Financial Accounting: A Critical Approach 3e _ Chapter 1 Answers

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CHAPTER 1
The Accounting Environment: What Is Accounting and Why Is It Done?
EXERCISES
E1-1.
This is a good critical thinking question. Many students will assume an answer and provide it.
The key is understanding the factors that go into the choice that person is making—the
objectives she has in making the trip and the constraints she faces. The purpose of the question is
to realize that solutions are context based. You really can’t provide an answer that you can be
sure is helpful until you ask some questions. Does she intend to drive, in which case she wants to
know the best route for the trip? If so, does she prefer a scenic route or the route that will get her
there in the shortest time, or the least distance? Other modes of transportation can be introduced
(train, plane, bus, roller skates). The solution should consider constraints (does she have the
money for a plane ticket, time for the scenic route, a driver’s license if a drive is recommended).
Many variations are possible, but the point is that no useful answer can be given without
knowing more about the criteria she will apply in making the decision.
E1-3.
Various answers might be provided, but stakeholders would include students, faculty and staff,
government agencies who provide funding, potential donors, alumni, and potential students.
Students/potential students want to know that they will obtain the best university
experience for them. They may want to know whether the university has above average
library or computing facilities. They may want to know the quality of the programs, the
reputation of the faculty, the availability of fitness facilities, or even whether it’s a “party
school.” Various sources of information could be consulted. University calendars, university
fairs, discussions with current students, faculty, and alumni, and independent rankings may
provide useful information.
Faculty will want to know that the university is committed to excellence in teaching and
research and will provide the needed resources, particularly for the programs they value.
They will want to detect trends in funding of programs, resources for research and teaching
or salaries. They will look at proposed budgets and hiring plans as well as financial
statements of recent periods.
Governments want to assess the financial needs of universities to determine their funding
requirements. They will look to determine how past funding amounts have been used,
projected enrollments and budgets and the participation of other sources of funding.
Potential donors want to know that the money they give will be used for the purpose for
which it is given. They will look for accountability for past donations, plans for the future,
and the needs of the institution.
Alumni might be interested in the perceived success or prestige of the university.
E1-5.
Copyright © 2010 McGraw-Hill Ryerson Ltd.
John Friedlan, Financial Accounting: A Critical Approach, 3e
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A claim by a chain of donut shops that they serve the best coffee in the world is not very credible
since it is very unlikely that they have evaluated even all coffee shops in their own community
let alone the country or the world. The claim would be more credible, for example, if they
reported that some independent organization had awarded them first prize in a contest, which had
received entries from many countries. To determine whether the chain had the world’s best
coffee would be very difficult, since “best is a subjective matter with differing tastes across
countries and individuals. Conceivably one could sample the coffee served by the best-known
chains or look to the opinions of experts. Perhaps an internet website that invites everyone’s
opinion might provide helpful information. Most people would not consider the cost of obtaining
a high level of certainty about the claim to be worth the benefits of finding out.
E1-7.
Individual responses will vary considerably to this question. However, it’s necessary to clearly
establish the criteria applied for selecting a university and those criteria should be tailored to the
circumstances of the cousin. Then consideration can be given to what and how relevant
information should be gathered and then to how the universities will be ranked. Considerations
would include areas of interest (science, arts, business), career goals, academic performance,
resources to pay for university and accommodation away from home if appropriate, extra-
curricular and social interests, and any other personal interests. This question has no right
answer. What is crucial is the approach used to solve the problem and to recognize that a “one-
size fits all approach is not appropriate.
E1-9.
Many different measurements might be suggested. The following list is not comprehensive:
Class size indicates how much attention an individual student might receive from their
professors. This would be fairly easy to measure since number of students in a class is easy to
determine. However, within a university there can be wide ranges of class sizes and averages
could be misleading.
Distance from home indicates whether accommodations will needed or whether
commuting is possible. This would be easy and objective to measure
Cost of tuition indicates whether the student will be able to afford their education. Tuition
cost is easy and objective to determine but doesn’t give a complete measure of the cost of an
education. The cost of accommodation, books, transportation, and so on should also be
considered.
Scholarships and financial aid available also indicate whether the student will be able to
afford their education. Information on these is readily available but can take some research to
ensure all sources of funds are considered. It may be difficult to determine whether a
particular student would receive the money associated with these sources.
Employment levels and average salaries of alumni will indicate the student’s potential for
success after university. University programs often provide this information so in that sense
it’s readily available. Actual determination of the amounts can be difficult because it requires
self-reporting by graduates. Some/many graduates may not respond and there is no guarantee
that any information they provide is true.
Copyright © 2010 McGraw-Hill Ryerson Ltd.
John Friedlan, Financial Accounting: A Critical Approach, 3e
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Research funding indicates how much support a professor receives for their projects.
Grants awards are usually publicized by the university and the granting organization so this
information is readily available and objective.
Quality and effectiveness of professors. Students provide feedback in course evaluations,
although students may not be fully able to evaluate teaching quality. These evaluations may
also be affected by the grades students receive in the course and their level of interest. This is
difficult to measure and highly subjective.
The measure of a particular university that is best depends on the needs and priorities of the user.
Different measurements are appropriate for different purposes and so the “best measurement
can’t be identified. Only the best measurement for a particular purpose can be identified.
E1-11
ExpenseOld Car New Car
Cost of New Car$19,000
Sale of Old Car(14,700)
Insurance (Over 5 Years)$5,125 4,375
Lifetime Service Costs (Over 5 years)1,750 1,125
Cost of Gas Required (Over 5 years)* 27,720 18,480
Cash Expended$34,595 $28,280
*Old Car = 22,000 km/100 litres*8 litres per 100 km*5 years* $2.10
per litre
New Car = 22,000 km/100 litres*12 litres per 100 km *5 years*
$2.10 per litre
Financially it is worth it to buy the new car given the cost savings over the five year period that
the car will owned. Additional financial considerations may include (but are not limited to) the
likelihood that gas prices will be at the estimated level, the potential that you may drive
more/less, and the resale value of the existing car. Non-financial considerations include (but are
not limited to) the styling of the car, safety features, and the functionality (i.e. if one is a small
car and the other a large SUV and you require additional space for transporting people/objects).
E1-13.
The questions that could come to mind as one reads financial statements are unlimited. Any
questions at this stage of the book are valid and reasonable. The key is to try to identify what
types of users of the financial statements were envisioned when they were prepared, and what
decisions the users would make. The questions then should focus on why the information in the
financial statements might be relevant to these decisions.
Copyright © 2010 McGraw-Hill Ryerson Ltd.
John Friedlan, Financial Accounting: A Critical Approach, 3e
3
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