Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition Solutions Manual 1-1 Chapter 1 Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited. CHAPTER 1 THE PURPOSE AND USE OF FINANCIAL STATEMENTS LEARNING OBJECTI VES 1. Identify the uses and users of accounting information. 2. Describe the primary forms of business organization. 3. Explain the three main types of business activity. 4. Describe the purpose and content of each of the financial statements. SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT Questions 1. 1 K 6. 2 C 11. 3 C 16. 4 K 21. 4 C 2. 1 C 7. 2 C 12. 3 C 17. 4 AP 22. 4 C 3. 1 K 8. 2 C 13. 3 C 18. 4 C 23. 4 K 4. 1 C 9. 2 C 14. 3 C 19. 4 K 5. 1 C 10. 2 K 15. 4 K 20. 4 C Brief Exercises 1. 1 C 3. 3 C 5. 4 AP 7. 4 K 9. 4 C 2. 2 K 4. 3 C 6. 4 AP 8. 4 K 10. 4 AN Exercises 1. 1 C 4. 3 C 7. 4 AN 10. 4 AP 13. 4 AP 2. 2 C 5. 4 K 8. 4 AN 11. 4 AP 14. 4 AN 3. 3 K 6. 4 AP 9. 4 AP 12. 4 AP Problems: Set A and B 1. 1 C 3. 3 C 5. 4 AP 7. 4 AP 9. 4 AN 2. 2 C 4. 4 K 6. 4 AN 8. 4 AN 10. 4 AN Cases 1. 4 AN 3. 4 AN 5. 4 AN 7. 1,2,3,4 C 2. 4 AN 4. 1,2 C 6. 1 E A+ Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition Solutions Manual 1-2 Chapter 1 Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited. Legend : The following abbreviations will appear throughout the solution s manual file. LO Learning objective BT Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation Difficulty : Level of difficulty S Simple M Moderate C Complex Time: Estimated time to prepare in minutes AACSB Association to Advance Collegiate Schools of Business Comm unication Communication Ethics Ethics Analytic Analytic Tech. Technology Diversity Diversity Reflec. Thinking Reflective Thinking CPA CM CPA Canada Competency cpa-e001 Ethics Professional and Ethical Behaviour cpa-e002 PS and DM Problem -Solving and Decision -Making cpa-e003 Comm . Communication cpa-e004 Self-Mgt. Self-Management cpa-e005 Team & Lead Teamwork and Leadership cpa-t001 Reporting Financial Reporting cpa-t002 Stat. & Gov. Strategy and Governance cpa-t003 Mgt. Accounting Management Accounting cpa-t004 Audit Audit and Assurance cpa-t005 Finance Finance cpa-t006 Tax Taxation A+ Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition Solutions Manual 1-3 Chapter 1 Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited. ANSWERS TO QUESTIONS 1. Accounting is the information system that identifies and records the economic events of an organization, and then communicates them to a wide variety of interested users. LO 1 BT: K Difficulty : S TIME : 3 min. AACSB: None CPA: cpa -t001 CM: Reporting 2. (a) Internal users of accounting information work for the company and include finance directors, marketing managers, human resource personnel, production supervisors, and company officers. Internal users have access to company informati on that is not available to external users. (b) Some external users may be individuals who are employees of the company but are not directly involved in managing the company. External users of accounting information generally do not work for the company. The primary external users are investors, lenders, and other creditors. Other external users include labour unions, customers, the Canada Revenue Agency (CRA), and securities commissions. LO 1 BT: C Difficulty: M TIME : 5 mi n. AACSB: None CPA: cpa -t001 CM: Reporting 3. Internal users may want the following questions answered: • Is there enough cash to purchase a new piece of equipment? • What price should we sell our product for to cover costs and to maximize net income ? • How many employees can we afford to hire this year? • Which product line is the most profitable? • How much of a pay raise can the company afford to give me? External users may want the following questions answered: • Is the company earning enough to give me my req uired return on investment? • Will the company be able to repay its debts as the debts come due? • Will the company stay in business long enough to service the products I buy from it? LO 1 BT: K Difficulty: M TIME : 5 min. AACSB: None CPA: cpa -t001 CM: R eporting A+ Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition Solutions Manual 1-4 Chapter 1 Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited. 4. Primary users of accounting information include investors, lenders , and creditors. These external users need to make decisions concerning their ongoing business relationship with the company . They need to be able to assess the company’s performance and financial health because they intend to start, continue , or discontinue having transactions with the company. Other decision makers who have specific needs for certain financial information, such as the amount of taxes paid by the company , are not considered primary users. LO 1 BT: C Difficulty: M TIME : 5 min. AACSB: None CPA: cpa -t001 CM: Reporting 5. Decision makers rely on financial statement information and expect the accounting information to have been prepared ethically. W ithout the expectation of ethical behaviour, the information presented in the financial statements would have no credibility for the users of the accounting information . Without credibility, financial statement information would be useless to financial statement users. LO 1 BT: C Difficulty: M TIME : 5 min. AACSB: None Ethics CPA: cpa -t001 CM: Reporting and Ethics 6. (a) Proprietorship: Proprietorships are easier to form (and dissolve) than other types of business organizations. They are not taxed as separate entities; rather , the proprietor pays personal income tax on the company’s net income . Depending on the circumstances, this may be an advantage or disadvantage. Disadvantages of a proprietorship include unlimited liability (proprietors are personally liable for all debts of the business) and difficulty in obtaining financing compared to other forms of organization. In addition, the life of the proprietorship is limited as it is dependent on the willingness and capability of the proprietor to continue operations. A+
