Solutions manual
For
Financial accounting: Reporting, analysis and decision making
6th Edition (Australian)
by Carlon et al. Chapter 1: An introduction to accounting 1.1 Chapter 1: An introduction to accounting Assignment classification table Learning objectives Brief exercises Exercises Problems 1.Explain the business context and the
need for decision making.1 2.Define accounting, describe the
accounting process and define the
diverse roles of accountants.1 3.Explain the characteristics of the main
forms of business organisation.1 1A,1B 4.Understand the Conceptual Framework
and the purpose of financial reporting.
5.Identify the users of financial reports and
describe users’ information needs.3 1 2A; 2B 6.Identify the elements of each of the four
main financial statements.4,5,6 1,2,3,4,5, 7, 8,9,10 3A,4A,5A,6A 7A,8A,3B,4B 5B,6B,7B,8B 7.Describe the financial reporting
environment.2 8.Explain the accounting concepts,
principles, qualitative
characteristics and constraints
underlying financial
statements6 3A, 3B 9.Calculate and interpret ratios for
analysing an entity’s
profitability, liquidity and solvency.7 11,12,13 9A,10A 9B,10B . Solutions manual to accompany Financial accounting: Reporting, analysis and decision making 6e 1.2 Solutions to questions 1.1. The first step in the process of decision making is to identify the issue or the decision to be made. The next step is to gather the relevant information required for the analysis. Once gathered, you then identify the tool or technique that can provide the analysis of the issue so a decision may be made. The final step is to evaluate the results of the analysis and make the decision. The primary function of accounting is to relevant information to aid in making a business decision. 1.2. When running a business most of your actions require decisions. Beginning with deciding which is the most suitable business structure and where are you going to locate your business and are you going to have an online presence as well, how are you going to fund your activities (borrow or have equity investors), how many employees do you need and what level of inventory is required to name a few decisions. When starting a new business deciding on the suitable accounting system and information system is important. Are you intending to have EFTPOS? Are you going to have online sales? Etc. 1.3. Advantages of company structure are limited liability (shareholders not being personally liable for corporate debts), indefinite life, easy transferability of ownership (through selling shares) , and greater ability to raise funds. Disadvantages of a company are the establishment costs and ongoing fees and increased government regulations. 1.4. External users are those outside the business who have an interest in knowing about the activities of the entity as resource providers, recipients of goods or services or parties performing a review of oversight function. Examples include investors, creditors such as banks and suppliers, taxing authorities, regulatory agencies, trade unions and customers. 1.5. (a)Statement of profit or loss .
(b)Statement of financial position .
(c)Statement of financial position .
(d)Statement of profit or loss .
(e)Statement of financial position .
(f)Statement of financial position .
1.6. The Conceptual Framework consists of a set of concepts to be followed by preparers of financial statements and standard setters. The Conceptual Framework provides guidance to preparers of financial information by defining who is required to report and who the users are likely to be. . Chapter 1: An introduction to accounting 1.3 1.7. It is important to determine if a business is a reporting entity as it is only reporting entities that are required to prepare general purpose financial reports in accordance with the accounting standards. Three main indicators determine which of the forms of business organisation fall into the category of a reporting entity. That is, an entity is more likely to be classified as a reporting entity if it is (1) managed by individuals who are not owners of the entity, (2) politically or economically important, and (3) sizable in any of the following ways — sales, assets, borrowings, customers or employees. 1.8. The three categories in the statement of cash flows are operating activities, investing activities and financing activities. The categories were chosen because they represent the three principal types of business activity. 1.9. Retained earnings is the profit retained in a company. Retained earnings is increased by profit and is decreased by dividends and by losses. 1.10. The going concern principle lends credibility to the cost principle; otherwise items would be reported at liquidation value. By assuming the entity will continue to operate, assets can continue to be reported at cost because they are expected to bring benefits to the business through use even though they may have little or no resale value. 1.11. Rose Ena is correct. Comparability means that financial statements can be compared between companies and over time. Using the same accounting principles and accounting methods from period to period with a company, facilitates comparability. When accounting methods are inconsistent, it is difficult to determine whether a company is better off, worse off or the same from period to period. 1.12. A company’s operating cycle is the average time taken to acquire goods and services and convert them to cash in producing revenues . 1.13. (a) Tia is not correct. There are three characteristics: • liquidity • profitability • solvency. (b) The three parties are not primarily interested in the same characteristics of a company. Short-term creditors are primarily interested in the liquidity of the business. In contrast, long -term creditors and shareholders are primarily interested in the profitability and solvency of the company. However, they may use the same financial statements as a source of information. 1.14. (a) The increase in profit margin is good news because it means that a larger percentage of profit is generated for each dollar of net sales. (b) An increase in the current ratio generally signals good news because the company improved its liquidity. (c) The decrease in the debt to total assets ratio is good news because it means that the company has decreased the proportion of assets funded by creditors, thus reducing risk of being unable to repay debt. (d) An increase in current cash debt coverage ratio is good news because it means that the company has increased its ability to meet short -term obligations. The higher the current cash debt coverage the more favourable is the liquidity of the business. .
