Cornerstones of Financial

Cornerstones of Financial Accoun�ng 3rd Canadian Edi�on 3e Jay Rich, Maryanne Mowen, Don Hansen (Solu�ons Manual All Chapters, 100% Original Verified, A+ Grade) (All Chapters/Supplement files download link at the end of this file.) 1 / 4

Chapter 1: Financial Statements and Making Business Decisions

1-1 Copyright © 2021by Nelson Education Ltd.

1 FINANCIAL STATEMENTS AND MAKING BUSINESS DECISIONS

DISCUSSION QUESTIONS

Accounting is a system for identifying, measuring, recording, and communicating financial information about an organization’s activities to permit informed decisions by decision-makers of the information. Bookkeeping is the process—made up of mechanical “steps”—of recording transactions and maintaining accounting records. While bookkeeping is part of accounting, accounting is viewed as the complete information system that communicates the economic activities of a company to interested parties. Accounting is often referred to as the “language of business” because it communicates information about economic activities of a company that help people make decisions.Accounting information is demanded or needed by decision-makers both inside and outside the business to provide information about business activities and finances so that informed decisions can be made. Five groups that create the demand for accounting information and their uses of accounting information are described below.(1)Managers need accounting information to plan and make decisions about the business (e.g., predicting the consequences of their actions and deciding on which actions to take) and to control its operations (e.g., evaluating the effectiveness of their past decisions).(2)Employees use accounting information about their employer to aid in planning their careers (e.g., judging the future prospects of the company).(3)Investors (owners) need accounting information about a business to evaluate the future prospects of a business and to decide where to invest their money.(4)Creditors (lenders) need accounting information to decide whether or not to lend money or extend credit to a business.(5)Governments need accounting information about businesses to determine taxes owed by businesses, to implement a variety of regulatory objectives, and to make national economic policy decisions.An accounting entity is a company that has an identity separate from that of its owners and managers and for which accounting records are kept. There are three main forms that accounting entities take: a sole proprietorship, a partnership, and a corporation.A sole proprietorship is a business entity owned by one person. A partnership is a business entity owned jointly by two or more individuals. Proprietorships and partnerships are not legally separate from the personal affairs of the owners. That is, the owners are responsible for the debts of the business. A corporation is a separate legal entity formed by one or more persons called shareholders. A corporation is legally separate from the affairs of its owners, which limits the shareholders’ legal responsibility for the debts of the business to the amount that the shareholders invested in the business. Corporate shareholders may pay more taxes 2 / 4

Chapter 1: Financial Statements and Making Business Decisions

1-2 Copyright © 2021by Nelson Education Ltd.than owners of sole proprietorships or partnerships. The majority of business in Canada is conducted by corporations.The three main types of business activities are financing activities, investing activities, and operating activities.Financing activities involve obtaining the funds necessary to begin and operate a business. These funds come from either issuing shares or borrowing money. Investing activities involve buying and selling assets that enable a corporation to operate. Operating activities are the normal business activities that a company engages in as it conducts its business. These activities involve selling products or services, purchasing inventory, collecting amounts due from customers, and paying suppliers.Assets are the economic resources or future economic benefits obtained or controlled by a business. Liabilities are the creditors’ claims on the resources of a business. Shareholders’ equity is the ownership claims on the resources of a business. Shareholders’ equity is considered a residual interest in the assets of a business that remain after deducting the business’s liabilities. All three items appear on the statement of financial position, forming the

following equation: Assets Liabilities Shareholders Equity=+’

Revenues are the increases in assets (resources) that result from the sale of products or services. Expenses are the costs of assets (resources) used, or the liabilities created, in the operation of the business. If revenues are greater than expenses, a corporation has earned net income. If expenses are greater than revenues, a corporation has incurred a net loss.

The four primary financial statements are:

(1)The statement of financial position: a presentation of information about a company’s economic resources (its assets) and the claims against those resources by creditors and owners (liabilities and shareholders’ equity) at a specific point in time.(2)The statement of earnings: a report on how well a company has performed its operations— the profitability of a company—over a period of time.(3)The statement of retained earnings: a report on how much of the company’s income was retained in the business and how much was distributed to owners over a period of time.(4)The statement of cash flows: a report on the changes in a company’s cash during a period of time. The statement of cash flows provides information about the company’s cash inflows (sources) and outflows (uses/generated) from operating, investing, and financing activities.There are many questions that can be answered based on each of the financial statements:

(1)The statement of financial position:

What is the total amount of assets (economic resources) of a corporation? What is the total amount of liabilities (claims against the resources) for a corporation? 3 / 4

Chapter 1: Financial Statements and Making Business Decisions

1-3 Copyright © 2021by Nelson Education Ltd.How much equity do the owners of the corporation have in its assets?Is the corporation able to pay its debts as they become due?

(2)The statement of earnings:

How much revenue was earned last month? Last quarter? Last year?What was the total amount of expenses incurred to earn that revenue?How much better off is the corporation at the end of the year than it was at the beginning of the year?Was the corporation profitable, and what are the prospects for the corporation’s future profitability?What are the prospects for the future growth of the corporation?

(3)The statement of retained earnings:

How much income was distributed in dividends by the corporation?What amount of equity in the business has been generated internally?

(4)The statement of cash flows:

How much cash was taken in or paid out as a result of operations?How much cash was invested in new equipment?How much cash was used to pay off business debt?Point-in-time measurement means as of a particular date. The statement of financial position is a point-in- time measurement. The period-of-time description applies to what has happened over a time interval. The statement of earnings is a period-of-time measurement that explains the business activities between statement of financial position dates. The statement of cash flows and the statement of retained earnings are also period-of-time measurements.

The basic accounting equation is: Assets Liabilities Shareholders Equity=+’

The equation is significant because it means that the statement of financial position must always balance.This implies that what a company owns (its resources) must always be equal to the claims of its creditors (liabilities) and investors (shareholders’ equity).Each financial statement includes a heading that is comprised of (a) the name of the company, (b) the title of the financial statement, and (c) the time period covered—either a point-in-time measurement (an exact date) or a period-of-time description (e.g., a year ended on a specific date).Current assets are cash and other assets that are reasonably expected to be converted to cash within one year or the operating cycle, whichever is longer. Current liabilities are obligations that will be satisfied within one year or the operating cycle, whichever is longer.

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