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Chapter 2

Financial Accounting: A Critical Approach 3e _ Chapter 2 Answers

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Department
Accounting
Course Code
ACC 110
Professor
Else Grech

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CHAPTER 2
Financial Statements: A Window on an Entity
EXERCISES
E2-1.
Assets=Liabilities +Owners Equity
Situation 1 $425,000 $236,000 $189,000
Situation 2 1,350,000 730,000 620,000
Situation 3 200,00050,000 150,000
Situation 4 420,00070,000 350,000
E2-3.
Current assets are assets that will be used up, sold, or converted to cash within one year or one
operating cycle. Current liabilities will be paid or satisfied within one year or one operating
cycle. It’s assumed below that the period to be applied is one year.
a.Current asset, since the inventory is expected to be sold within one year.
b. Current liability, since these amounts must be paid within 60 days.
c.Current asset, since the amount is expected to be collected in less than one year.
d. Non-current asset, since the machines will be used for more than one year unless there is
an expectation that they will be replaced or sold within the year.
e.Non-current asset, since machines are used over more than one period. An exception
would be if there is an expectation that it will be sold soon.
f. Current liability, since the bank loan might have to be paid at any time. Even if it’s
expected that the loan won’t have to be repaid within a year, the loan would be classified
as current because it might have to be repaid.
g. Non-current asset, since we know it won’t be realized in cash in the next year.
h. Non-current liability, since it won’t be settled within a year.
E2-5
Speers Ltd.
Income Statement
For the year ended December 31, 2013
Revenue $4,500,000
Expenses3,750,000
Net Income$ 750,000
Speers Ltd.
Copyright © 2010 McGraw-Hill Ryerson Ltd.
John Friedlan, Financial Accounting: A Critical Approach, 3e
1
www.notesolution.com
Statement of Comprehensive Income
For the year ended December 31, 2013
Net Income$750,000
Other Comprehensive Income75,000
Comprehensive Income$825,000
E2-7.
Retained
Earnings August 1, 2010 $ - August 1, 2011
$97,50
0 August 1, 2012
$261,5
00
+
Net Income97,500 Net Income189,000 Net Income
225,00
0
-Dividends - Dividends (25,000) Dividends (40,000)
Retained
Earnings July 31, 2011 $97,500 July 31, 2012
$261,50
0July 31, 2013
$446,5
00
Minden Corporation
Statement of Retained Earnings
For the year ended July 31, 2013
Retained Earnings, August 1, 2012 $ 261,500
Net income for the year225,000
Less dividends (40,000)
Retained Earnings, July 31, 2013 $ 446,500
Note: The fact each shareholder invested $50,000 each is irrelevant because it’s included in the
commons shares account not retained earnings.
E2-9
a.Operating
b. Operating
c.Operating
d. Financing
e.Operating
f. Investing
g. Financing
E2-11
Selkirk Corporation
Summarized Income Statement and Balance Sheets
Copyright © 2010 McGraw-Hill Ryerson Ltd.
John Friedlan, Financial Accounting: A Critical Approach, 3e
2
www.notesolution.com
For December 31,
2014 2013 2012
Revenues$478,000 $412,500 $375,000
Expenses 327,000 290,000 297,000
Net income151,000 122,500 78,000
Retained earnings at the beginning
of the year
165,500 68,000 0
Dividends declared during the year129,000 25,000 10,000
Retained earnings at the end of the
year
187,500 165,500 68,000
Capital stock at the end of the year180,000 150,000 100,000
Liabilities at the end of the year300,000 280,000 225,000
Assets at the end of the year667,500 595,500 393,000
E2-13.
a.Operating cash outflow, since inventory is part of operating activities.
b. Financing or operating (IFRS allows both) cash outflow. Dividends are a payment to equity
investors.
c.Financing cash inflow, since the proceeds are received from a lender.
d. Investing cash outflow since a long-term asset increases. (If the furniture were purchased for
resale it would be an operating item. However, since it was purchased to decorate an office
the amount is an investing activity.)
e.Investing cash inflow since a long-term asset decreases. This assumes that Argentia isn’t a
vehicle dealer (in which case the amount would be an operating item). The assumption seems
reasonable given the amount received for the four delivery trucks.
f. Financing cash inflow since common shares increases.
g. Operating cash inflow since it’s a cash receipt from providing goods/services to clients.
h. Operating cash outflow since it’s an increase in a current asset for an expense that contributes
to revenue
E2-15
Dugald Ltd.
Statement of Cash Flows
For the year ended December 31, 2015
Cash from Operations $658,000
Cash used for Investing Activities*(355,000)
Cash from Financing Activities** (35,000)
Increase in Cash During 2015 268,000
Cash on December 31, 2014 125,000
Copyright © 2010 McGraw-Hill Ryerson Ltd.
John Friedlan, Financial Accounting: A Critical Approach, 3e
3
www.notesolution.com

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Description
CHAPTER 2 Financial Statements: A Window on an Entity EXERCISES E2-1. Assets = Liabilities + Owners Equity Situation 1 $425,000 $236,000 $189,000 Situation 2 1,350,000 730,000 620,000 Situation 3 200,000 50,000 150,000 Situation 4 420,000 70,000 350,000 E2-3. Current assets are assets that will be used up, sold, or converted to cash within one year or one operating cycle. Current liabilities will be paid or satisfied within one year or one operating cycle. Its assumed below that the period to be applied is one year. a. Current asset, since the inventory is expected to be sold within one year. b. Current liability, since these amounts must be paid within 60 days. c. Current asset, since the amount is expected to be collected in less than one year. d. Non-current asset, since the machines will be used for more than one year unless there is an expectation that they will be replaced or sold within the year. e. Non-current asset, since machines are used over more than one period. An exception would be if there is an expectation that it will be sold soon. f. Current liability, since the bank loan might have to be paid at any time. Even if its expected that the loan wont have to be repaid within a year, the loan would be classified as current because it might have to be repaid. g. Non-current asset, since we know it wont be realized in cash in the next year. h. Non-current liability, since it wont be settled within a year. E2-5 Speers Ltd. Income Statement For the year ended December 31, 2013 Revenue $4,500,000 Expenses 3,750,000 Net Income $ 750,000 Speers Ltd. 1 Copyright 2010 McGraw-Hill Ryerson Ltd. John Friedlan, Financial Accounting: A Critical Approach, 3e www.notesolution.com Statement of Comprehensive Income For the year ended December 31, 2013 Net Income $750,000 Other Comprehensive Income 75,000 Comprehensive Income $825,000 E2-7. Retained $97,50 $261,5 Earnings August 1, 2010 $ - August 1, 2011 0 August 1, 2012 00 + 225,00 Net Income 97,500 Net Income 189,000 Net Income 0 - Dividends - Dividends (25,000) Dividends (40,000) Retained $261,50 $446,5 Earnings July 31, 2011 $97,500 July 31, 2012 0 July 31, 2013 00 Minden Corporation Statement of Retained Earnings For the year ended July 31, 2013 Retained Earnings, August 1, 2012 $ 261,500 Net income for the year 225,000 Less dividends (40,000) Retained Earnings, July 31, 2013 $ 446,500 Note: The fact each shareholder invested $50,000 each is irrelevant because its included in the commons shares account not retained earnings. E2-9 a. Operating b. Operating c. Operating d. Financing e. Operating f. Investing g. Financing E2-11 Selkirk Corporation Summarized Income Statement and Balance Sheets 2 Copyright 2010 McGraw-Hill Ryerson Ltd. John Friedlan, Financial Accounting: A Critical Approach, 3e www.notesolution.com For December 31, 2014 2013 2012 Revenues $478,000 $412,500 $375,000 Expenses 327,000 290,000 297,000 Net income 151,000 122,500 78,000 Retained earnings at the beginning 165,500 68,000 0 of the year Dividends declared during the year 129,000 25,000 10,000 Retained earnings at the end of the 187,500 165,500 68,000 year Capital stock at the end of the year 180,000 150,000 100,000 Liabilities at the end of the year 300,000 280,000 225,000 Assets at the end of the year 667,500 595,500 393,000 E2-13. a. Operating cash outflow, since inventory is part of operating activities. b. Financing or operating (IFRS allows both) cash outflow. Dividends are a payment to equity investors. c. Financing cash inflow, since the proceeds are received from a lender. d. Investing cash outflow since a long-term asset increases. (If the furniture were purchased for resale it would be an operating item. However, since it was purchased to decorate an office the amount is an investing activity.) e. Investing cash inflow since a long-term asset decreases. This assumes that Argentia isnt a vehicle dealer (in which case the amount would be an operating item). The assumption seems reasonable given the amount received for the four delivery trucks. f. Financing cash inflow since common shares increases. g. Operating cash inflow since its a cash receipt from providing goods/services to clients. h. Operating cash outflow since its an increase in a current asset for an expense that contributes to revenue E2-15 Dugald Ltd. Statement of Cash Flows For the year ended December 31, 2015 Cash from Operations $658,000 Cash used for Investing Activities* (355,000) Cash from Financing Activities** (35,000) Increase in Cash During 2015 268,000 Cash on December 31, 2014 125,000 3 Copyright 2010 McGraw-Hill Ryerson Ltd. John Friedlan, Financial Accounting: A Critical Approach, 3e www.notesolution.com Cash on December 31, 2015 $393,000 *Cash from investing activities = Sale of computer equipment: 125,000 - Purchase of marketable securities: 480,000 **Cash from financing activities = New bank loan: 300,000 - Repayment of mortgage: 335,000 E2-17 Balance Sheet (B/S); Income Statement (I/S); Statement of Retained Earnings/Statement of Shareholders Equity (SSE); Statement of Cash Flow (C/F) a. Amounts owed by customers (accounts receivable) (B/S) b. Depreciation expense (I/S) c. Common shares (B/S) d. Services owed to customers (unearned revenue) (B/S) e. Delivery vehicles (B/S) f. Cash from operations (C/F) g. Dividends paid (C/F) if they were paid and declared in the same period (SSE) h. Cost of inventory sold to customers during the year (cost of sales) (I/S) E2-19. a. Sussex Ltd. Income Statement For the Year Ended September 30, 2013 Revenue $495,000 Cost of Sales 34,000 Gross Margin 461,000 Expenses $22,50 Depreciation expense 0 139,00 General and administrative expenses 0 Interest expense 27,000 Marketing and promotion expense 15,000 Research expense 50,000 Salaries and wage expense 97,500 Selling expenses 35,000 Income tax expense 41,000 4 Copyright 2010 McGraw-Hill Ryerson Ltd. John Friedlan, Financial Accounting: A Critical Approach, 3e www.notesolution.com
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