ($60,000 - $7,000)
Expenses
Insurance expense
Earnings before income tax
Income tax expense
Net earnings
$53,000
5,000
48,000
12,000
$36,000
PROBLEM 1-8A
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Kimmel, Weygandt, Kieso, Trenholm
(a)
i.
Financial Accounting, Second Canadian Edition
Total assets = Total liabilities and shareholders’ equity
Total assets = $85,000
ii.
Cash = Total assets – (Accounts receivable + Land + Buildings and
equipment)
Cash = $85,000 - ($20,000 + $15,000 + $40,000)
Cash = $10,000
iii.
Operating expenses = Service revenue - Earnings before income tax
Operating expenses = $75,000 - $30,000
Operating expenses = $45,000
iv.
Net earnings = Earnings before income tax – Income tax expense
Net earnings = $30,000 - $15,000
Net earnings = $15,000
v.
Net earnings = $15,000 (same as (iv))
vi.
Retained earnings = $20,000 (as per statement of retained earnings)
vii.
Common shares = Total liabilities and shareholders’ equity - (Liabilities +
Retained earnings)
Common shares = $85,000 - ($15,000 + $20,000)
Common shares = $50,000
(b)
In preparing the financial statements the first statement to be prepared is
the statement of earnings. The net earnings figure is used in the statement
of retained earnings to calculate the ending balance of retained earnings.
The balance sheet is then completed using the balance of retained
earnings as calculated in the statement of retained earnings. Finally the
cash flow statement is completed using information from the statement of
earnings (e.g., net earnings) and balance sheet (e.g., cash balance).
PROBLEM 1-9A
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
1.
Karim Corporation has violated the monetary unit assumption. Although the
death of the company’s president will have an impact on the company it
cannot be measured in monetary terms and therefore cannot be recorded.
2.
In order to comply with the full disclosure principle, Topilynyckyj Ltd. must
adhere to generally accepted accounting principles. Even though the
company is small, investors, creditors and other financial statements users
still require information on which to base their decisions.
3.
If the shipyard chooses to report its financial results only once every two
years, it will be violating the time period assumption. This assumption
states that the life of a business can be divided into artificial time periods
and that useful reports can be generated covering those periods. As a
minimum, reports should be produced annually.
4.
Paradis Inc. has violated the economic entity assumption. In order to
properly report the financial condition and performance of the company,
Marc Paradis’ personal assets must not be recorded in the company’s
accounts. The boat is being used primarily for personal pleasure and
should not be recorded as an asset of the business.
5.
Bourque Corporation is violating the cost principle by recording equipment
at an amount higher than they actually paid for it. The amount that the
company would have paid for it if there had not been a “flood sale” is
irrelevant.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 1-1B
(a)
The professors should incorporate their business because of their concerns
about the legal liabilities. A corporation is the only form of business that
provides limited liability to it owners.
(b)
Joseph should run his bait shop as a proprietorship because this is the
simplest form of business to establish. It is also the least expensive. He is
the only person involved in the business and is planning to operate for a
limited time.
(c)
Robert and Tom should form a corporation when they combine their
operations. This is the best form of business for them to choose because
they expect to raise significant funds in the coming year and it is easier to
raise funds in a corporation. A corporation may also receive more
favourable income tax treatment.
(d)
A partnership would be the most likely form of business for Darcy, Ellen and
Meg to choose. It is simpler to form than a corporation and less costly.
(e)
Hervé is most likely to select to operate his business as a proprietorship.
He wants to maintain control of the business. Operating as a proprietorship
will allow him to do this. He has no savings or personal assets, therefore
will not require a corporation to protect his personal assets.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 1-2B
(a)
Indigo Books &
Music
High Liner Foods
Incorporated
Financing
Sale of shares
Royal Bank
Issue debt
securities to
investors
Borrow money
from a bank
Payment of
dividends to
shareholders
Sale of bonds
The Gap, Inc.
Sale of shares
Mountain
Equipment Co-op
Ganong Bros.
Limited
Investing
Purchase of longterm investments
Purchase of
production
equipment
Purchase of store
fixtures
Purchase of
production
equipment
Purchase office
equipment
Purchase of store
fixtures
Operating
Sale of books
Payment for fish
Payment for
inventory
Payment of utility
bill
Payment of
interest on savings
accounts
Payment of wages
and benefits
(b)
Financing
Sale of shares is common to all corporations. Issue of debt is common to all
corporations. Borrowing from a bank is common to all businesses. Payment of
dividends is common to all corporations. Sale of bonds is common to large
corporations
Investing
Purchase and sale of property, plant, and equipment would be common to all
businesses—the types of assets would vary according to the nature of the
business. Some types of businesses require a larger investment in long-lived
assets. A new business or expanding business would be more apt to be acquiring
assets.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 1-2B (Continued)
(b) (Continued)
Operating
The activities identified would be common to most businesses with the exception
of the payment of interest on savings accounts. The source of the cash receipt
(e.g., sale of books) and cash payment (e.g., payment for fish) would vary by the
nature of the business.
Solutions Manual
1-31
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 1-3B
Accounts payable and accrued charges
Accounts receivable
Common shares
Income and other taxes payable
Interest expense
Inventories
Long-term debt
Property and equipment
Sales
Solutions Manual
1-32
(a)
L
A
SE
L
E
A
L
A
R
(b)
O
O
F
O
O
O
F
I
O
Chapter 1
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Kimmel, Weygandt, Kieso, Trenholm
Solutions Manual
Financial Accounting, Second Canadian Edition
1-33
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 1-4B
(a)
In deciding to extend credit to a new customer, The North Face Inc. would
focus its attention on the balance sheet. The terms of credit they are
extending require repayment in a short period of time. Funds to repay the
credit would come from cash on hand. The balance sheet will show if the
company has enough cash to meet its obligations.
(b)
An investor purchasing common shares of Books Online that they intend to
hold for a long period of time, 5 years, should focus on the company’s
statement of earnings. The statement of earnings reports the company’s
past performance in terms of revenues, expenses and net earnings. This is
generally regarded as a good indicator of the company’s future
performance.
(c)
In deciding whether to extend a loan the Caisse D’Economie Base Montréal
is interested in two things—the ability of the company to make interest
payments on an annual basis for the next five years and the ability to repay
the principal amount at the end of five years. In order to evaluate both of
these factors the focus should be on the cash flow statement. This
statement provides information on the cash the company generates from its
operations on an ongoing basis. This will be the most important factor in
determining if the company will survive and be able to repay the loan.
(d)
The CEO should focus on the cash flow statement as this statement clearly
sets out the cash generated from operating activities and the amount the
company has spent in the past on purchasing equipment and paying
dividends.
Note to instructor: Other answers may be valid provided they are properly
supported.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 1-5B
ONE PLANET COSMETICS CORP.
Statement of Earnings
Month Ended June 30, 2004
Revenues
Service revenue
Expenses
Supplies expense
Gas and oil expense
Advertising expense
Utilities expense
Total expenses
Earnings before income taxes
Income tax expense
Net earnings
$8,000
1,200
900
500
0 300
2,900
5,100
1,500
$3,600
ONE PLANET COSMETICS CORP.
Statement of Retained Earnings
Month Ended June 30, 2004
Retained earnings, June 1
Add: Net earnings
000$
0
0 3,600
3,600
Less: Dividends
1,700
Retained earnings, June 30
$1,900
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Chapter 1
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 1-5B (Continued)
ONE PLANET COSMETICS CORP.
Balance Sheet
June 30, 2004
Assets
Cash
Accounts receivable
Cosmetic supplies
Equipment
Total assets
$ 6,000
4,000
2,400
30,000
$42,400
Liabilities and Shareholders’ Equity
Liabilities
Notes payable
Accounts payable
Total liabilities
Shareholders’ equity
Common shares
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
Solutions Manual
1-36
$13,000
1,300
14,300
26,200
1,900
28,100
$42,400
0
Chapter 1
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 1-6B
Maison Corporation should include the following items in its cash flow statement:
Cash, January 1, 2004
Cash paid to suppliers
Cash dividends paid
Cash paid to purchase equipment
Cash received from customers
MAISON CORPORATION
Cash Flow Statement
Year Ended December 31, 2004
Operating activities
Cash received from customers
$120,000
Cash paid to suppliers
(90,000)
Cash provided by operating activities
$30,000
Investing activities
Cash paid to purchase equipment
$(15,000)
Cash used by investing activities
(15,000)
Financing activities
Cash dividends paid
Cash used by financing activities
(11,000)
Increase in cash
Cash, January 1, 2004
Cash, December 31, 2004
Solutions Manual
1-37
$(11,000)
4,000
50,000
$54,000
Chapter 1
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 1-7B
(a)
1.
The economic entity assumption states that economic events can be
identified with a particular unit of accountability. Since the boat actually
belongs to Guy Gélinas—not to GG Corporation—it should not be reported
on the corporation's balance sheet. Likewise, the boat loan is a personal
loan of Guy's—not a liability of GG Corporation.
2.
The cost principle dictates that assets are recorded at their original cost.
Therefore, reporting the inventory at $30,000 would be improper and
violates the cost principle. The inventory should be reported at $15,000.
3.
Including the personal loan Guy made to his brother would be a violation of
the economic entity assumption. The $5,000 is not an asset of GG
Corporation—it is a personal asset of Guy Gélinas.
(b)
GG CORPORATION
Balance Sheet
December 31, 2004
Assets
Cash
Accounts receivable
Inventory
Total assets
$20,000
45,000
15,000
$80,000
Liabilities and Shareholders’ Equity
Liabilities
Accounts payable
Notes payable
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
$40,000
15,000
55,000
25,000*
$80,000
*$80,000 – $55,000 = $25,000
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 1-8B
(a)
(b)
i.
Common shares = Total liabilities and Shareholders’ equity –
(Liabilities + Retained earnings)
Common shares = $65,000 - ($7,000 + $25,000)
Common shares = $33,000
ii.
Retained earnings = $25,000 (from statement of retained earnings)
iii.
Operating expenses = Revenue - Earnings before income tax
Operating expenses = $80,000 - $30,000
Operating expenses = $50,000
iv.
Net earnings = Earnings before income tax - Income tax expense
Net earnings = $30,000 - $10,000
Net earnings = $20,000
v.
Net earnings (from (iv)) = $20,000
In preparing the financial statements, the first statement to be prepared is
the statement of earnings. The net earnings figure is used in the statement
of retained earnings to calculate the ending balance of retained earnings.
The balance sheet is then completed using the balance of retained
earnings as calculated in the statement of retained earnings. Finally the
cash flow statement is completed using information from the statement of
earnings (e.g. net earnings) and balance sheet (e.g. cash balance).
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 1-9B
(a)
Seco Corporation has violated the full disclosure principle. The information
on the lawsuit could have a significant effect on its financial results and
condition and would be important to users of its financial statements.
(b)
By recording the ‘value’ of its people, Dot.com Corporation is violating the
monetary unit assumption. It is estimating and recording the value of the
‘assets’ but at the present time there is no method to measure this value in
monetary terms.
(c)
Barton, Inc. is violating the cost principle by increasing the amount recorded
for its inventory. The inventory must be recorded at its cost to the
company—that is, the amount the company paid to acquire it.
(d)
Bonilla Corp. is violating the time period assumption. This assumption
states that the life of a business can be divided into artificial time periods
and that useful reports can be generated covering those periods. As a
minimum, reports should be produced annually.
(e)
Steph Wolfson has violated the economic entity assumption. In order to
properly report the financial condition and performance of the company, her
personal assets must not be recorded in the company’s accounts. She
should have recorded payment of company funds for the purchase of a
personal asset as an amount owing by her to the company.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 1-1 FINANCIAL REPORTING PROBLEM
(a)
Loblaw’s financial statements cover a 52-week period. Its fiscal year end is 52 weeks
after the start. It will fall on the closest Saturday to December 31.
(b)
Loblaw’s total assets at December 28, 2002 were $11,110 million and its total liabilities
and shareholders’ equity were the same amount of $11,110 million.
(c)
Loblaw’s had cash of $823 million and short-term investments of $304 million for a total
of $1,127 million on December 28, 2002.
(d)
Loblaw’s had accounts payable and accrued liabilities totalling $2,336 million at the end
of their 2002 fiscal year and $2,291 million at the end of their 2001 fiscal year.
(e)
Loblaw reports net sales for two consecutive years as follows:
2002
2001
(f)
$23,082 million
$21,486 million
From 2001 to 2002, Loblaw’s net earnings increased $165 million ($728 - $563).
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 1-2 COMPARATIVE ANALYSIS PROBLEM
(a)
1.
2.
3.
4.
(b)
Total assets
Receivables
Net sales
Net earnings
Loblaw
(amounts in millions)
$11,110
605
23,082
728
Sobeys
(amounts in millions)
$ 3,192.5
285.4
10,414.5
179.0
Loblaw's total assets were approximately 3.5 times greater ($11,110 vs. $3,192.5) than
Sobeys’ total assets. Loblaw's accounts receivable were approximately 212% more than
Sobeys’ and represent 2.6% ($605 ÷ $23,085) of its net sales. Sobeys’ accounts
receivable amounted to 2.7% ($285 ÷ $10,414.5) of its net sales. Loblaw’s net sales
were approximately 2.2 times as large as Sobeys’ net sales. In addition, Loblaw's net
earnings were almost 4.0 times more than Sobeys.
It can be seen from this information that both companies appear profitable but that
Loblaws is a much larger business.
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Kimmel, Weygandt, Kieso, Trenholm
BYP 1-3
(a)
Financial Accounting, Second Canadian Edition
RESEARCH CASE
The ten red flags that investors should look for to ensure that the statement of earnings
reflects the company’s bottom line are:
Companies taking a “Big Bath”
Highlighting everything but the bad stuff
Companies attempting to move debt off the balance sheet
Revisions to the company’s pension plan
Turning expenses into assets
Earnings that are not from operations and not expected to recur
The accounting treatment of stock option plans
“Channel-stuffing” or moving inventory to distributors to improve performance
Companies which change accounting standards from US to Canadian GAAP or
vice versa
10. Information in the notes to the financial statement such as the addition of a going
concern note.
1.
2.
3.
4.
5.
6.
7.
8.
9.
(b)
A shareholder should read the notes to the financial statements. According to Al Rosen,
“the footnotes to the financial statements are a treasure trove of information," He
suggests that users "Read the footnotes first. After seeing all the ways a company
has bent, spindled and mutilated its earnings, you may have an entirely
different outlook on the company."
(c)
According to the research article, Toronto-based e-commerce company Microforum Inc.
was involved in a scandal in September 2000.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 1-4 INTREPRETING FINANCIAL STATEMENTS
(a)
A creditor might be concerned about the decline in the amount of cash and short-term
deposits. They may feel that the ability of the company to meet its debt obligations is
reduced. In particular they may be concerned that the company spent more on investing
and financing activities than they generated from operating activities. They may be
concerned that the company is financing property, plant, and equipment from operating
funds. Creditors may want to look at the company’s balance sheet to examine the
overall debt position of the company.
(b)
An investor would be concerned about the fact that the auditors are questioning the
continued viability of this company. The inability of the company to generate cash from
operations and the fact that the company is disposing of significant assets to raise cash
world cause them to reconsider whether they want to continue to invest in this company.
(c)
I would be interested in seeing their projections for future sales growth and profitability. I
would also want to see their interim financial statements to see how the company is
performing in the current year.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 1-5 INTERPRETING FINANCIAL STATEMENTS
(a)
Its most important economic resources are its human resources—skills, talent and
knowledge of it staff and its customer base. These assets are not currently reported on
the balance sheet.
(b)
The balance sheet does not tell you what the company is worth. It does give you limited
information on the value of the company. Cash and accounts receivable are reported at
their realizable values. And, if the market value of assets such as inventory, investments
or goodwill are lower than their cost, they are written down to market value rather than
cost. This is a subject we will study in later chapters.
Generally, however, the value of the assets reported on the balance sheet does not
indicate the market value of the company’s assets (e.g., capital assets) nor does it
include the value of unrecorded assets as discussed in (a).
(c)
The most likely reason for the company preparing its statements in US dollars is that
most of the users of the statements (e.g. investors and creditors) are in the United
States or in other countries where US dollars are the standard currency.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 1-6 A GLOBAL FOCUS
Nestlé follows the standards issued by the International Accounting Standards Committee.
Ganong’s is a Canadian company and therefore follows the standards issued by the Canadian
Institute of Chartered Accountants. To the extent that these standards differ, then comparison
may be difficult.
There are at least two issues here. First, Nestlé’s financial reports are prepared under the
historical cost convention. As noted in the chapter, the cost principle underlies Canadian
accounting standards. Thus, this would assist comparison. The second issue relates to the full
disclosure principle discussed in the chapter. It is noted that Nestlé provides disclosures as
required by the “4th and 7th European Union company law directives.” To the extent that these
disclosure requirements differ from Canadian disclosure requirements comparison may be
impeded.
There is also a concern related to the monetary unit assumption. In the Canadian financial
statements are prepared in terms of Canadian dollars. Nestlé prepares its statements in terms
of Swiss francs. While conversion from francs to dollars is possible, it will not necessarily
capture the full economic situation.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 1-7 FINANCIAL ANALYSIS ON THE WEB
Due to the frequency of change with regard to information available on the World Wide Web,
the Accounting on the Web cases are updated as required. Their suggested solutions are also
updated whenever necessary, and can be found online in the Instructor Resources section of
our home page <www.wiley.com/canada/kimmel>.
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Kimmel, Weygandt, Kieso, Trenholm
BYP 1-8
(a)
(b)
Financial Accounting, Second Canadian Edition
COLLABORATIVE LEARNING ACTIVITY
1.
The donation of materials is clearly an expense of the business. The donations of
temporary help are also likely an expense of the business, since the donation of
the employees' time is made by Kelly Services. The employees still receive their
pay, but the employer is not required to pay Kelly. Of course, if the employees
donated their own time, these would be personal expenses. However, that is not
likely.
2.
The donation of the gladiolas was an expense of the business; the planting of the
gardens was likely on the employees' own time and therefore any costs incurred
were personal expenses of the employees.
3.
Clearly a business expense, since the payment is made by Kelly Services to the
charity.
4.
This may be either a personal expense or a corporate expense. Executives are
not paid on an hourly basis and this may not be part of their corporate
responsibilities, in which case this would not be a corporate expense. However
companies are increasingly encouraging or requiring this type of activity on the
part of their executives’ responsibilities, in which case it would be a corporate
expense.
1.
For the materials, Advertising Expense is the most likely category of those listed
because the company's name was on all the gifts. It might be a Charitable
Contribution Expense, but since the gifts were of a general nature and contained
the name of the donor, rather than the recipient, it is not as likely. The most likely
category for the donation of temporary help is Employee Wages Expense,
although it might be categorized as Charitable Contribution Expense since the
time was donated.
2.
Charitable Contribution Expense is the most likely. It is not Grounds Maintenance
Expense because the grounds maintained are not those of the company. The
employees' time is not recorded in the company records, of course, since the time
was volunteered.
3.
Clearly Charitable Contribution Expense.
4.
No additional cost was incurred over and above the executives’ regular
remuneration. Therefore it is not recorded in the company's records.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 1-9 COMMUNICATION ACTIVITY
To:
Karen Staudinger
From:
Student
I have received the balance sheet of Vermon Company, Inc. as of December 31, 2004.
The purpose of the balance sheet is to report, at a specific point in time, the assets of the
business and any claims to those assets.
A number of items in this balance sheet are not properly reported. They are:
1.
The balance sheet should be dated as at a specific date, not for a period of time.
Therefore, it should be dated "December 31, 2004."
2.
On the balance sheet the assets are listed in terms of liquidity, with the most liquid
assets being shown first. Therefore, Equipment should be below Supplies on the
balance sheet.
3.
Accounts receivable should be shown as an asset and reported between Cash and
Supplies on the balance sheet.
4.
Accounts payable should be shown as a liability, not an asset. The notes payable is also
a liability and should be reported in the liability section.
5.
Liabilities and shareholders’ equity should be shown separately on the balance sheet.
Common Shares, Retained Earnings, and Dividends are not liabilities.
6.
Common Shares, Retained Earnings, and Dividends are part of shareholders’ equity.
The Dividends account is not reported on the balance sheet but is subtracted from
Retained Earnings to arrive at the ending balance for Retained Earnings.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 1-9 (Continued)
A correct balance sheet is as follows:
VERMON COMPANY, INC.
Balance Sheet
December 31, 2004
Assets
Cash
Accounts receivable
Supplies
Equipment
Total assets
$10,500
3,000
2,000
20,500
$36,000
Liabilities and Shareholders’ Equity
Liabilities
Notes payable
Accounts payable
Total liabilities
Shareholders’ equity
Common shares
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
*Retained earnings
Less: Dividends
Ending retained earnings
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$12,000
5,000
17,000
11,000
8,000*
19,000
$36,000
$10,000
2,000
$ 8,000
Chapter 1
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 1-10
ETHICS CASE
(a)
The stakeholders in this situation are the new CEO and CFO, and the creditors and
investors who rely on the financial statements to make business decisions.
(b)
The CEO and CFO should not sign the certification until they have taken steps to assure
themselves that the most recent reports accurately reflect the activities of the business.
However, as the current management of the company, they cannot refuse to sign the
certification just because they are new. They are the management team now and must
accept the responsibility that goes with these positions.
(c)
The CEO and CFO have no alternative other than to take the steps necessary to assure
themselves of the accuracy of the financial information, and, if accurate, sign the
certification. If the information is not accurate, they need to make the required
corrections to the financial information.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
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