Burnley, Understanding Financial Accounting, Second Canadian Edition

DQ2-3 The value of the land is reported at its original purchase price,
or its historical cost. This is representationally faithful,
verifiable, accurate and free from error. However, historical
cost may not be relevant if the market value of the land has
increased significantly since it was purchased. Some users
may find it more useful to know the current market value of the
land.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
DQ2-5 Material information is information that is useful and matters to
decision makers. Information is material when it influences the
user of the information. Therefore, it is associated with the
qualitative characteristic of relevance. It is information that, if
known, would make a difference in the decisions that are made
about investments in, or investments made by, a company.
Normally, the greater the dollar value of an item, the more
material it is. However, some small dollar items can be
qualitatively material due to particular situations (i.e. even a
small dollar fraud by senior management could be considered
material).
LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
DQ2-6 The cost constraint is applied by companies when deciding
what financial information should be reported. The benefits of
reporting the information must exceed the cost involved in its
preparation. If the benefit doesn’t exceed the cost, that
information should not be captured and reported on the
financial statements.
LO 2 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
DQ2-7 Under the accrual basis of accounting, transactions are
recorded in the period in which they occur (i.e. revenues when
earned and expenses when incurred) regardless of when the
cash related to these transactions flowed into or out of the
company. Under the cash basis of accounting, transactions are
only recorded when the cash is actually received or paid by the
company.

LO 3 BT: C Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Burnley, Understanding Financial Accounting, Second Canadian Edition

DQ2-8 Advantages of using the accrual basis:

[Link] is recognized when earned which is more
meaningful to users. Under the cash basis, the revenue is
recognized when the cash is received, even if the work
associated with has been done previously or may not be
completed for several periods.
[Link] results in statements of income that reflect the revenues
and expenses of the period more accurately.
[Link] increases the comparability of financial statements from
one period to another.

Disadvantages of using the accrual basis:

[Link] is more complicated for unsophisticated users to prepare
or interpret.
[Link] uncertainty regarding the collectability of future cash
flows. Under the accrual basis, some of the revenues
recognized may never be collected. This is a non-issue
under the cash basis.
[Link] income determined under the accrual basis does not
give a clear view of the amount of cash that an organization
has generated in a given time period.

LO 3 BT: K Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
DQ2-9 Since revenue is only recorded when cash is received,
management could require customers to pay before providing
the product or service to show revenue before it is earned and
therefore increasing net income. Management could also delay
paying for expenses to increase net income as well.
The accrual basis of accounting prevents both these
manipulations by only recording revenue when it is earned,
when the product or service is provided to the customer and
expenses are recorded when they are incurred.
LO 3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Burnley, Understanding Financial Accounting, Second Canadian Edition

DQ2-10 Under the accrual basis of accounting, revenues are recorded

when they have been earned regardless of whether the related
cash has been received by the company. When a university
bookstore sells a textbook, it ‘earns’ the revenue when the
textbook is sold and delivered to the student. In this case, most
students pay for textbooks at the same time as receiving them,
therefore the cash basis and the accrual basis would be the
same for the sale of textbooks.

The revenue earned from the parking would be recognized

throughout the semester, as the student uses the parking
space. The university would recognize a portion of the parking
revenue each month throughout the semester. Under the cash
basis of accounting, the full amount of the parking pass would
have been recognized as revenue in the month the cash was
received.

LO 3 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

DQ2-11 Under accrual-basis accounting, a prepaid expense is recorded

as an asset on the statement of financial position and expensed
as the related benefits are realized. For example, if rent is paid
for future months, no expense is recognized immediately even
though cash is paid. The prepaid expense is then expensed
over the months that benefit from the advance payment (i.e.
rent expense would be recognized in each month covered by
the prepaid rent).

LO 3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Burnley, Understanding Financial Accounting, Second Canadian Edition

DQ2-12 Under accrual-basis accounting, an accrued expense (such as

interest) is one that is recognized on the statement of income
as an expense before any cash is paid out. In this case, a
liability is also set up on the statement of financial position, that
will be eliminated once the cash has been paid to settle the
liability.

LO 3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

DQ2-13 When transactions are recorded in the accounting system, the

equality of the basic accounting equation (or statement of
financial position equation), Assets = Liabilities + Shareholders’
Equity, must be maintained. This implies that all transactions
must affect at least two accounts in the financial statements to
maintain the equality, although the effects may be within the
same category of accounts. For example, the collection of cash
on account from customers both increases an asset (Cash) and
decreases another asset (Accounts Receivable).

LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-2A
i. (a) No effect on the income statement
(b) Revenue recorded $35,000 and an increase to net income for
$35,000
ii. (a) Revenue recorded $115,000 and an increase to net income for
$115,000
(b) Revenue recorded $115,000 and an increase to net income for
$115,000
iii. (a) Revenue recorded $30,000 and an increase to net income for
$30,000
(b) No effect on the income statement
iv. (a) No effect on the income statement
(b) Expenses recorded $85,000 and a decrease to net income for
$85,000
v. (a) Expenses recorded $75,000 and a decrease to net income for
$75,000
(b) No effect on the income statement
vi. (a) Expenses recorded $32,500 and a decrease to net income for
$32,500
(b) Expenses recorded $35,000 and a decrease to net income for
$35,000
vii. (a) Expense recorded $1,000 and a decrease to net income for
$1,000
(b) Expense recorded $500 and a decrease to net income for $500

Summary of results on the next page

5
Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-2A (Continued)

Summary of results:

(a) Cash Basis (b) Accrual Basis

Expense Revenu Expense
Revenue
s e s
i. i. $35,000
ii. $115,000 ii. 115,000
iii. 30,000 iii.
iv. iv. $85,000
v. $75,000 v.
vi. 32,500 vi. 35,000
vii. 1,000 vii. 500
$145,000 $118,500 $150,000 $120,500

Net income $26,500 Net income $29,500

LO 3 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-3A

a. Increase assets (cash) and increase shareholders’ equity

(common shares)
b. Decrease assets (cash) and increase assets (land)
c. Increase assets (accounts receivable) and increase shareholders'
equity (sales revenue increases, which increases retained
earnings)
d. Increase assets (cash) and decrease assets (accounts receivable)
e. Decrease assets (cash) and decrease shareholders’ equity
(dividends declared increases, which decreases retained earnings)
f. Increase assets (cash) and increase liabilities (bank loan)
g. Decrease assets (cash) and decrease shareholders’ equity
(interest expense increases, which decreases retained earnings)
h. Increase assets (inventory) and increase liabilities (accounts
payable)
i. Decrease assets (cash) and decrease liabilities (accounts
payable)
j. Decrease assets (cash) and decrease shareholders’ equity
(delivery expense increases, which decreases retained earnings)
k. Decrease assets (cash) and increase in assets (prepaid
insurance) when payment is made. As insurance is used,
decrease in assets (prepaid insurance) and a decrease
shareholders’ equity (insurance expense increases, which
decreases retained earnings)
l. Decrease assets (increases accumulated depreciation, which is a
contra asset) and decreases shareholders' equity (increases
depreciation expense, which decreases retained earnings)

LO 5 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-5A

Assets Liabilities S/H Equity

Date Inflatabl Unearne Loan Commo
R/E/
Sept Cash A/R Inv. e A/P d Payabl n R/E
DD
. Equip. Revenue e Shares
260,00
1 260,000
0
160,00 160,00
1
0 0
(100,0 40,00
3 140,000
00) 0
8 6,600 6,600
2,50
11 2,500
0
4,30 4,30
15:1 8,600 R
0 0
(5,700 (5,7
15:2 E
) 00)
(1,7 (1,700
19
00) )
3,40 (3,400
23
0 )
(3,0 (3,000
30:1
00) )
(8
30:2 (800) E
00)*
*$160,000 x 6% x 1/12 = $800 Interest expense

LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

Assets Liabilities S/H Equity

Dat Loan
e Wages Payabl Common
Jan Cash A/R Inv. Equip. A/P Payable e Shares R/E R/E/DD
1 12,500 12,500 -
3 22,000 22,000
5 - 24,700 - 24,700
9 (4,000) - 8,000 4,000
15 16,000 9,000 - - - 25,000 R
(14,000 (14,000
15 ) ) E
(15,000
19 ) (15,000)
25 7,800 (7,800) -
27:1 10,500 - 10,500 R
27:2 - (7,600) (7,600) E
28 (2,200) 200 (2,400) E
28 - 800 (800) E
AP2-6A

LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-7A

Trans (i) Effect on Net Earnings (ii) Effect on cash flows

-
action
a. No effect Increase of $60,000
b. No effect No effect
c. No effect Decrease of $500
d. Increase of $200 (Sales of No effect (sold on account,
$500 less Cost of goods sold inventory already owned)
of $300)
e. No effect Decrease of $10,000
f. No effect Decrease of $1,000
g. Decrease of $300 No effect
(Supplies expense)
h. No effect Increase of $700
i. No effect No effect
j. No effect Decrease of $2,000
k. Decrease of $500 No effect
(Depreciation expense)

LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-8A

Assets Liabilities S/H Equity

Loan Common Rev/Exp/
# Cash A/R Inv. Supplies Equip. A/P Payable Shares R/E DD
a 150,000 150,000
b (25,000) 50,000 25,000
c 45,000 45,000
d:1 52,000 52,000 Rev
d:2 (35,000) (35,000) Exp
e (1,000) (1,000)
f 25,000 25,000
g (1,200) (1,200) Exp
h (750) 750
i (250) (250) Exp
j (8,000) (8,000) DD

LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-10A

A Revenue – Expenses = Net Earnings, Revenue – $17,000 = $2,000,

Revenue = $17,000 +$2,000 = $19,000

B Retained earnings, end of year = Retained earnings, beginning of the year

+ Net Earnings – Dividends declared = $6,000 + $2,000 – $500 = $7,500

C Total assets, beginning of the year = Total Liabilities, beginning of the year
+ Total Common Shares, beginning of the year + Total Retained Earnings,
beginning of the year = $9,000 + $1,000 + $6,000 = $16,000

D Total Liabilities, end of year = Total Assets, end of year (given $28,000) –
Total common shares, end of year (calculated in E) – Total retained
earnings, end of year (calculated in B) = $28,000 - $5,000 - $7,500 =
$15,500

E Common shares, end of the year = Common shares, beginning of the year
+ Additional common shares issued during the year = $1,000 + $4,000 =
$5,000

F Net earnings = Revenue – Expenses = $29,000 - $25,000 = $4,000

G Dividends declared = Retained earnings, opening + Net earnings

(calculated in F) – Retained earnings, ending = $10,000 + $4,000 - $11,000
= $3,000

H Total assets, beginning of year = Total liabilities, beginning of year + Total

common shares, beginning of year (calculated in J) + Total retained
earnings, beginning of year = $10,500 + $5,000 + 10,000 = $25,500

I Total assets, end of year = Total liabilities, end of year + Total common
shares, end of year + Total retained earnings, end of year = $9,500 +
$8,500 + 11,000 = $29,000

J Common shares, beginning of the year = Common shares, end of year –

additional common shares issued during the year = $8,500 – 3,500 =
$5,000

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

LO 6 BT: AP Difficulty: C Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-11A a. Total revenues: $448,800 + $4,800 + $2,200 = $455,800

b. Total expenses: $272,000 + $63,300 + $38,800 + $1,200 +
$26,400 = $401,700
c. Net earnings: $455,800 - $401,700 = $54,100
d. Dividends declared: $96,000 + $54,100 - $105,600 = $44,500

Alternate:

Beg. R/E + net income – dividends declared = End R/E

$96,000 + $54,100 - ? (div. decl.) = $105,600
$150,100 - ? (div. decl.) = $105,600
? (div. decl.) = $150,100 - $105,600

Therefore, dividends declared = $44,500

LO 6 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-13A

a.
The Wizard’s Corner
Statement of Income
For the year ended June 30, 2020

Sales revenue $190,000

Less expenses:
Cost of goods sold $103,000
Wages expense 36,000
Rent expense 12,000
Advertising expense 6,000
Depreciation expense 2,000
Total expenses 159,000
Net income $ 31,000

b.

Retained earnings at July 1, 2019 $21,000

Plus: Net income 31,000
Less: dividends declared 3,000
Retained earnings at June 30, 2020 $49,000

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP8-13A (Continued)

c.
The Wizard’s Corner
Statement of Financial Position
As at June 30, 2020

ASSETS
Current assets
Cash $ 40,000
Accounts receivable 15,000
Inventory 28,000
Prepaid rent 1,000
84,000
Non-current assets
Equipment 11,000
Total Assets $ 95,000

LIABILITIES & SHAREHOLDERS’ EQUITY

Current liabilities
Accounts payable $11,000
Wages payable 2,000
13,000
Total liabilities 13,000
Shareholders’ equity
Common shares 33,000
Retained earnings 49,000
Total Shareholders’ Equity 82,000

Total Liabilities and Shareholders’

Equity $ 95,000

LO 6 BT: AP Difficulty: M Time: 45 min. AACSB: None CPA: cpa-t001 CM: Reporting

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-14A

a.

Assets Liabilities S/H Equity

Date/
Wages Interest Dividends Loan Common Rev/
Ref. Cash A/R Inv. Buildings Land A/P Payable Payable Payable Payable Shares R/E Exp/DD
Jan.1 250,000 250,000
Jan.2 50,000 50,000
(200,000 140,00 60,00
Jan.3
) 0 0
130,00
4
130,000 0
5 30,000 175,000 205,000 Rev
6 (120,000) (120,000) Exp
7 (115,000) (115,000)
8 155,000 (155,000)
9 (55,000) 2,000 (57,000) Exp
10 3,000* (3,000) Exp
11 (4,000)** (4,000) Exp
Dec.15 7,000 (7,000) DD
Totals 115,000 20,000 10,000 136,000 60,000 15,000 2,000 3,000 7,000 50,000 250,000 14,000

*$50,000 x 6% = $3,000
** ($140,000 - $ 20,000) ÷ 30 = $4,000

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-14A (Continued)

b.
Singh Company
Statement of Income
For the Year Ending December 31, 2020

Revenues
Sales revenue $205,000

Expenses
Cost of goods sold $120,000
Wages expense 57,000
Interest expense 3,000
Depreciation expense 4,000 184,000
Net income $ 21,000

Singh Company
Statement of Changes in Equity
For the year ended December 31, 2020
Number Share
of Capital - Retained
Total
Common Common Earnings
Shares Shares
Balance, Beginning of Year $0 $0
Net Income 21,000 21,000
Declaration of Dividends (7,000) (7,000)
Issuance of Common Shares 10,000 $250,000 250,000
Balance, End of Year 10,000 $250,000 $14,000 $264,000

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-14A (Continued)

Singh Company
Statement of Financial Position
As at December 31, 2020

ASSETS
Cash $115,000
Accounts Receivable 20,000
Inventory 10,000
Land 60,000
Buildings 136,000
TOTAL ASSETS $341,000
LIABILITIES
Accounts Payable $ 15,000
Wages Payable 2,000
Interest Payable 3,000
Dividends Payable 7,000
Loan Payable 50,000
TOTAL LIABILITIES 77,000
SHAREHOLDERS’ EQUITY
Common Shares 250,000
Retained Earnings 14,000
TOTAL SHAREHOLDERS’
EQUITY 264,000
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY $341,000

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-14A (Continued)

Singh Company
Statement of Cash Flows
For the Year Ending December 31, 2020

Cash Flow from Operating Activities:

Cash collections from customers $185,000
Cash payments to suppliers (115,000)
Cash payments for wages (55,000)
Cash flows from operating activities 15,000
Cash Flow from Investing Activities:
Purchase of land and building (200,000)
Cash used in investing activities (200,000)
Cash Flow from Financing Activities:
Cash proceeds from issuance of shares $ 250,000
Cash proceeds from bank loan 50,000
Cash from financing activities 300,000

Increase in cash 115,000

Cash, beginning of year 0
Cash, end of year $115,000

LO 5,6 BT: AP Difficulty: M Time: 60 min. AACSB: None CPA: cpa-t001 CM: Reporting

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-2B
i. (a) No effect on the income statement
(b) No effect on the income statement
ii. (a) Revenue recorded $80,000 ($100,000 x 80%) and an increase to net income of $80,000
(b) Revenue recorded $100,000, Cost of Goods Sold recorded $60,000 and an increase to net
income for $40,000
iii. (a) Revenue recorded $20,000 and an increase to net income for $20,000
(b) No effect on the income statement
iv. (a) Expenses recorded $13,000 and a decrease to net income for $13,000
(b) Expenses recorded $12,000 and a decrease to net income for $12,000
v. (a) Expenses recorded $5,500 and a decrease to net income for $5,500
(b) Expenses recorded $5,000 and a decrease to net income for $5,000
vi. (a) Expenses recorded $37,500 and a decrease to net income for $37,500
(b) Expenses recorded $38,000 and a decrease to net income for $38,000

Summary of results on the next page

21
 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP8-2B (Continued)

Summary of results:

(a) Cash Basis (b) Accrual Basis

Expense Revenu
Revenue Expenses
s e
i. i.
ii. $80,000 * ii. $100,000 $60,000
iii. 20,000 iii.
iv. $ 13,000 iv. 12,000
v. 5,500 v. 5,000
vi. 37,500 vi. 38,000
$100,000 $56,000 $100,000 $115,000

Net income $44,000 Loss ($15,000 )

*($100,000 x 80%) = $80,000

LO 3 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-3B a. Increase assets (equipment) and decrease assets (cash)

b. Increase assets (cash) and increase liabilities (bank loan)
c. Increase assets (inventory) and increase liabilities (accounts payable)
d. Increase assets (cash) and increase shareholders’ equity (sales revenue increases, which
increases retained earnings)
e. Decrease assets (cash) and decrease liabilities (accounts payable)
f. Increase liabilities (wages payable) and decrease shareholders’ equity (wages expenses
increases, which decreases retained earnings)
g. Decrease assets (cash) and decrease shareholders’ equity (interest expense increases, which
decreases retained earnings)
h. Decrease assets (cash) and decrease liabilities (loan)
i. Decrease assets (cash) and decrease liabilities (wages payable)
j. Increase assets (inventory) and increase liabilities (accounts payable)
k. Decrease assets (cash) and decrease in shareholders’ equity (utilities expense increases, which
decreases retained earnings)
l. Decrease assets (increases accumulated depreciation, which is a contra asset) and decrease
shareholders' equity (increases depreciation expense, which decreases retained earnings)

LO 5 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

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Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-5B

Assets Liabilities S/H Equity

Dat Bank
e Deliver Loan Commo
Sep Equip y Payabl n R/E/
t Cash A/R Inv. . Van A/P e Shares R/E DD
1 20,000 20,000
4 10,000 10,000
7 (4,500) 4,500
9 2,500 2,500
15 4,000 4,000 R
19 2,100 2,100
(2,700
20 (2,700) )
(15,000
21 ) 15,000
(1,800 (1,800
28 ) ) E
28 (700) (700) E
29 400 (400) E
LO 5 BT: AP 30 (150) (150) E Difficulty: M
Time: 20 min.
30 2,200 (2,200) AACSB:
None CPA: cpa-
t001 CM: Reporting

24
 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-6B

Assets Liabilities S/H Equity

Date Prepaid Unearned Loan Common

Jan Cash A/R Inv. Rent A/P Revenue Payable Shares R/E R
1 150,000 150,000
1 100,000 100,000
2 (8,000) 5,000 (3,000)
8 26,200 26,200
12 6,500 6,500
16:1 9,100 9,100 18,200
16:2 (9,200) (9,200)
19 (7,000) (7,000)
25 7,100 (7,100)
31:1 (5,000) (5,000)
31:2 (750)* (750)

*$100,000 x 9% x 1/12 = $750

LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-7B
Transactio Effect on Net Earnings (i) Effect on cash flows (ii)
n
a. No effect Increase of $125,000
b. No effect Decrease of $40,000
c. No effect No effect
d. Decrease of $1,200 Decrease of $1,200
(Advertising expense)
e. Increase of $26,300 (Sales No effect (sold on account,
of $38,200 less Cost of inventory already owned
goods sold of $11,900)
f. No effect Decrease of $20,000
g. Decrease of $5,000 Decrease of $5,000
(Wages expense)
h. No effect Increase of $26,400
i. No effect Decrease of $2,000
j. Decrease of $900 Decrease of $2,900
(Interest expense)
k. Decrease of $2,000 No effect
(Depreciation expense)
l. Decrease of $300 No effect
(Interest expense)

LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-8B

Assets Liabilities S/H Equity

Dividends Loan Common

Date/Ref. Cash A/R Inv. Equip. A/P Payable Payable Shares R/E Rev/Exp/DD
a 250,000 250,000
b 100,000 100,000
c (178,000) 178,000
d (50,000) 75,000 25,000
e:1 46,000 46,000 92,000 Rev
e:2 (49,000) (49,000) Exp
f (20,000) (20,000)
g (3,700) (3,700) Exp
h (5,200) (4,000) (1,200) Exp
i (22,600) (22,600) Exp
j 8,000 (8,000) DD

LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-10B

A Revenue – Net Earnings = Expenses $123,000 – $45,000 = $78,000

B Dividends declared = Retained earnings, beginning of the year + Net

Earnings – Retained Earnings, end of year = $278,000 + $45,000 -
$311,000 = $12,000

C Total assets, end of the year = Total Liabilities, end of the year + Total
Common Shares, end of the year + Total Retained Earnings, end of the
year = $408,000 + $150,000 + $311,000 = $869,000

D Proceeds from common shares issued during the year = Common shares,
end of the year – Common shares, beginning of the year = $150,000 -
$100,000 = $50,000

E Revenues = Net earnings + Expenses = $77,000 + $158,000 = $235,000

F Retained earnings, end of year = Retained earnings, beginning of the year

+ Net earnings – Dividends declared = $321,000 + $77,000 – $20,000 =
$378,000

G Common shares, end of year = Assets, end of year – Liabilities, end of year
– Retained earnings, end of year (solved in F) = $726,000 - $273,000 -
$378,000 = $75,000

H Proceeds from common shares issued during the year = Common shares,
end of the year (solved in G) – Common shares, beginning of the year =
$75,000 - $50,000 = $25,000

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-11B a. Total revenues: $510,000 + $1,800 + $2,600 = $514,400

b. Total expenses: $364,000 + $43,700 + $38,000 + $200 +
$22,700 = $468,600
c. Net earnings: $514,400 - $468,600 = $45,800
d. Dividends declared: $145,000 + $45,800 - $185,500 = $5,300

Alternate:

Beg. R/E + net income – dividends declared = End R/E

$145,000 + $45,800 - ? (div. decl.) = $185,500
$190,800 - ? (div. decl.) = $185,500
? (div. decl.) = $190,800 - $185,500

Therefore, dividends declared = $5,300

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-13B

a.
Insomniacs Coffee Ltd.
Statement of Income
For the year ended December 31, 2020

Sales revenue $2,910,000

Less expenses:
Cost of goods sold $1,650,000
Wages expense 510,000
Rent expense 180,000
Advertising expense 78,000
Depreciation expense 82,000
Interest expense 42,000
Total expenses 2,542,000
Net Income $ 368,000

b.

Retained Earnings at January 1, 2019 $410,000

Plus: Net Income 368,000
Less: dividends declared 180,000
Retained earnings at December 31, 2020 $598,000

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-13B (Continued)

c.
Insomniacs Coffee Ltd.
Statement of Financial Position
As at December 31, 2020

ASSETS
Current assets
Cash $ 120,000
Accounts receivable 185,000
Inventory 305,000
Prepaid Insurance 23,000
633,000
Non-current assets
Equipment 1,240,000
Total Assets $1,873,000

LIABILITIES & SHAREHOLDERS’ EQUITY

Current liabilities
Accounts payable $340,000
Wages payable 45,000
385,000
Non current liabilities
Loan Payable 790,000
Total liabilities 1,175,000
Shareholders’ equity

Common shares $ 100,000

Retained earnings 598,000
Total Shareholders’ Equity 698,000

Total Liabilities and Shareholders’

Equity $1,873,000

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Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-14B
a.
Assets Liabilities S/H Equity
Rev/
Date/ Wages Dividend Loan Common Exp/
Ref. Cash A/R Inv. Buildings Land A/P Payable Payable Payable Shares R/E DD
Jan. 1 700,000 700,000
Jan. 1 250,000 250,000
Jan. 3 (700,000) 300,000 400,000
4 (90,000) 190,000 100,000
5 155,000 155,000 310,000 Rev
6 (128,000) (128,000) Exp
7 132,000 (132,000)
8 (95,000) (95,000)
9 (91,800) 4,200 (96,000) Exp
10 (15,000)* (15,000) Exp
11 (35,000)** (35,000) Exp
12 (7,500) 7,500 (15,000) DD
Total 237,700 23,000 62,000 265,000 400,000 5,000 4,200 7,500 250,000 700,000 21,000

*$250,000 x 6% = $15,000
** ($300,000 - $ 20,000) ÷ 8 = $35,000

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-14B (Continued)

a.
Moksh Ltd.
Statement of Income
For the Year Ending December 31, 2020

Revenues
Sales revenue $310,000

Expenses
Cost of goods sold $128,000
Wages expense 96,000
Interest expense 15,000
Depreciation expense 35,000 274,000
Net income $ 36,000

Moksh Ltd.
Statement of Changes in Equity
For the year ended December 31, 2020
Number Share
of Capital - Retained
Total
Common Common Earnings
Shares Shares
Balance, Beginning of Year $0 $0
Net Income 36,000 36,000
Declaration of Dividends (15,000) (15,000)
Issuance of Common Shares 10,000 $700,000 700,000
Balance, End of Year 10,000 $700,000 $21,000 $721,000

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-14B (Continued)

Moksh Ltd.
Statement of Financial Position
As at December 31, 2020

ASSETS
Cash $237,700
Accounts Receivable 23,000
Inventory 62,000
Land 400,000
Buildings 265,000
TOTAL ASSETS $987,700
LIABILITIES
Accounts Payable $ 5,000
Wages Payable 4,200
Dividends Payable 7,500
Bank Loan Payable 250,000
TOTAL LIABILITIES 266,700
SHAREHOLDERS’ EQUITY
Common Shares 700,000
Retained Earnings 21,000
TOTAL SHAREHOLDERS’
EQUITY $721,000
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY $987,700

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

AP2-14B (Continued)

Moksh Ltd
Statement of Cash Flows
For the Year Ending December 31, 2020

Cash Flow from Operating Activities:

Cash collections from customers $287,000
Cash payments to suppliers (185,000)

Cash payments for wages (91,800)

Cash payments for interest (15,000)
Cash flows from operating activities (4,800)
Cash Flow from Investing Activities:
Purchase of land and building (700,000)
Cash used in investing activities (700,000)
Cash Flow from Financing Activities:
Cash proceeds from issuance of shares 700,000
Cash proceeds from bank loan 250,000
Cash paid for dividends (7,500)
Cash from financing activities 942,500

Increase in cash 237,700

Cash, beginning of year 0
Cash, end of year $237,700

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

UP 2-1 Most public companies operate internationally and a significant

number of them are also cross-listed, meaning that they are listed on
stock exchanges both inside and outside of Canada. IFRS, a
common set of financial reporting standards, was developed to
minimize the differences in financial reporting across countries and to
reduce the need for companies to generate different sets of financial
information in each country in which they operate or raise funds.
ASPE, on the other hand, represents a set of simplified standards
that Canadian standards setters have established to reduce the
financial reporting burden for private companies.

The objective of both IFRS and ASPE is to produce financial reporting

that is useful to the financial statement users. Both IFRS and ASPE
focus on the needs of shareholders (current and potential) and
creditors in determining the financial information that would be useful.
Specifically, the standards’ aim is to provide financial information that
assists these two user groups in making decisions about providing
resources to the reporting company, such as whether they should buy
or sell the reporting company’s shares, and whether they should
extend credit to the reporting company. The needs of these two user
groups often correspond with the needs of other users, such as
employees, unions, and governments, but they may not completely
overlap.

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

UP2-4

a. From the perspective of a shareholder of the company, treating the cost

of a piece of equipment as an expense at the date of purchase will
misstate net income in the current period as well as in future periods.
The current period’s income would be understated because the full cost
of the equipment would be deducted in the current period rather than
being depreciated and allocated to each of the future periods in which it
is expected to help generate revenue (i.e. the estimated useful life of the
asset). Future periods’ income will be overstated since there will be
revenue shown in those periods, but no expense related to the cost of
the equipment being used to generate the revenue. In addition, there
would be no equipment on the statement of financial position.

b. From the perspective of a buyer, the concern would be the equipment

would not be listed on the statement of financial position of the company
(since it would already have been expensed). In attempting to value the
assets of the company, the buyer would have to recognize that there are
some assets that do not appear on the statement of financial position,
but should be considered in valuing the company. In addition, the
balance of retained earnings would be lower because the full cost of the
equipment had been charged to an expense at its purchase.

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

UP2-5 When the cash is received in August, the university would record a
liability, unearned revenue. As each month passes, a portion of the
unearned revenue would be recognized as revenue, thus decreasing
the liability and increasing retained earnings. The university would
recognize the revenue evenly over the months of September through
December, as the tuition would cover the December exam period.

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

UP2-6 The statement of income and the statement of financial position are
both prepared using accrual accounting. These financial statements
may show strong earnings, yet the company may have problems
making loan payments if most of its sales were on credit, and if it then
has problems collecting from its customers.

By comparing the current and previous statement of financial position,

a user can see the change in cash from the beginning of the year to
the end of the year. There may be a very small change; however
there may be thousands of cash transactions during the year. The
statement of cash flows categorizes all cash transactions into
operating, investing, and financing activities. This allows the user to
determine where cash is coming from and where it is going. It is
particularly important to know whether the company can pay for its
current obligations to vendors and employees through cash
generated from operations. If the company has to sell its property,
plant and equipment in order to pay for its operating expenses, then
the company may be in serious jeopardy of not being able to
continue.

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

UP2-7 I would tell my friend NOT to invest in this company because it is not
generating enough cash from operations (i.e. it has negative cash
flows from operating activities) to cover its operating expenses. It
appears that the company is selling its property, plant and equipment
(i.e. it has positive cash flows from investing activities). The normal
balance for investing should be negative, indicating that the company
is using cash to acquire property, plant and equipment to grow its
business and increase its operating profits. A company that sells its
property, plant and equipment may soon have to go out of business
as it has no means to generate income. Similarly, a increase in cash
from financing activities indicates that the company is borrowing
money or is obtaining financing from shareholders through the
issuance of shares to generate enough cash to continue operations.

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

UP2-8 This company is not generating enough cash from operations (i.e. it
has negative cash flows from operating activities) to cover its
operating expenses. It appears that the company is purchasing
property, plant and equipment (i.e. it has negative cash flow from
investing activities) which is a good thing as it indicates that the
company is using cash to acquire property, plant and equipment to
grow its business and increase its operating profits in the future. The
purchases of this property required financing, which is confirmed by
the increase in cash from financing activities. It appears that the
company is either a new company in a growth phase and able to
attract capital (in which case it may be a good time to accept the job),
or it is an older company with declining operations that is still able to
secure new financing (in which case you may want to consider the
company’s ability to turn its operations around and its ability to
continue to secure additional financing before deciding whether to
accept the job).

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

WIP2-2 Shareholder’s equity is the residual amount that remains when total
liabilities are subtracted from total assets. It represents a company’s net
assets. It is the shareholder’s claim on the company. Shareholder’s
equity it not money since money (cash) as it includes all of the various
asses of a company (cash, accounts receivable, inventory, equipment
etc.) If a company’s assets are liquidated, the cash received would likely
be different than the amount that the assets are carried at on the
statement of financial position.

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

WIP2-3 The statement: “Companies that have a large amount of retained

earnings have been profitable” is correct. The statement “They should
distribute the retained earnings as dividends, or pay off any debt, or
invest the amount to generate some extra income for the company” is
incorrect. Retained earnings are not cash so it can’t be used to pay-off
debt and dividends can only be declared if there is cash available.
Retained earnings are earnings that have been retained in the company
so they do represent a reinvestment of earnings into the company but
again they do not represent cash, which is an asset.

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

WIP2-4 Companies can generate cash to pay for purchases of land, building,
equipment and inventory in two ways: borrow money or issue shares.
So if the company has a low debt balance, it likely has issued shares for
cash to finance its significant purchases or it used cash earnings from
prior periods to fund the purchase.

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 Burnley, Understanding Financial Accounting, Second Canadian Edition

C2-3 Mega Manufacturing

Mega Manufacturing appears to be improving its financial position to be more

In line with the performance of other companies in the same industry.
Profit margin has decreased in the past year, which indicates that the level of
profit generated by each dollar of sales revenue declined. The company
remains well above the industry average.

Currently the company is able to generate a return of 10% on its assets. This
means that for every $100 invested in assets the company is able to generate
profits of $10. The company appears to be performing slightly below the
average for companies in the industry, but has improved these results in the
last year.

Finally, the return on equity ratio compares the profits earned in the business
to the amount invested by shareholders. Shareholders will use this ratio to
evaluate the ability of the business to provide them with an acceptable return
on their investment. Investors will often compare the return on equity for
businesses of similar risk to make decisions about buying new shares or
selling their existing shares. With a return on shareholders’ equity of 12%,
Mega Manufacturing is providing investors with a return that is below the
industry average. The 2% increase over the past year should make this
company an attractive investment, especially if it continues to increase and it
becomes closer to the industry average.

LO7 BT: AN Difficulty: C Time: 25 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance

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Burnley, Understanding Financial Accounting, Second Canadian Edition

Legal Notice

Copyright

Copyright © 2018 by John Wiley & Sons Canada, Ltd. or related

companies. All rights reserved.

The data contained in these files are protected by copyright. This manual is
furnished under licence and may be used only in accordance with the terms
of such licence.

The material provided herein may not be downloaded, reproduced, stored

in a retrieval system, modified, made available on a network, used to create
derivative works, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording, scanning, or otherwise without the
prior written permission of John Wiley & Sons Canada, Ltd.
MMXVIII iii F2

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