CHAPTER 1 – The Environment of Financial Reporting
Student Solutions
Assignment 1-7 (WEB)
1. Debt/equity ratio decreases
Times-interest-earned ratio increases
Income and equity increase
Income increases*
2. Debt/equity ratio increases
Times-interest-earned ratio decreases
Times-interest-earned ratio increases
Income and equity decrease
Income decreases*
3. Debt/equity ratio decreases marginally Lower discount amortization, lower debt
compared to effective interest method
Income increases, interest expense
decreases*
4. Debt/equity ratio increases
Times-interest-earned ratio decreases**
Debt increases
5. Debt/equity ratio increases
Times-interest-earned ratio decreases
Income and equity decline; warranty
liability increases
Income decreases*
6. Debt/equity ratio decreases
Times-interest-earned ratio increases
Income and equity increases
Income increases*
* Income effect is in the first or early years; later the difference would reverse and the effect would be the opposite.
** Dividends on shares are reclassified from the retained earnings statement to the income statement as “interest,” decreasing earnings and increasing “interest.”
Assignment 1-12 (WEB)
GAAP statements are general purpose financial statements meant to address the needs of investors, creditors and others making resource allocation decisions and/or assessing management stewardship. Furthermore, if a company wants or needs an audit report that states that the financial statements are fairly presented in accordance with GAAP, then obviously GAAP must be followed.
Generally, investors and creditors are well-served by GAAP, even though there is a lot of choice within GAAP. Securities commissions, that require copies of annual audited financial statements of public companies, take a dim view of non-GAAP statements that result in a less-than-clean audit report. Lenders often like to be able to do ratio analysis that permits comparison to similar companies. On the other hand, GAAP statements are sometimes of little use in special situations, like business valuations or when assessing the market value of assets pledged as security.
Copyright 2008 McGraw-Hill Ryerson Ltd. All rights reserved
Intermediate Accounting, 4 th edition - Beechy/Conrod

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1
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While GAAP is a norm, there are special circumstances in which other accounting principles are followed:
1. To meet the needs of special users.
2. To comply with regulated accounting policies (RAP).
For example; statements may be
 non-consolidated, at the user’s request.
 designed to value a company according to a purchase/sale agreement.
 designed to allocate profits or ‘value’ to shareholders or partners using specific revenue recognition or valuation rules.
 used to set (regulated) rates by a regulatory board.
 used to evaluate cash flow, profitability or solvency by a lender using specific policies.
Private companies are free to use a disclosed basis of accounting (DBA) should they be more appropriate. Private companies may also choose to use differential reporting, if all shareholders consent. However, differential reporting is permitted by the CICA
Handbook and therefore is not a departure from GAAP.
Assignment 1-16 (WEB)
Order
4
Description
B
A
D
F
C
E
Copyright 2008 McGraw-Hill Ryerson Ltd. All rights reserved
Intermediate Accounting, 4 th edition - Beechy/Conrod