Solutions to review - Review 1.1 Multiple-choice questions 1 (a), (c)...

Financial Accounting and Reporting, A Global Perspective, 5e Hervé Stolowy, Michel Lebas, Yuan Ding (Solutions Manual All Chapters) 1 / 4

1 Solutions to review questions and problems Review 1.1 Multiple-choice questions

• (a), (c), (d) and, in most countries, (b).

The statement of changes in shareholders’ equity, which presents the changes in the ‘net worth’ (as described in the introduction to the chapter) has not been included in this list. It is, however, a compulsory financial statement in many countries. This statement will be explored further in Chapter 11.

• False.

Many transactions have no impact on cash, either because the impact is postponed to a later date (as in the case of a sale on account) or because there never will be a direct cash impact as is the case, as we will see later in Chapters

• and 7, for the recognition of the loss of value of physical assets or the consumption of the productive capacity of

a fixed asset (depreciation).

• False.

Financial accounting does not always have clear or complete documents supporting the exact value at which a transaction should be recorded. That value is often subjective. For example, the risk of un-collectability on a credit sale may be estimated statistically (on the basis of past records) but cannot be known exactly for each transaction before final settlement or an incident actually occurs.

• (b).

Bookkeeping means ‘formal recording of transactions’. It is therefore part of financial accounting since recording of transactions is compulsory. Management accounting also uses the same recorded data for its own analyses.Review 1.2 Discussion questions

• Why decision makers use accounting information and for what purpose?

Decision makers use accounting information for decisions regarding resource allocation. This allocation concerns management of internal resources so as to increase the wealth creation of the firm. It concerns shareholders who may want to (re)consider investing their wealth in this or that firm. Decision makers also use accounting to monitor the achievements of subordinate managers since accounting records their actions and the consequences of these.

• Why have standards of reporting emerged that constrain the way events are recorded in accounting?

To a large extent reporting standards have emerged to reduce the transaction cost borne by both producers and users of financial information. If the producer knows the recommended or preferred way to record an event, there is no need for the accountant to search for the most suitable way to do so. If the user receives data that come from a standardized coding method (whether rules-based or principles-based) and agreed methods of aggregation and transformation, all users can interpret the same piece of data to mean the same thing. Further it improves the pos- sibility of inter-firm comparisons without removing the possibility, for the user, of recoding the data in a preferred format. The topic of financial reporting standards will be further developed in Chapter 5.

• What distinguishes financial accounting and reporting, from managerial accounting?

The answer to this question is covered in Table 1.9.40204_Review_ptg01.indd 122/03/17 12:32 pm 2 / 4

2Solutions to review questions and problems Review 2.1 Vivaldi Company (1)

Topic: Transactions and the business equation

Level of difficulty: Low

• Basic business equation

Assets5 Liabilities1 Shareholders’ equity (SE) Cash1Accounts receivable 1Merchandise inventory 1Equipment2Accumulated depreciation 5Taxes payable 1Salaries and social security payable 1Accounts payable 1Net income 1Share capital Details of SE transactions (A)1601401100Initial investment (B)140240Purchases of merchandise (C)1727External expense (D)11201120Sales of merchandise (E)145245Personnel expenses (F)120220Tax expenses

(G)160260

(H)235235

(I)230230

(J)2424Depreciation expenses (K)110110Change in inventory End balance

551601101401245201151121141100

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3Solutions to review questions and problems

• Preparation of the year-end balance sheet (as of 31 December X1)

AssetsEquity and liabilities Fixed assets (equipment) Equipment depreciation Fixed assets (net value) Merchandise inventory Accounts receivable (120 − 60)  Cash at bank (60 + 60 − 35 − 30)   40 −4 36 10 60 55 Capital Net income Accounts payable (40 + 7 − 35)  Salaries and social expenses payable 

(30 + 15 − 30) 

Taxes payable 100 14 12 15 20 Total161 Total161 2. Preparation of the year-end balance sheet (as of 31 December X1)

• Preparation of the income statement (for the year X1)

3. Preparation of the income statement (for the year X1)  ExpensesRevenues Purchases of merchandise Change in inventory of merchandise Other purchases and external expenses Taxes Personnel expenses (30 + 15) Depreciation expenses 40 −10 7 20 45 4 Sales of merchandise120 Net income14 Total120Total120

Remarks:

■■The balance sheet is itself an account, which is comprised of the balances of all balance sheet subsidiary accounts. The net income (profit or loss) is itself the balance of the balance sheet account.■■The income statement is the account that records the balances of all the expense and revenue accounts. Net income (profit or loss) is the balance of the income statement.■■The income of the period is the same, by construction, in the balance sheet and the income statement. In the balance sheet, it is also the net potential addition to retained earnings, subject to appropriation by sharehold- ers. These will decide, at the annual general assembly, how much of the yearly net income should be paid out as dividends to shareholders, and how much (the complement to one) should be retained and added to the retained earnings.

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