SOLUTIONS TO PROBLEMS

PROBLEM 1.1A

a. 1. The South Face Inc. is an external user of accounting information in assessing

the creditworthiness of their customer.

2. An investor purchasing common shares of Orbite Online Inc. is an external

user.

3. In deciding whether to extend a loan, Caisse d’Économie Base Montréal is an

external user.

4. As an employee of Tech Toy Limited, the CFO is an internal user.

b. 1. In deciding to extend credit, South Face would focus its attention on the
statement of financial position of the new customer. 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 and other current assets. The statement
of financial position of the new customer will show if the company has enough
current assets to meet its current obligations.

2. Since the investor intends to hold the shares for a long period of time (at least
five years), s(he) should focus on the company’s statement of income. The
statement of income reports the company’s past performance in terms of
revenues, expenses, and net income. This is generally regarded as a good
indicator of the company’s future performance.

3. The Caisse is interested in two things—the ability of the company to make

interest payments on a monthly basis for the next three years and the ability to
repay the principal amount at the end of the three years. In order to evaluate
both of these factors, the focus should be on the statement of cash flows. This
statement provides information on the cash the company generates from its
operations on an ongoing basis. It also tells whether the company is currently
borrowing or repaying debt.

4. The CFO should focus on the statement of cash flows 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 instructors: Other answers may be valid provided they are properly supported.

LO 1 BT: C Difficulty: M TIME: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting
 PROBLEM 1.2A

a. 1. Randi is most likely to select to operate her business as a private corporation.

This will assist her with the potential liability of storing RVs for others. She will
be able to raise funds to purchase carports as needed and hire employees to
install and remove the carports. It is easier to raise funds through a private
corporation rather than a proprietorship or partnership.

2. The graduate students should incorporate their business. A public corporation

would give them easier access to capital which would help fund clinical trials.
However, public corporation focus on short term results where companies try
to meet or exceed analysts’ expectations. In the past, public companies had
more ways to raise capital, however that as changed as the private markets
have become flush with cash. The students could start off as a private
corporation to minimize the pressure of short-term results and impatient
shareholders and then go public once the company has met some long-term
goals and objectives.

3. Stella should operate her ice cream cart as a proprietorship as this is the
simplest and least costly form of business organization to establish and
eventually dissolve. She is the only person involved in the business and is
planning to operate for a limited time.

4. Palmieri should incorporate his business as a private corporation. Providing a

transport service on water involves a potential liability and a corporation is the
only business form that provides limited liability. The business is not too
capital intensive, and a private corporation has sufficient flexibility to raise
funding if required.

5. A partnership would be the most likely form of business for Alexandro and
Alexis to choose. It is simpler to form than a corporation and less costly.

b. 1. ASPE
2. IFRS (IFRS is recommended if the goal is to become a public corporation
although as a private corporation, they may choose ASPE)
3. ASPE*
4. ASPE
5. ASPE*

* proprietorships and partnerships don’t have to follow any particular set of

accounting standards although they generally follow ASPE for external financial
reporting purposes.

LO 2 BT: C Difficulty: M TIME: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting
 PROBLEM 1.3A
a.
Operating Investing Financing
Indigo Books & Sale of books Purchase of store Issue of shares
Music equipment

High Liner Foods Payment for fish Purchase of Borrowing money

production from a bank
equipment

Mountain Payment for Purchase of store Borrowing money

Equipment Co-op inventory fixtures from a bank
Ganong Bros. Payment of Purchase of Payment of
salaries and production dividends to
benefits equipment shareholders

Royal Bank Payment of Purchase of office Issue of bonds

interest on equipment
savings accounts

b. Financing
Issuing shares is common to all corporations. Issuing debt is common to most
corporations. Borrowing from a bank is common to most companies. Payment of
dividends is common to many, but not all, corporations. Issuing bonds is common to
large public corporations.

Investing
Purchasing property, plant, and equipment is common to most companies—the types
of assets would vary according to the nature of the business. Some types of
companies require a larger investment in long-lived assets. A new business or
expanding business would be more apt to be acquiring assets.

Operating
The general activities identified above would be common to most corporations with the
exception of the payment of interest on savings accounts. The source of the cash
receipt (for example, from the sale of books) and cash payment (for example, for the
payment for fish) would vary by the nature of the business.
LO 3 BT: C Difficulty: C TIME: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting
 PROBLEM 1.4A

a. b.

Accounts payable L SFP

Building A SFP
Cash A SFP
Common shares SE SFP, SCE
Deferred revenue L SFP
Depreciation expense E SI
Dividends payable L SFP
Intangible assets A SFP
Interest expense E SI
Interest payable L SFP
Inventory A SFP
Land A SFP
Long-term debt L SFP
Prepaid rent A SFP
Repairs and maintenance expense E SI
Rent expense E SI
Retained earnings SE SFP, SCE
Salaries expense E SI
Supplies expense E SI

LO 4 BT: K Difficulty: S TIME: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
 PROBLEM 1.5A
a. and b.
b.
Shareholders’
a. Assets Liabilities Equity
Accounts payable $15,600 L $ 15,600
Accounts receivable 13,100 A $13,100
Bank loan payable 32,000 L 32,000
Cash 9,350 A 9,350
Common shares 20,000 SE $ 20,000
Deferred revenue 1,800 L 1,800
Equipment 30,500 A 30,500
Income tax payable 1,800 L 1,800
Intangible assets 5,000 A 5,000
Interest payable 300 L 300
Inventory 9,200 A 9,200
Prepaid insurance 1,000 A 1,000
Retained earnings 21,250 SE 21,250
Salaries payable 700 L 700
Supplies 2,800 A 2,800
Vehicles 22,500 A 22,500 ______ ______
Totals $93,450 $52,200 $41,250

Assets = Liabilities + SE
$93,450 = $52,200 + $41,250

c. Beginning balance in Retained Earnings + Revenues – Expenses – Dividends

declared = Ending balance in Retained Earnings
$18,000 + $296,750 – $278,500 – $15,000 = $21,250

LO 4 BT: AP Difficulty: M TIME 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
 PROBLEM 1.6A
a. (All amounts are in millions of dollars)

Home Depot, Inc.

[1] Total assets = Total liabilities + Total shareholders’ equity

Total assets = $67,282 + $3,299
Total assets = $70,581

[2] Total liabilities = Total assets – Total shareholders’ equity

Total liabilities = $71,876 – $(1,696)
Total liabilities = $73,572

[3] Shareholders’ equity, beginning of year + Total revenues – Total expenses

– Repurchase of shares – Dividends declared + Other increases in
shareholders’ equity = Shareholders’ equity, end of year
$3,299 + $151,157 – [3] – $15,001 – $6,985 + $558 = $(1,696)
[3] Total expenses = $134,724

Canadian Tire

[4] Total liabilities = Total assets – Total shareholders’ equity

Total liabilities = $20,377.1 – $5,834.7
Total liabilities = $14,542.4

[5] Total assets = Total liabilities + Total shareholders’ equity

Total assets = $15,291.4 + $6,510.8 [6]
Total assets = $21,802.2

[6] Shareholders’ equity, beginning of year – Repurchase of shares –

Dividends declared + Total revenues – Total expenses + Other increases
in shareholders’ equity = Shareholders’ equity, end of year
$5,834.7 − $131.1 – $291.2 + $16,292.1 – $15,031.4 – $162.3 = $6,510.8
PROBLEM 1.6A (CONTINUED)

b. At the end of the most recent fiscal year, Canadian Tire financed 29.9%
($6,510.8 million ÷ $21,802.2 million) of its assets with equity and 70.1% of its
assets with debt ($15,291.4 million ÷ $21,802.2 million). For the equivalent fiscal
year end, Home Depot’s financed -2.4% ($(1,696) million ÷ $71,876 million) of its
assets with equity and 102.4% ($73,572 million ÷ $71,876 million) of its assets
with debt. Home
Depot had more liabilities than assets and negative equity financing. Home
Depot is riskier because all of its assets are financed by debt.

c. Both retailers typically have low inventories at the end of December and at the
end of January as a result of the holiday sales, with little or no new inventory
purchased during the month of January so no major differences in financial
position at the end of December compared to January would be anticipated. As
long as there were no significant economic events that affected one company
more than the other in the intervening period (January), it is unlikely that the
different year-end dates would affect the comparison in b.

LO 4 BT: AN Difficulty: C TIME: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
 PROBLEM 1.7A

a.
ONE THINGAMAJIG CORP.
Statement of Income
Month Ended October 31, 2024

Revenues
Service revenue $35,400
Expenses
Salaries expense $4,000
Repair and maintenance expense 5,700
Utilities expense 2,000
Supplies expense 2,000
Interest expense 3,000
Total expenses 16,700
Income before income tax 18,700
Income tax expense 1,700
Net income $17,000
[Revenues – Expenses = Net income or (loss)]

ONE THINGAMAJIG CORP.

Statement of Changes in Equity
Month Ended October 31, 2024

Common Retained Total

Shares Earnings Equity
Balance, October 1 $ 0 $ 0 $ 0
Issued common shares 40,000 40,000
Net income 17,000 17,000
Dividends declared (7,000) (7,000)
Balance, June 30 $40,000 $10,000 $50,000

(Beginning equity ± Changes to equity = Ending equity)

PROBLEM 1.7A (CONTINUED)

a. (continued)

Note to instructors: Students may list the accounts in the following statement in any
order within the assets, liabilities, and shareholders’ equity classifications as they
have not yet learned how to classify/order accounts.

ONE THINGAMAJIG CORP.

Statement of Financial Position
October 31, 2024

Assets

Cash $ 20,000
Accounts receivable 8,500
Supplies 4,000
Vehicles 50,000
Total assets $82,500

Liabilities and Shareholders’ Equity

Liabilities
Accounts payable $ 8,000
Bank loan payable 24,500
Total liabilities 32,500
Shareholders’ equity
Common shares 40,000
Retained earnings 10,000
Total shareholders’ equity 50,000
Total liabilities and shareholders’ equity $82,500

(Assets – Liabilities = Shareholders’ equity)

PROBLEM 1.7A (CONTINUED)

b. The financial statements must be prepared in the order of (1) statement of

income, (2) statement of changes in equity, and (3) statement of financial
position. This is because each subsequent financial statement depends on
information contained in the previous statement. The net income from the
statement of income flows to the retained earnings account on the statement of
changes in equity. The shareholders’ equity totals in the statement of changes in
equity (for example, for common shares and retained earnings) then flow to the
shareholders’ equity section of the statement of financial position.
LO 4 BT: AP Difficulty: M TIME: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
 PROBLEM 1.8A
a.
Activity
Cash dividends paid $ 10,000 financing
Cash paid to purchase equipment 35,000 investing
Cash payments for operating activities 120,000 operating
Cash receipts from operating activities 140,000 operating
Cash received from issue of long-term debt 20,000 financing
Cash received from issue of shares 20,000 financing

b.
MAISON CORPORATION
Statement of Cash Flows
Year Ended December 31, 2024
Operating activities
Cash receipts from operating activities $140,000
Cash payments for operating activities (120,000)
Net cash provided by operating activities $20,000
Investing activities
Purchase of equipment $(35,000)
Net cash used by investing activities (35,000)
Financing activities
Issue of long-term debt $ 20,000
Issue of shares 20,000
Payment of dividends (10,000)
Net cash provided by financing activities 30,000

Net increase in cash 15,000

Cash, January 1 12,000
Cash, December 31 $27,000

(Cash flows from operating, investing, and financing activities = Net change in cash)
PROBLEM 1.8A (CONTINUED)

c. The company is generating less cash from operating activities (+$20,000) than it is
using for its investing activities (–$35,000). The company, however, is making up
for the deficiency by generating cash from financing activities. Cash from financing
activities is not a renewable source of cash and usually entails future cash
payments in the form of interest on debt, principal repayment, and dividend
payments for shares.
LO 4 BT: AN Difficulty: M TIME: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
 PROBLEM 1.9A
a.
[1] Operating expenses = Service revenue – Income before income tax
Operating expenses = $450,000 – $240,000
Operating expenses = $210,000

[2] Income tax expense = Income before income tax - Net income [4]
Income tax expense = $240,000 – $225,000
Income tax expense = $15,000
[3] Net income (from [4]) = $225,000
[4] Net Income = Ending retained earnings [6] + Dividends declared [5] –
Beginning retained earnings
Net Income = $215,000 + $10,000 - $0
Net Income = $225,000
[5] Dividends Declared = $10,000

[6] Ending retained earnings = Total equity – Common Shares

Ending retained earnings = $515,000 - $300,000
Ending retained earnings = $215,000
[7] Net Income [4] = $225,000
Net income can also be calculated from the total equity column from the
statement of changes in equity = Ending shareholders’ equity + Dividends
declared – issued common shares – beginning shareholders’ equity =
$515,000 + $10,000 - $275,000 - $25,000 = $225,000

[8] Buildings = Total assets – Cash – Accounts receivable –

Land – Equipment
Buildings = $895,000 – $25,000 – $50,000 – $280,000 – $215,000
Buildings = $325,000
[9] Bank loan payable = Total liabilities + Accounts payable
Bank loan payable = $380,000 – 80,000
Bank loan payable = $300,000

[10] Common shares = $300,000 (from the Statement of Changes in Equity)

[11] Retained earnings = $215,000 [6] (from the Statement of Changes in Equity)

[12] Total shareholders' equity = Common shares + Retained earnings

Total shareholders' equity = $300,000 (from [10]) + $215,000 (from [11])
Total shareholders’ equity = $515,000
Total shareholders’ equity is also provided in the statement of changes in
equity
PROBLEM 1.9A (CONTINUED)

a. (continued)

[13] Total liabilities and shareholders' equity = Total liabilities + Total

shareholders equity
Total liabilities and shareholders' equity = $380,000 + $515,000 (from [12])
Total liabilities and shareholders’ equity = $895,000
Total liabilities and shareholders’ equity is also = Total assets of $895,000

b. (1) In preparing the financial statements, the first statement to be prepared is

the statement of income, followed by the statement of changes in equity,
and then the statement of financial position.

Note to instructors: While the statements must be prepared in this

sequence, these statements can be presented in a variety of orders. Often
the statement of financial position is presented first, as the most
“permanent” statement.

(2) The reason the statements must be prepared in the order indicated above is
that each statement depends on information in the previously prepared
statement. For example, the net income figure from the statement of income
is used in the statement of changes in equity to calculate the ending
balance of retained earnings. The shareholders’ equity section of the
statement of financial position is then completed using the ending balances
of common shares and retained earnings, as calculated in the statement of
changes in equity.

LO 4 BT: AN Difficulty: C TIME: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
 PROBLEM 1.10A
a. 1. Remove the boat from the listing of assets since it does not belong to the
corporation. Remove the boat loan payable from the listing of liabilities since
this is a personal loan of Guy Gélinas.

2. Remove the $10,000 outstanding receivable from Guy’s brother. This is not a
company receivable and should not be listed on the company’s statement of
financial position.

3. Correct the Common Shares account to remove the extra amount that had
been added to “balance”:
Remove accounts receivable $10,000
Remove boat asset 24,000
Remove bank loan (40,000)
Net adjustment to common shares $ 6,000

Provide separate totals for liabilities and shareholders’ equity as the two
components that are financing the assets of the company.
PROBLEM 1.10A (CONTINUED)

b. GG CORPORATION
Statement of Financial Position
July 31, 2024

Assets
Cash $20,000
Accounts receivable ($50,000 − $10,000) 40,000
Inventory 36,000
Total assets $96,000

Liabilities and Shareholders’ Equity

Liabilities
Accounts payable $34,000
Total liabilities 34,000
Shareholders’ equity
Common shares [$50,000 + $6,000 (from (3) above)] 56,000
Retained earnings 0 6,000
Total shareholders’ equity 62,000
Total liabilities and shareholders’ equity $96,000

(Assets – Liabilities = Shareholders’ equity)

(c) As a private company, GG Corporation should also prepare a statement of income,

a statement of retained earnings, and a statement of cash flows.

LO 4 BT: AN Difficulty: C TIME: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting