SOLUTIONS TO PROBLEMS

PROBLEM 2.1A

Statement of Financial
Item Position Category

Accounts receivable Current assets

Accounts payable Current liabilities
Accumulated depreciation - buildings Non-current assets
Accumulated depreciation - machinery Non-current assets
Bank loan payable (due after one year) Non-current liabilities
Cash Current assets
Common shares Shareholders’ equity
Deferred revenue Current liabilities
Goodwill Non-current assets
Inventory Current assets
Land and buildings Non-current assets
Machinery Non-current assets
Prepaid expenses Current assets
Retained earnings Shareholders’ equity

LO 1 BT: K Difficulty: S Time: 15 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting
 PROBLEM 2.2A
a.
Statement of Financial
Item Position Category

Accounts receivable Current assets

Accumulated amortization—intangibles Intangible assets (contra account)
Accumulated depreciation—aircraft Property, plant, and equipment (contra account)
Accumulated depreciation—buildings Property, plant, and equipment (contra account)
Accumulated depreciation—machinery Property, plant, and equipment (contra account)
and equipment
Accumulated depreciation—simulators Property, plant, and equipment (contra account)
Aircraft Property, plant, and equipment
Buildings and land Property, plant, and equipment
Cash Current assets
Machinery and equipment Property, plant, and equipment
Intangible assets Intangible assets
Inventory Current assets
Other assets (non-current) Other assets
Prepaid expenses Current assets
Simulators Property, plant, and equipment
Other assets (current) Current assets
Assets under construction Property, plant, and equipment
 PROBLEM 2.2A (CONTINUED)

b.
CAE Inc.
Statement of Financial Position (partial)
March 31, 2021
(in millions)

Assets

Current assets
Cash $ 926.1
Accounts receivable 518.6
Inventory 647.8
Prepaid expenses 52.1
Other current assets 1,234.6
Total current assets $3,379.2
Property, plant, and equipment
Aircraft $ 91.9
Less: Accumulated depreciation 15.8 $ 76.1
Machinery and equipment $ 192.9
Less: Accumulated depreciation 144.6 48.3
Simulators $2,140.6
Less: Accumulated depreciation 717.5 1,423.1
Buildings and land $ 513.8
Less: Accumulated depreciation 231.7 282.1
Assets under construction 139.8
Total property, plant, and equipment 1,969.4
Intangible assets $2,750.7
Less: Accumulated amortization 694.9 2,055.8
Other assets 1,344.0
Total assets $8,748.4

LO 1 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting
 PROBLEM 2.3A
a. Statement of Financial
Item Position Category
Accounts payable and accrued liabilities Current liabilities
Current portion of long-term debt Current liabilities
Deferred income tax liabilities (long-term) Non-current liabilities
Income taxes payable Current liabilities
Long-term debt Non-current liabilities
Other current liabilities Current liabilities
Other long-term liabilities Non-current liabilities
Other shareholders’ equity items Shareholders’ equity
Retained earnings Shareholders’ equity
Share capital Shareholders’ equity
PROBLEM 2.3A (CONTINUED)

b. CAE Inc.
Statement of Financial Position (partial)
Liabilities and Shareholders' Equity
March 31, 2021
(in millions)

Current liabilities
Accounts payable and accrued liabilities $ 945.6
Income taxes payable 16.2
Other current liabilities 1,455.2
Current portion of long-term debt 216.3
Total current liabilities $2,633.3
Non-current liabilities
Long-term debt $2,135.2
Other long-term liabilities 643.6
Deferred income tax liabilities 123.5
Total non-current liabilities 2,902.3
Total liabilities 5,535.6
Shareholders' equity
Share capital $1,516.2
Retained earnings 1,543.7
Other shareholders’ equity items 152.9
Total shareholders’ equity 3,212.8
Total liabilities and shareholders' equity $8,748.4

c. Yes, these two amounts agree. Assets of $8,748.4 million equal total liabilities plus
shareholders’ equity of the same amount.

LO 1 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting
 PROBLEM 2.4A

a.
BISKANE CORPORATION
Statement of Income
Year Ended December 31, 2024

Revenues
Service revenue $167,900
Interest income 600
Total revenues $168,500
Expenses
Salaries expense $135,000
Operating expense 43,500
Depreciation expense 2,800
Repairs and maintenance expense 3,700
Insurance expense 2,000
Utilities expense 1,700
Interest expense 2,500
Supplies expense 500
Total expenses 191,700
Income (loss) before income tax (23,200)
Income tax expense 0
Net income (loss) ($23,200)

[Revenues – Expenses = Net income or (loss)]

PROBLEM 2.4A (CONTINUED)

BISKANE CORPORATION
Statement of Changes in Equity
Year Ended December 31, 2024

Common Retained
Shares Earnings Total Equity

Balance, January 1 $45,000 $167,800 $212,800

Issued common shares 15,000 15,000
Net income (loss) (23,200) (23,200)
Dividends declared _ _____ (4,000) (4,000)
Balance, December 31 $60,000 $140,600 $200,600

(Beginning equity ± Changes to equity = Ending equity)

[Ending retained earnings = Beginning retained earnings ± Net income or (loss) – dividends
declared]
 PROBLEM 2.4A (CONTINUED)

a. (continued)
BISKANE CORPORATION
Statement of Financial Position
December 31, 2024
Assets
Current assets
Cash $ 17,000
Trading investments 40,000
Accounts receivable 22,400
Supplies 100
Prepaid insurance 2,400
Total current assets $ 81,900
Property, plant, and equipment
Land $106,000
Buildings $65,000
Less: Accumulated depreciation—buildings 17,500 47,500
Equipment $45,000
Less: Accumulated depreciation—equipment 18,500 26,500
Total property, plant, and equipment 180,000
Total assets $261,900
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $12,000
Salaries payable 19,300
Current portion of bank loan payable 5,500
Total current liabilities $ 36,800
Non-current liabilities
Bank loan payable ($30,000 - $5,500) 24,500
Total liabilities 61,300
Shareholders' equity
Common shares $ 60,000
Retained earnings 140,600
Total shareholders’ equity 200,600
Total liabilities and shareholders' equity $261,900

(Assets = Liabilities + Shareholders’ equity)

PROBLEM 2.4A (CONTINUED)

b. The statement of income reports the net income or loss for the period. This figure
is then used in the statement of changes in equity, along with dividends declared
and any issues (or repurchases) of shares, to calculate the balances in common
shares and retained earnings at the end of the period. These ending balances
are then used in the statement of financial position to determine shareholders’
equity and complete the accounting equation.
LO 1 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa.t001 CM: Reporting
 PROBLEM 2.5A

a.
1. Working capital Current assets – Current liabilities
$ 162,565 – $98,000 = $64,565

Current assets
2. Current ratio
Current liabilities
$162,565
= 1.7 :1
$98,000

Total liabilities
3. Debt to total assets
Total assets
$363,000
= 35.4%
$1,026,765

Basic earnings per Income available to common shareholders

4.
share Weighted average number of common shares
$125,100
= $1.79
70,000

Price-earnings Market price per share

5.
ratio Basic earnings per share
$24.00
= 13.4 times
$1.79

b. Ogimaa’s liquidity has deteriorated dramatically as evidenced by a reduction in

the working capital relative to 2023 as well as the lower current ratio. In addition,
the solvency has also deteriorated as the debt to total assets ratio is higher in
2024. Ogimaa’s profitability has also suffered as the basic earnings per share
ratio decreased in 2024, as have investors’ expectations for future profitability as
indicated by the decrease in price-earnings ratio. This is assuming the weighted
average number of shares has not materially changed in 2024.

LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and
Finance.
 PROBLEM 2.6A

a.
Working capital = Current assets – Current liabilities
Chen = $407,200 – $166,325 = $240,875
Caissie = $190,400 – $133,700 = $56,700

Current assets
Current ratio =
Current liabilities

Chen Caissie

$407,200 $190,400
= 2.4 :1 = 1.4 :1
$166,325 $133,700

Chen is significantly more liquid than Caissie. It has a higher current ratio and
more current assets available to pay current liabilities as they come due.

b.
Total liabilities
Debt to total assets =
Total assets

Chen Caissie

($166,325 + $108,500) ($133,700 + $40,700)

= 29.3% = 52.8%
($407,200 + $532,000) ($190,400 + $139,700)

Caissie is considerably less solvent than Chen. Caissie's debt to total assets ratio
of 52.8% is almost double that of Chen’s ratio of 29.3%. The lower the
percentage of debt to total assets, the lower the risk that a company may be
unable to pay its debts as they come due.
PROBLEM 2.6A (CONTINUED)

c.
Chen Caissie
Service revenue $1,800,000 $620,000
Operating expenses 1,458,000 438,000
Interest expense 10,000 4,000
Income tax expense 85,000 35,400
Total expenses 1,553,000 477,400
Net income $ 247,000 $142,600

Income available to common shareholders

Basic earnings per share =
Weighted average number of common shares

Chen Caissie

$247,000 = $3.25 $142,600 = $2.30

76,000 62,000

Market price per share

Price-earnings ratio =
Basic earnings per share

Chen Caissie

$25.00 = 7.7 times $15.00 = 6.5 times

$3.25 $2.30

Based on the price-earnings ratio, investors believe that Chen will be more
profitable than Caissie in the future. It is not meaningful to compare basic
earnings per share between companies.
LO 2 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and
Finance
 PROBLEM 2.7A

a.
Oats Ltd. Barley Ltd.

1. Working capital $3,000 + $8,000 + $40,000 $8,000 + $5,500 + $14,000

– $20,000 – $18,000
= $31,000 = $9,500

2. Current ratio $51,000 = 2.6:1 $27,500 = 1.5:1

$20,000 $18,000

3. Debt to total assets $20,000 + $75,000 = 54.0% $18,000 + $25,000 = 22.3%

$51,000 + $125,000 $27,500 + $165,000

4. Basic earnings per share $12,000 = $3.43 $27,000 = $6.00

3,500 4,500

5. Price-earnings ratio $95 = 27.7 times $10 = 1.7 times

$3.43 $6

b. Liquidity
With a current ratio of 2.6:1, Oats is more liquid than Barley and Oats has a
stronger ratio than the industry average of 1.7:1 whereas Barley is lower than the
industry average.
Solvency
Barley is more solvent than Oats as evidenced by its lower debt to total assets
ratio, which is better than the industry average of 49%. Oats’ debt to total assets is
higher than the industry average, so it is less solvent than the industry standard.

Profitability
Although the basic earnings per share ratio does not provide a basis for
comparison by investors, the price-earnings ratio can be calculated to compare
to each other or to the industry average of 20.0 times.

The price-earnings ratio, which reveals investors’ sentiment concerning future

profitability, shows that Oats is favoured over Barley. Oats also has a higher
price-earnings ratio than the industry’s ratio of 20.0. Barley is substantially lower
than the industry ratio indicating that investors are not as optimistic about its
future earning potential even though it has a higher earnings per share than
Oats.

There is a large difference in the debt to total assets ratio of the companies.
Debt to total assets is very high for Oats, increasing the risk of the investment
 made by shareholders. Oats may be financing future growth with debt and their
investors may be comfortable with a high debt to total assets ratio.
LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and
Finance

PROBLEM 2.8A

a. The higher the amount of working capital, the better a company’ liquidity. From
2022 to 2024 Pitka Corporation’s working capital deteriorated and showed a
constant downward trend over the three-year period.

A higher current ratio is evidence of better liquidity for a company (assuming the
components of the current assets are also liquid). Although the current ratio
stayed the same from 2022 to 2023, it deteriorated 2023 to 2024 and is low.

A smaller (lower) debt to total assets ratio shows evidence of better solvency.
The percentage of total liabilities to total assets increased from 2022 to 2023,
showing deterioration in the solvency for Pitka. On the other hand, the ratio
improved substantially from 2023 to 2024.

The higher the basic earnings per share, the better the profitability. Profitability
decreased from 2022 to 2023, but improved from 2023 to 2024.

The investors appeared to have less confidence in the future net income of Pitka
as evidenced by Pitka's price-earnings ratio, which declined from 2022 to 2023.
This view changed as demonstrated by the climb in the price-earnings ratio from
2023 to 2024.

b. Liquidity
Pitka’s current ratio, although steady in 2022 and 2023, declined slightly in 2024.
This trend is of concern given the low level of liquidity the company has with a
current ratio of 1.1:1.

Solvency
Pitka’s debt to total assets ratio improved in the last year. It appears to be
reasonable in size, as does the solvency of the company in 2024.

Profitability
Pitka’s profitability declined and then recovered as is demonstrated by the basic
earnings per share ratio. The price-earnings ratio in 2024 indicates expectations
of improving profitability.

LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa.t001 and cpa.t005 CM: Reporting and
Finance
 PROBLEM 2.9A

a. The objective of financial reporting is to provide information that is useful to

existing and potential investors and creditors in making decisions about providing
resources to the company. In this case, the information will be used by the team’s
bank. Bucky’s suggestions concerning how elements should be reported on the
financial statements do not meet the objective of financial reporting. His
suggestions would lead to a violation of the fundamental basis on which financial
statements are prepared: accrual accounting. The suggested changes to the
financial statements would not portray economic reality and would not faithfully
represent the performance of the business and its financial position at December
31, 2024. Bucky’s suggestions show bias and an attempt to portray a financial
picture that would be perceived as more favourable than it is in reality.
b. 1. Failing to include the estimated expenses for utilities and the corresponding
liability for the utilities already consumed by December 31, 2024 violates
accrual accounting. The expense was incurred and a liability exists, and
although the exact amount is not known, a reasonable estimate can be made
as this type of expense occurs often. The definitions of the elements have
been met. Failing to include the expense would represent an error of
omission done on purpose to increase the profitability and reduce the
liabilities of the company at December 31, 2024.
2. Unless the company uses the revaluation model for all of its long-lived
assets, increasing the value of the building to its fair value would violate the
historical cost basis of accounting. It is likely far more relevant to the financial
statement user of this company to see the original purchase price of the
building rather than its fair value as it is unlikely to be resold soon. Assets
and revenue (from the recording of an unrealized gain from the increase in
the value of the asset) would be overstated if Bucky’s instructions were
followed.
3. The signing bonus paid to Wayne Crosby does not represent an asset at
December 31, 2024. No future benefit can be derived from this payment as it
was not conditional upon the occurrence of a future event. Consequently, the
expenditure does not fit the definition of an asset.
LO 3 BT: E Difficulty: C Time: 30 min. AACSB: None CPA: cpa.t001 CM: Reporting
 PROBLEM 2.10A
a. The advantage of the fair value basis of accounting is that it represents a more
up-to-date measurement of the value of the asset reported. Consequently, the
amounts reported are more relevant to the financial statement users. The
disadvantage of the fair value basis of accounting and corresponding advantage
of historical cost is that historical cost is more reliable and shows the amount
paid for the asset. The historical cost might provide a more faithful representation
because it can be easily verified and is neutral.

b. The reason a company might choose to adopt the fair value basis of accounting
for real estate is that assets reported on the statement of financial position will
have higher values than they would using the historical cost basis. It is inherent
in the nature of real estate that the land will increase in value over time. Creditors
will find the fair value a more relevant basis for making lending decisions. The
increase in the assets will cause a corresponding increase in equity.

c. The reason a company might choose to adopt the historical cost basis of
accounting for real estate is that assets reported on the statement of financial
position will have more faithful representation because it reports the actual cost
of the asset when it was acquired and this measurement can be easily verified
and it is neutral. There is also a significant cost to obtaining reliable fair value
information, on a regular basis, to be reported in the financial statements.

d. When comparing public real estate companies, the reader is well advised to read
the accounting policy note to the financial statements disclosing the
measurement policy used for the real estate property. One would need to
determine the corresponding fair value for real estate for the company that used
the historical cost basis of accounting. In fact, this information is required to be
disclosed for real estate companies, even if they adopted the historical cost basis
of accounting, to improve comparability and disclosure. Otherwise, trying to
compare businesses that use different bases of accounting would be very
difficult.

LO 3 BT: E Difficulty: C Time: 30 min. AACSB: None CPA: cpa.t001 CM: Reporting