CHAPTER 2Financial Statements: A Window on an EntityEXERCISESE2-1.Assets = Liabilities + Owners’ EquitySituation 1 $425,000 $236,000 $189,000Situation 2 1,350,000 730,000 620,000Situation 3 200,000 50,000 150,000Situation 4 420,000 70,000 350,000E2-3.Current assets are assets that will be used up, sold, or converted to cash within one year or oneoperating cycle. Current liabilities will be paid or satisfied within one year or one operatingcycle. 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 isan 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 exceptionwould 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’sexpected that the loan won’t have to be repaid within a year, the loan would be classifiedas 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.E2-5Speers Ltd.Income StatementFor the year ended December 31, 2013Revenue $4,500,000Expenses 3,750,000Net Income $ 750,000Speers Ltd.Statement of Comprehensive IncomeCopyright © 2010 McGraw-Hill Ryerson Ltd.John Friedlan, Financial Accounting: A Critical Approach, 3e1For the year ended December 31, 2013Net Income $750,000

Other Comprehensive Income 75,000Comprehensive Income $825,000E2-7.RetainedEarnings August 1, 2010 $ - August 1, 2011$97,500 August 1, 2012$261,500+Net Income 97,500 Net Income 189,000 Net Income225,000- Dividends - Dividends (25,000) Dividends (40,000)RetainedEarnings July 31, 2011 $97,500 July 31, 2012$261,500 July 31, 2013$446,500Minden CorporationStatement of Retained EarningsFor the year ended July 31, 2013Retained Earnings, August 1, 2012 $ 261,500Net income for the year 225,000Less dividends (40,000)Retained Earnings, July 31, 2013 $ 446,500Note: The fact each shareholder invested $50,000 each is irrelevant because it’s included in thecommons shares account not retained earnings.E2-9a. Operatingb. Operatingc. Operatingd. Financinge. Operatingf. Investingg. FinancingE2-11Selkirk CorporationSummarized Income Statement and Balance SheetsFor December 31,2014 2013 2012Revenues $478,000 $412,500 $375,000Copyright © 2010 McGraw-Hill Ryerson Ltd.John Friedlan, Financial Accounting: A Critical Approach, 3e2Expenses 327,000 290,000 297,000Net income 151,000 122,500 78,000Retained earnings at the beginning

of the year165,500 68,000 0Dividends declared during the year 129,000 25,000 10,000Retained earnings at the end of theyear187,500 165,500 68,000Capital stock at the end of the year 180,000 150,000 100,000Liabilities at the end of the year 300,000 280,000 225,000Assets at the end of the year 667,500 595,500 393,000E2-13.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 equityinvestors.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 forresale it would be an operating item. However, since it was purchased to decorate an officethe amount is an investing activity.)e. Investing cash inflow since a long-term asset decreases. This assumes that Argentia isn’t avehicle dealer (in which case the amount would be an operating item). The assumption seemsreasonable 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 contributesto revenueE2-15Dugald Ltd.Statement of Cash FlowsFor the year ended December 31, 2015Cash from Operations $658,000Cash used for Investing Activities* (355,000)Cash from Financing Activities** (35,000)Increase in Cash During 2015 268,000Cash on December 31, 2014 125,000Cash on December 31, 2015 $393,000*Cash from investing activities = Sale of computer equipment: 125,000 - Purchase ofmarketable securities: 480,000Copyright © 2010 McGraw-Hill Ryerson Ltd.John Friedlan, Financial Accounting: A Critical Approach, 3e3

**Cash from financing activities = New bank loan: 300,000 - Repayment of mortgage:335,000E2-17Balance Sheet (B/S); Income Statement (I/S); Statement of Retained Earnings/Statement ofShareholders’ 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 StatementFor the Year Ended September 30, 2013Revenue $495,000Cost of Sales 34,000Gross Margin 461,000ExpensesDepreciation expense$22,500General and administrative expenses139,000Interest expense 27,000Marketing and promotion expense 15,000Research expense 50,000Salaries and wage expense 97,500Selling expenses 35,000Income tax expense 41,000427,000Net Income $34,000b. Net income is $34,000.c. Gross margin is $461,000.d. Gross margin percentage is 93% ($461,000/$495,000))Copyright © 2010 McGraw-Hill Ryerson Ltd.John Friedlan, Financial Accounting: A Critical Approach, 3e4E2-21.

Lunenberg Ltd.Income Statement Prepared Using the Cash Basis of AccountingCash collected from customers $206,500Amounts paid to suppliers (60,725)Amount paid to employees = $30,625 +1,750 (32,375)Income taxes (13,125)Cash basis net income $ 100,275Lunenberg Ltd.Income Statement Prepared Using the Accrual Basis of AccountingRevenue ($206,500+19,600) $226,100Cost of Supplies ($60,725 + 14,175 – 4,900) (70,000)Wages expense ($30,625 + 3,850 – 1,750) (32,725)Depreciation expense (7,000)Income taxes (13,125)Accrual basis net income $103,250The two bases of accounting provide different results because expenses and revenues arerecognized in different periods. The calculation of the cost of supplies under the accrual systemis tricky. The $4,900 of supplies on hand isn’t expensed because it was on hand (and therefore anasset) at the end of the period. Advances paid to employees are not reflected in the accrualincome statement because it’s for work that will be done in the future. Therefore, the amount isclassified as an asset until the work is provided.Copyright © 2010 McGraw-Hill Ryerson Ltd.John Friedlan, Financial Accounting: A Critical Approach, 3e5PROBLEMSP2-1.Auberndale Ltd.Balance SheetsAs at December 31(in thousands of dollars)2014 2013 2012Current AssetsCash $ 3,570 $ 5,856 $ 1,428Accounts Receivable 11,067 9,996 8,925Inventory 19,635 15,708 14,280Prepaid Assets 1,071 357 714Total Current Assets 35,343 31,917 25,347Land 4,463 4,463 4,462Plant & Equipment 26,775 24,633 21,777Accumulated Depreciation (13,209) (11,067) (9,639)Other Assets 1,643 2,925 3,656Total Non-Current Assets 19,672 20,954 20,256Total Assets $55,015 $52,871 $45,603Current Liabilities

Accounts Payable $10,710 $10,352 $8,211Bank Loan Payable 1,193 3,084 1,428Total Current Liabilities 11,903 13,436 9,639Mortgage Payable 6,069 7,065 7,854Total Liabilities 17,972 20,501 17,493Shareholders’ EquityCommon Shares 6,784 6,144 6,069Retained Earnings 30,259 26,226 22,041Total Shareholders’ Equity 37,043 32,370 28,110Total Liabilities and Shareholders’ Equity $55,015 $52,871 $45,603Auberndale Ltd.Income StatementFor the Year Ended December 31(in thousands of dollars)2014 2013 2012Sales Revenue $89,250 $80,325 $73,185Cost of Goods Sold 62,474 55,335 49,979Gross Margin 26,776 24,990 $23,206ExpensesCopyright © 2010 McGraw-Hill Ryerson Ltd.John Friedlan, Financial Accounting: A Critical Approach, 3e1Selling 11,067 9,818 8,925Administrative 5,355 4,998 4,820Amortization 2,321 1,785 1,428Interest 893 1,356 1,428Total Expenses 19,636 17,957 16,601Income Before Income Taxes 7,140 7,034 6,605Income Taxes 2,714 2,456 2,057Net Income $4,426 $4,578 $4,548Auberndale Ltd.Statement of Retained EarningsFor the Year Ended December 31(in thousands of dollars)2014 2013 2012Retained Earnings, Beginning of year $26,226 $22,041 $17,850Net Income 4,426 4,578 4,548Dividends 393 393 357Retained Earnings, End of year $30,259 $26,226 $22,041b. It’s difficult to make much of an assessment of a loan application when virtually nothing isknown about the prospective borrower. The financial statements tell us that Auburndale Ltd.has been profitable over the last three years and the profits have been stable. However, saleshave increased significantly over the three years but profits haven’t kept up. There is nodramatic proportional change in any of the expenses so a more detailed examination of theindividual expenses is needed to understand the decline in profitability. The gross margin

percentage has declined very slightly over the three years (30% in 2014, 31.1% in 2013, and31.7% in 2012). The liquidity position of Auburndale seems reasonable, with a lot morecurrent assets than liabilities. Also, Auburndale Ltd. doesn’t appear to have an excessiveamount of debt. Ratios such as the current ratio and debt-to-equity ratio could be calculatedto support these comments.Different conclusions are possible. Any conclusion that is drawn should be supported by theexplanation provided. At best only a preliminary conclusion can be drawn because there aremany unanswered questions.Additional information includes: What business is Auburndale Ltd. in? What will the money be used for? How long will the loan be for? What are projected cash flows for the term of the loan? When is the loan to be paid off? What assets are available as collateral? What are their market values? Are there any changes expected in the near future that will change the

nature orperformance of the business?Copyright © 2010 McGraw-Hill Ryerson Ltd.John Friedlan, Financial Accounting: A Critical Approach, 3e2

If cash is needed for investment why are dividends being paid? Why has profit decreased somewhat when sales have increased 11.1%

from 2012to 2014? Why has the gross margin percentage been decreasing? Why has inventory increased by so much? Anticipated growth, expansion,

orinventory that can’t be used? Who are the managers and what is known about them? Other points can be raised.

P2-3Hanmer LtdStatement of IncomeFor the year ended December 31,2013 2012Revenue $3,160,000 $2,851,000Cost of Sales 1,200,000 1,040,000Gross Margin 1,960,000 1,811,000

ExpensesAdvertising and promotion 270,000 250,000General and Admin 321,000 301,000Miscellaneous 52,000 64,000Rent 58,000 55,000Salaries, wages andcommissions 485,000 450,000Utilities 15,800 15,200Income taxes 187,500 148,000Total Expenses 1,389,300 1,283,200Net Income $570,700 $527,800b) Gross Margin % 62.0% 63.5%c) Revised Gross Margin $2,006,600Revised Net Income $ 617,300• Calculation of revised gross margin and net income is basedon rounded gross margin of 63.5%.• Revised GM = $3,160,000 0.635P2-5To qualify as an asset according to IFRS, the following criteria must be satisfied:• Provide future benefitCopyright © 2010 McGraw-Hill Ryerson Ltd.John Friedlan, Financial Accounting: A Critical Approach, 3e3

• Be reasonably measurable• Entity has control or use of asset to make money• Result of a past transactiona. Parts used to make computers are assets because they were purchased at one point in time(arise from a past transaction), the cost of the parts is determinable (from invoices fromsuppliers), are controlled by the entity (they are used by the company in a way it deemsappropriate), and will provide a future benefit (by being built into computers that will be sold).b. Large sign outside the facility with the company’s name is an asset as it was purchased at onepoint in time (arises from a past transaction), is controlled by the entity, provides a future benefit(it informs potential customers of the entity’s location and provides advertising) and the cost ofthe sign is measureable.c. Defective parts that must be disposed of aren’t assets because they provide no future benefitsince they can’t be sold or included in computers that will be sold (in other words, they’re

garbage (or perhaps can generate a small amount as scrap). The defective parts are under thecontrol of the entity, they’re cost can be determined, and they arise from a past transaction butthey aren’t assets because they have no future benefit.d. A building is an asset as the entity has control of its use, it’s the result of a past transaction asit would have been purchased at one time, it provides a future benefit in that the company canuse it to run its operations and perform tasks that will ultimately create revenue, and its cost canbe determined.e. Insurance paid in advance is an asset because it arises from a past transaction (it waspurchased), is under the control of the entity (the entity would be the beneficiary should anythinghappen to the facility), the cost of the policy is easily determined, and it provides a future benefit(the entity is protected in the event of theft or fire and will recover amounts lost).f. Money owed by customers is an asset because it’s the result of a past transaction (the customermade a purchase), the entity has control over the rights to receive this money, the amount owedis measureable, and it provides a future benefit as the company is entitled to receive cash.P2-7.a.Nathan ReedBalance SheetAssets Liabilities and Owners’ EquityCash $ 844 Accounts payable $ 200Accounts receivable 750 Bank loan 2,000Computer 1,200 Total liabilities 2,200Car 1,800Personal property 6,000 Owners’ equity 8,394Total assets $ 10,594 Total liabilities and owners’ equity $ 10,594This balance sheet is prepared on the following assumptions and rationale. However, there areother reasonable assumptions that could be made for this statement.i. Cash can be used to buy things that Nathan needs; thus will be a future benefit to him.Copyright © 2010 McGraw-Hill Ryerson Ltd.John Friedlan, Financial Accounting: A Critical Approach, 3e4

ii. The used car is a benefit for Nathan because he can use it to drive around and do things. Hepurchased it three years ago and estimates it’s going to be useful for another two years. Thecar is depreciating at $900 a year ($4,500/5) or Nathan is using up $900 of value from the careach year; thus, the car net value is $1,800 (two years left). This amount, however, doesn’trepresent the amount Nathan could obtain by selling the car.iii. Nathan has the right to receive $750 from the social group; this right is a benefit to Nathan.iv. Nathan has an obligation to give up $2,000 of his cash asset sometime in the future; thisobligation increases Nathan’s liabilities.v. The computer purchased is a benefit to Nathan because he will be able use it for personal useand school, so it’s an asset. The $700 he paid decreased his cash but this amount was paidseveral months ago before his bank balance was determined, therefore it has no effect on hiscurrent bank balance. The total debt was $500 at purchase time six months ago. He has paid$300 for the six months period. He still has a current obligation to pay $200 over the nextfour months, which is a liability. The amount shown for the computer doesn’t give anindication of how much it could be sold for or would cost to replace.vi. The cost of his personal property was $6,000 which benefits Nathan in many different ways,thus increase in his assets. There is no information given to when he has purchased theseitems or how long these items will be benefit to him.Nathan’s equity in his assets is determined by subtracting the amount of liabilities from theamount of assets.b. One possible response: alternate assumptions and viewpoints are possible. The art schoolwould use the information in the balance sheet to assess whether Nathan requires financialassistance to attend the school, since the amount of the scholarship is based on theirperception of his financial need. The balance sheet does provide information on his currentfinancial position. The cash inflow from the collection of the account receivable will increase

the cash balance to $1,594. The computer won’t provide cash, but it does probably indicatethat Nathan’s computing needs are met for the duration of his program. The school may viewthe car as a luxury and suggest that it be sold to provide cash. The personal possessions reallydon’t indicate much relevant information because we don’t know their age or condition. Onemight assume that they could not be sold for a significant amount of cash and that the booksare not relevant to the art program.The response of the art school to Nathan’s financial obligations depends on whether they areaware of the repayment arrangements that he has made. Without additional information, itappears that Nathan will be required to pay $2,200 in the near future. In fact, only the $200must be paid before graduation and will be paid off in 4 months. The point illustrates theneed to ask questions to avoid being misled.Copyright © 2010 McGraw-Hill Ryerson Ltd.John Friedlan, Financial Accounting: A Critical Approach, 3e5It’s really not helpful to consider that Nathan has $8,394 in equity, particularly since noadjustment has been made to reflect the fact that the computer is six months old. The value ofhis personal possessions is questionable.c. The important thing to understand in this question is the balance sheet doesn’t tell the wholestory and to make informed decisions a user should search or inquire to obtain moreinformation. Many additional items of information would be helpful. The balance sheet onlyindicates his current financial position, but don’t indicate expected cash receipts andpayments during the time he is a student. This balance sheet also doesn’t indicate the cashvalue of the assets, which could be relevant. The school would want to know what expensesNathan would incur. They would already be aware of the school-related costs such as tuition,books, and art supplies. They would also need to know his budget for accommodation, food,clothing, transportation, and other expenses. They would also ask about any income that he

expects to earn during the duration of the degree, as well as what financial support isexpected from other sources such as family members or other scholarships.P2-9.a.Louis Davis Dental PracticeBalance SheetAssets Liabilities and Owners’ EquityCash $ 4,750 Accounts payable $ 12,000Accounts receivable 19,000 Wages payable2,500Supplies 750 Bank loan 10,000Furniture 13,200 Total liabilities 24,500Equipment 33,333 Owners’ equity 46,533Total assets $71,033 Total liabilities and Owners’ equity $ 71,033i. Equipment: This equipment has and is providing a benefit to the practice by providing theresources needed to do his work. Two thirds of the estimated life of this asset has been used upleaving a current benefit of one third of the life of the assets (1/3 x 100,000), thus there is acurrent benefit value of the asset of $33,333 not used up. This isn’t the same as the market valueof the equipment. These are resources that belong to the practice so the amount is also reflectedon the right-hand side of the balance sheet in either equity or liabilities.ii. Furniture: This furniture has and is providing a benefit to Louis and his dentist practice. Fortypercent of the estimated life of this asset has been used up leaving a current benefit of sixtypercent of the life of the assets (.6 x 22,000), thus there is a current benefit value of the asset of$13,200 not used up. Again, the amount isn’t the same as the market value. These are resourcesthat belong to the practice so the amount is also reflected on the right-hand side of the balancesheet in either equity or liabilities.iii. Accounts receivable: Louis has a right to receive $19,000, which is an asset.Copyright © 2010 McGraw-Hill Ryerson Ltd.John Friedlan, Financial Accounting: A Critical Approach, 3e6iv. Accounts payable: This represents an obligation for Louis to give up $12,000 in cash infuture, which is a liability.

v. Cash: Cash can be used to buy things the practice needs and thus provides future benefits.vi. Wages payable: This is a liability for Louis to pay $2,500 in cash in two weeks.vii. Bank loan: This is liability for Louis to pay $10,000 in the future.viii. Supplies: These supplies will be used to provide services to customers and so is an asset tothe practice.b. One possible response: alternative interpretations are possible. The judge would use theinformation in the balance sheet to determine Louis’ wealth in the practice. The balance sheetseems to indicate that his equity in the business is worth $46,533, but that is likely to be verymisleading. The equipment and furniture are likely to be worth a different amount than whatis reported on the balance sheet. The value on the balance sheet is the net book value of thefurniture and equipment and represents an amount of how an asset has provided benefit to thebusiness not what the asset can be sold for or value of asset. An appraisal of the equipmentand furniture would provide more relevant information to determining value and sellingprice. The balance sheet also doesn’t capture Louis’ value to the practice.c. The important thing to understand in this question is that the balance sheet doesn’t tell thewhole story and to make informed decisions a stakeholder should search or inquire to obtainthe information they require. (An important step in this process is understanding theinformation being received.) Many additional pieces of information would be helpful. Thebalance sheet indicates the current financial position of the business, but doesn’t reflect thevalue that has been created by building a reputation, the value of the patient list and location,and the value of Louis to the practice. We would also like to know how much cash has beentaken out of the business this year since Louis might have anticipated the purpose of theinformation request and skimmed off assets to reduce the appearance of wealth and obtain alower settlement. We might wonder if he expects to collect 100% of the accounts receivable,

whether he has done work for anyone that he has not included in accounts receivable becausethey haven’t been billed, or if he has done any work for cash or on a barter basis that hasn’tbeen recorded.P2-11Belinda’s Cart BusinessIncome Statement for NovemberCash Basis Accrual BasisRevenue ($4,150+1,000) $5,150 ($4,150+700) $4,850Cost of Sales 2,500 1,750Gross Margin 2,650 3,100Copyright © 2010 McGraw-Hill Ryerson Ltd.John Friedlan, Financial Accounting: A Critical Approach, 3e7ExpensesWages 850 (850-150+200) 900Mall Rent 500 (500/2) 250Advertising 751,350 1,225Net Income $1,300 $1,875Differences between the cash and accrual method are a result of:• Credit sales which are included under the accrual method, but not under the cash method• Cash collected from prior months sales, which are included under the cash method and not theaccrual method• Supplies purchased but not sold, which are included under the cash method but not the accrualmethod• Supplies sold but not paid for, which are included under the accrual method but not the cashmethod• Wages paid for prior months work are included under the cash method but not the accrualmethod• Wages not paid but owed for work in November are included under the accrual method but notthe cash method• Mall rent (fees paid for operating the cart) are fully included under the cash method, but onlypartially included under the accrual method ($500 rent was paid for 2 months = $250 permonth)• Advertising was done in November but paid until December is included under the accrualmethod but not the cash method

P2-13Balance Sheet as of September 30Assets Liabilities and Shareholder’s EquityCash $ 4,000 Bank loan $ 8,000Accountsreceivable 1,200Accounts payable 2,100Inventory 5,000 Unearned revenue 1,000Furniture &Fixtures 9,000 Common shares 4,000Retained Earnings 4,100$19,200 $19,200Asset Side: Liability and Shareholder's Equity Side-Add furniture and fixtures -Remove accounts receivable-Remove accounts payable-Subtract dividends from retained earnings(retained earnings = net income – dividend = $5,200 - $1,100)-Add accounts receivable -Add accounts payableCopyright © 2010 McGraw-Hill Ryerson Ltd.John Friedlan, Financial Accounting: A Critical Approach, 3e8-Remove dividend paid -Add customer deposit-Add cash received for depositsP2-15.TransactionRevisedcurrentratioEffecton thecurrentratioReviseddebttoequityratioEffecton thedebt-toequityratioRevisedcurrentassets$1,200,000Revised

currentliabilities$960,000Revisedtotalliabilities$2,000,000RevisedTotalequities$1,250,0001 Purchase ofinventoryfor $50,000cash. Theinventoryisn’texpected tobe sold untilafter theyear end.1.25 Noeffect1.60 Noeffect1,200,000 960,000 2,000,000 1,250,0002 Bonuses of$60,000cash arepaid toseniormanagers.(This one istricky. Thebonus is anexpense sobe sure toconsider theeffect of thetransactionon netincome andthe resultingimpact onequity.)

1.19 Decrease 1.68 Increase 1,140,000 960,000 2,000,000 1,190,0003 Dividendsof $50,000are declaredand will bepaid afterthe year end.(Once the1.19 Decrease 1.71 Increase 1,200,000 1,010,0002,050,000 1,200,000Copyright © 2010 McGraw-Hill Ryerson Ltd.John Friedlan, Financial Accounting: A Critical Approach, 3e9dividendshave beendeclaredthey becomea liabilitycalleddividendspayable.)4 Repaymentof $150,000on a longtermloan.1.30 Increase 1.48 Decrease 1,050,000*810,000 1,850,000 1,250,0005 A $55,000loan isarrangedand the cashobtained.The loanmust berepaid in 90days.1.24 Decrease 1.64 Increase 1,255,000 1,015,0002,055,000 1,250,000*Assumes the amount was classified as the current portion of the long-term loan.P2-17.Sudbury Ltd.Balance SheetAs of December 31, 2014

ASSETS LIABILITIES AND SHAREHOLDERS’EQUITYCurrent Assets Current LiabilitiesCash $4,000 Accounts payable $17,600Accounts receivable 32,000 Accrued liabilities 7,360Inventory 48,000 Salary and wages payable 2,400Prepaid assets 8,320 Income taxes payable 3,200Income taxes recoverable 4,960 Deposits from customers 4,000Loan to customer 4,000 Current portion of mortgage payable 8,000Other current assets 1,600Total current assets 102,880 Total current liabilities 42,560Property, plant and equipment 320,000 Mortgage payable 200,000Accumulated depreciation (120,000) Total liabilities 242,560Property, plant and equipment (net) 200,000Investments in shares 40,000 Common shares 240,000Patents 192,000 Retained earnings 60,070Copyright © 2010 McGraw-Hill Ryerson Ltd.John Friedlan, Financial Accounting: A Critical Approach, 3e10Other non-current assets 12,000 Accumulated other comprehensive income 4,250Total shareholders’ equity 304,320Total assets $546,880 Total liabilities and shareholders’ equity $546,880Sudbury, Ltd.Income StatementFor the period ending December 31, 2014Sales $480,000Interest revenue 3,520Total revenue 483,520Expenses:Cost of sales 152,000Promotion and advertising 12,000Depreciation 33,600Income tax 5,200Interest 16,800General and administrative 44,000Salaries and wages 67,200Other 8,000Research costs 122,000Fire loss 12,000Total expenses 472,800Net Income (loss) $10,720Sudbury, Ltd.Statement of Other Comprehensive IncomeFor the period ending December 31, 2014Net Income $10,720Other Comprehensive Income 2,100Comprehensive Income 12,820Sudbury Ltd.Statement of Retained Earnings

For the period ending December 31, 2014Retained earnings January 1, 2014 $53,350Net income 10,720Less dividends (4,000)Retained earnings December 31, 2014 $60,070P2-19.Copyright © 2010 McGraw-Hill Ryerson Ltd.John Friedlan, Financial Accounting: A Critical Approach, 3e11Note: The financial statements in Exhibit 2.5 are based on the format described in the IFRS. Theexhibit originally used the statements of Pernod Ricard SA but permission to use them wasn’tobtained so they were replaced. The company name used in this problem wasn’t changed toreflect the change in the text.IFRS SABalance SheetAs of June 30,2008 2007 2008 2007Cash and cash equivalents € 842 € 766 Current provisions € 574 € 710Current derivative instruments 38 102 Operating payables 3,300 3,548Other current assets 390 290 Income taxes payable 206 396Income taxes receivable 96 182 Other current liabilities 260 282Operating receivables 2,292 2,456 Other current financial liabilities 1,900 750Inventories 7,434 7,128 Current derivative instruments 54 32Total current assets 11,092 10,924 Total current liabilities 6,294 5,718Non-current assets Non-current provisions 934 1,068Intangible assets 14,276 15,672Provisions for pensions and other long-termemployee benefits 956 1,546Goodwill 6,406 6,954 Future income taxes 4,256 4,652Property, Plant and Equipment 3,216 3,350 Bonds 4,704 5,022Biological assets 132 120 Non-current derivative instruments 418 146Other non-current financialassets 290 242 Other non-current financial liabilities 6,106 7,876Investments in associates 6 4 17,374 20,310Deferred tax assets 1,444 1,678Total non-current assets 25,770 28,020 Shareholders' equityShare capital 682 680Additional paid-in capital 4,130 4,106Retained earnings and currency adjustments 6,350 6,132Net profit attributable to equity holders of the parent 1,678 1,662Shareholders' equity of the parent 12,840 12,580Minority interests 354 336Total shareholders equity 13,194 12,916Total assets € 36,862 € 38,944 Total liabilities and equity € 36,862 € 38,944The IFRS balance sheet is simply tipped over when compared with the traditional approachCanadian format. On the asset side, fixed assets are on the top and current assets on the bottom.

The more common arrangement is to have more liquid assets at the top. By placing these assetson top, users may focus on the more significant component of the asset pool. On the liabilitiesand equities side of the balance sheet, the equities are first instead of the more common situationof liabilities on top. Also, the most current year’s figures are also placed on the right instead ofthe left. This format is used in Europe. It’s hard to make a case that format makes a difference. ACopyright © 2010 McGraw-Hill Ryerson Ltd.John Friedlan, Financial Accounting: A Critical Approach, 3e12stakeholder with even a small amount of sophistication should be able to adapt to this somewhatdifferent format. There is certainly no more information in the revised statement than in the onepresented by the company. Different formats may cause stakeholders to focus on differentaspects of the statement.P2-21.a.Transaction Amount ClassificationCash from shareholders $450,000 FinancingMortgage 150,000 FinancingPurchase office building 500,000 InvestingCash from customers 600,000 OperatingCash paid for operating expenses 360,000 OperatingDividends paid 80,000 Financing or investingb.Markham Ltd.Statement of Cash FlowsFor the year ended August 31, 2013Cash provided by operating activitiesCash collected from customers $600,000Cash paid for operating expenses (360,000)Cash provided by operating activities 240,000Cash provided (used) by investing activitiesPurchase of office building (500,000)Cash provided (used) by financing activitiesInvestment by shareholders 450,000Borrowed from lender 150,000Dividends paid (80,000)Cash provided by financing activities 520,000Increase in cash during the year $260,000

c. The income statement and the statement of cash flows provide very different information.For example, it’s impossible to determine from the information given whether the companyearned a profit in this period. However, we do know that the operating activities of thecompany generated a positive cash flow, which is a positive sign. This means thatMarkham’s regular business activities generate cash which can be used for investment andfinancing (dividends, repayment of debt) purposes. What we don’t know is whether that wasaccomplished because selling price was much higher than cost or because the companyincreased current liabilities and decreased current assets. We can also see that the financingof the investment in the building was accomplished by an investment by the owners and alarge loan. While it’s possible to see some of this information from the balance sheet, the keyattribute of the cash flow statement is its focus on cash instead of on accrual accounting. TheCopyright © 2010 McGraw-Hill Ryerson Ltd.John Friedlan, Financial Accounting: A Critical Approach, 3e13income statement doesn’t focus on cash flows so net income doesn’t necessarily correspondto the amount of cash the company generated. So net income could be significantly differentfrom cash from operations because of how revenue is recognized and/or because of the termsof transactions (e.g. the company might provide customers with long-term financing onpurchases).Copyright © 2010 McGraw-Hill Ryerson Ltd.John Friedlan, Financial Accounting: A Critical Approach, 3e14P2-23..Economic Event Net income on thecash basisNet income on theaccrual basisa. Leon’s sells merchandise to a customeron credit.NoNo cash involved

YesSale has been completedb. Leon’s collects cash for goods that weresold last year.YesCash is collectedNoSale was in previousperiodc. Inventory Leon’s paid for last year issold in the current year.NoNo cash involvedYesExpense matched to saled. Dividends are declared and paid toshareholders.NoDividends are not anexpenseNoDividends are not anexpensee. Leon’s purchased and paid for inventoryin the current period but the inventory isunsold as of the year-end.YesCash paid outNoInventory is an asset untilsoldf. Leon’s depreciates a delivery truck. NoNo cash involvedYesMatching expense torevenue earnedP2-25.a. (Note: in the problem in the textbook the sum of the “what it cost” column is incorrect. Thecorrect total should be $12,050)Personal Balance SheetsCostReplacementCostSellingPrice

Assets:Cash $ 1,100 $ 1,100 $1,100Owed by employer 800 800 800Television 500 650 225Computer 1,200 900 300Furniture 3,200 3,800 1,700Books 750 875 300Clothes 1,600 1,950 300Stereo 900 1,100 700Jewellery 500 625 300Art 300 500 500Other 1,000 1,200 750Total assets $11,850 $13,500 $6,975Liabilities:Student Loans $ 7,500 $ 7,500 $ 7,500Loans from parents 3,000 3,000 3,000Total Liabilities $10,500 $10,500 $10,500Copyright © 2010 McGraw-Hill Ryerson Ltd.John Friedlan, Financial Accounting: A Critical Approach, 3e15My Equity $1,350 $3,000 ($ 3,525)Total Liabilities and Equity $11,850 $13,500 $ 6,975b. Each balance sheet gives different information and serves different purposes. The cost basedbalance sheet tells a reader the amount of money the student has “invested” in his or herpersonal life. The investment is simply the dollar amount spent. By deducting liabilities fromthe amount invested the student can get an idea of his or her interest, or equity, in thepersonal assets. In this case the student has a $1,300 interest in the assets. The remainingamount ($11,850 - $1,350) represents the interest of creditors. Other than this type ofanalysis, it’s difficult to identify a specific use for this cost-based information for assets. Theliabilities do provide useful information (give an indication of the amount of money thestudent owes, which might help the student assess how much additional borrowing the he orshe could support, whether a part-time job is needed, and so on). The cash and amount duefrom the employer give information about the liquidity of the student—the amount of cashand near cash the student has to meet his or her needs. Note that the information about liquid

assets (cash and amounts owed) and liabilities is common to all the statements.The second balance sheet, based on replacement cost, gives an indication of what it wouldcost to replace the assets owned by the student. The asset side of the balance sheet will beuseful for determining the amount of insurance the student would require for his or herbelongings. A problem with replacement cost measures is the difficulty with findingreplacement costs for items that are no longer available. For example, what is thereplacement cost for a 15 year old TV?The third balance sheet, based on selling price, gives a measure of the financial position ofthe student should he or she decide to sell off all the assets. In that case, the student wouldactually still owe money to creditors because selling off the assets would generate $6,975 incash whereas the student owes $10,500 for student loans and to parents. This is why theequity of the student is negative. A major difficulty with this statement is determining theactual amount that could be obtained by selling the assets. The amounts shown (except forcash and amount owed by employers) are guesses. The actual amount could deviatesignificantly because actual prices will depend on the condition of the goods, marketconditions, alternatives available to buyers, and the urgency of the seller. The student mightfind this statement useful if he/she was desperate for cash and needed to know how muchcould be raised.Note the appliances are not included in any of the balance sheets. The reason is that they areowned by the apartment building, not the tenant. However, information about the appliancesmight be relevant for some uses, like determining the amount of insurance you need.c. Actually, none of these balance sheets exactly fit the requirements of IFRS although the oneclosest is the one based on cost. As noted in the chapter, the basis for recording under IFRS isthe transaction value, in the case of the assets listed above, the cost or amount paid for them

(although IFRS does allow net realizable value to be used for certain capital assets). Cash isrecorded at its nominal amount and the amount owed by the employer is stated at the owedCopyright © 2010 McGraw-Hill Ryerson Ltd.John Friedlan, Financial Accounting: A Critical Approach, 3e16amount. The liabilities would be stated at the amounts owed. However, according to IFRS,most of these assets should be depreciated to reflect their usage. Depreciation isn’t reflectedin any of the balance sheets.d. It’s rarely possible with accounting information to make a statement about which informationis best. Best must be assessed in relation to the purpose of the information. Differentinformation is required for different decisions.Copyright © 2010 McGraw-Hill Ryerson Ltd.John Friedlan, Financial Accounting: A Critical Approach, 3e17