Solution Manual for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

solution Manual for Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition

CHAPTER 2

A further look at FINANCIAL STATEMENTS

Summary of Question TYPEs by STUDY Objective and Level of difficulty

Note: E = Easy M = Medium H = HardSUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Note: TF = True-False Ma = Matching

MC =Multiple ChoiceEx=ExerciseSAE = Short-Answer Essay

CHAPTER STUDY OBJECTIVES

1. Identify the sections of a classified statement of financial position. In a classified statement of financial position, assets are classified as current or non-current assets. In the non-current asset category, they are further classified as investments; property, plant and equipment; intangible assets and goodwill; or other assets. Liabilities are classified as either current or non-current. There is also a shareholders’ equity section, which shows share capital and retained earnings, among other equity items if any exist.

2. Identify and calculate ratios for analyzing a company’s liquidity, solvency, and profitability. Liquidity ratios, such as working capital and the current ratio, measure a company’s short-term ability to pay its maturing obligations and meet unexpected needs for cash. Solvency ratios, such as debt to total assets, measure a company’s ability to survive over a long period by having enough assets to settle its liabilities as they fall due. Profitability ratios, such as earnings per share and the price-earnings ratio, measure a company’s operating success for a specific period of time.

3. Describe the framework for the preparation and presentation of financial statements. The key components of the conceptual framework are (1) the objective of financial reporting; (2) qualitative characteristics of useful financial information, which include fundamental and enhancing characteristics and the cost constraint; (3) the going concern assumption underlying the accounting process; (4) elements of the financial statements; and (5) measurement of the elements of financial statements.

TRUE-FALSE STATEMENTS

1. Cash and office supplies are both classified as current assets.

2. Inventories and prepaid expenses are classified as long-term investments.

3. Long-term investments appear in the property, plant, and equipment section of the statement of financial position.

4. Special rights and privileges that provide a future economic benefit to the company are classified as intangible assets.

5. A liability is normally classified as a current liability if it is to be paid within the coming year.

6. Shareholders’ equity is divided into at least two parts: share capital and retained earnings.

7. All long-lived assets including land have estimated useful lives over which they are expected to generate revenue.

8. All long-lived assets are depreciated over their estimated useful lives.

9. Mortgages and pension liabilities are examples of non-current liabilities.

10. The investment classification on the statement of financial position normally includes investments that are intended to be held for a short period of time (less than one year).

11. Shareholders’ equity consists of two parts: common and preferred shares.

12. The main difference between intangible assets and property, plant, and equipment is the length of the asset’s life.

13. Listing assets and liabilities in reverse order of liquidity is not permitted in Canada.

14. The statement of financial position is normally presented as follows, when ordered in order of liquidity: Current assets, current liabilities, non-current assets, non-current liabilities, and shareholders’ equity.

15. The statement of financial position is normally presented as follows, when ordered in order