CHAPTER 1
The Accounting Environment: What Is Accounting and Why Is It Done?

QUESTIONS

Q1-1.
A variety of answers are possible but the essential elements are the production and communication of information so that stakeholders can make decisions.

Q1-2.
Financial accounting is concerned with providing information to those outside an entity such as investors, lenders, and CRA. Managerial accounting provides information to those inside the entity such as managers and other decision makers. Table 1.3 provides differences:

Table 1.3

DIFFERENCES BETWEEN FINANCIAL AND MANAGERIAL ACCOUNTING

| |Financial Accounting |Managerial Accounting |
|Stakeholders |External to the entity. Includes investors, |Internal to the entity. Managers and other |
| |lenders, taxation authorities (such as the |employees. |
| |Canada Revenue Agency), competitors, and many | |
| |others. These stakeholders usually don’t have | |
| |direct access to information about the entity | |
| |and must rely on the entity to provide it. | |
|Purpose of information |Used for the decisions of a particular |Used for operating decisions such as price |
| |stakeholder. Includes investment decisions, |setting, expansion, evaluating which products |
| |evaluating performance, predicting cash flows, |are successful, and determining the amount of a|
| |lending/credit decisions, etc. |product that should be produced. |
|Reporting unit |Financial statements are usually for an entity |Information can be very detailed and can be |
| |as a whole. |about any aspect of the entity (product, |
| | |activity, etc.) |
|Frequency of reporting |Financial statements must be prepared annually |Managers need information quickly, even daily |
| |at a minimum, quarterly for public companies. |or hourly. |
| |Certain external stakeholders might ask for | |
| |specific information on a more frequent basis | |
| |(e.g. bank) | |
|Constraints |Usually prepared in accordance with an |No constraints. Information can be prepared on |
| |established set of accounting standards, such |any basis the manager requires. There is no |
| |as IFRS or ASPE. Entities are required to |requirement for an entity to prepare any type |
| |provide financial statements on a prescribed |of report. Information is prepared to meet the |
| |basis. |needs of decision makers. |
|Perspective |Financial statements mainly report transactions|Reports prepared for managerial decision making|
| |that have already occurred. They are |are often future oriented. |
| |historical. | |

Q1-3
There are many characteristics and qualities required by good accountants. Sometimes people think of the traditional stereotypes of accountants: attention to detail, accuracy, being “good with numbers”, not to mention dull and boring. There is some truth in these stereo types (except maybe the dull and boring). In reality there is much more. Accountants are dynamic. The profession demands very strong analytical skills, creativity, the ability to use good judgment, and good interpersonal and communications skills.

Q1-4
Economic consequences are the impacts on wealth caused of a decision or choice. Accounting has economic consequences because how an entity does its accounting (policy choices, estimates) can affect the wealth of different stakeholders. For example, if you can choose between two acceptable ways to account for an economic event, the choice made might affect the amount of tax a company pays, bonuses managers receive or the selling price of the business.

Q1-5
Accounting information can provide insight into how much cash you have, how much you’re earning and bringing home, how much you’re spending, and how much you’re saving. This can provide information on your ability to repay the loan and interest. Accounting information can also provide information on items that could be pledged as security (if the lender requires this) or that you could convert to cash if you needed to, and other loans you have.

Q1-6
Different stakeholders make different decisions that may require different information. For example, lenders want to know whether the company will be able to repay its loans but the Canada Revenue Agency (CRA) wants to know the amount of taxes that should be paid for the current year. Much of the information that the lenders would request, such as who are the company’s major customers and the amounts they owe the company, would be of no interest to the CRA. The CRA is simply interested in compliance with the income tax act.

Q1-7.
There are two elements to this question: Accounting has economic consequences and managers often have choices when they prepare financial statements. Accounting information has economic consequences for managers because their bonuses, job security, and personal wealth can be affected by the measurements and information in the financial statements. Managers often have choices that impact the measurements and information in the financial statements and these choices affect the economic consequences. If a manager can choose among legitimate, acceptable alternatives it’s reasonable to expect he will choose the alternative that has the best economic consequences for him. For example, different accounting choice might affect the ability to obtain a bank loan, the price investors will pay for shares, the amount of tax an entity pays, or the bonus a manager receives. It’s important to emphasize that when managers do choose in favour of the own interests that the alternatives are legitimate and acceptable.

Q1-8.
It’s not possible to make a general statement about which stakeholder is most important—the answer depends on the entity and its needs. A private company with no external stakeholders would likely focus on CRA as the most important stakeholder. For a private company in need of a loan a prospective lender would be most important. From a stakeholder’s standpoint the most important stakeholder is herself!

Q1-9.
Employees of an entity are stakeholders. Their livelihood depends on the survival of the entity and their wages are impacted by its performance.

Q1-10
The government of Canada is a stakeholder in Pinwana Ltd. for a number of reasons. First, the company is obligated to pay taxes on its income. Also, as a technology company it may be eligible for government subsidies and tax breaks. The government may have an interest because Pinwana is in an important sector of the economy. Because Pinwana is an employer the government will have an interest because there may be employment law and regulation that the company must comply with. The government could be a stakeholder if it’s a customer of the company.

Q1-11
Many different pieces of information would be relevant when assessing whether you could attend a university in another province. Most of the information would help assess whether you could afford to attend. First, you’d want to know total tuition and ancillary fees for out-of-province students. Information regarding the amount of provincial government’s scholarships and bursaries offered would be helpful in determining if and how much financial aid would be available to you. It would also be helpful to know cost of living (housing, food, etc.) expenses on average so you can make a budget of expected monthly expenditures while in university. Travel costs to and from home would help you assess your ability to return home for periodic visits.

Q1-12.
A corporation is a separate legal entity with many of the rights and responsibilities of an individual. Some of the attractive features of a corporation are limited liability and the ease of transferring ownership.

Q1-13.
A proprietorship is an unincorporated business with one owner. Unlike a corporation a proprietorship isn’t a separate legal entity and it doesn’t pay taxes. The proprietor is responsible for taxes. Proprietors also face unlimited liability and personal assets may be seized if the proprietor doesn’t meet its legal obligations. Proprietorships are easier and less expensive to set up than corporations.

Q1-14.
A partnership is an unincorporated business owned by two or more entities called partners. (Partners can be people, corporations, or other partnerships.) A partnership has the same features as a proprietorship except that there is more than one owner. Unlike a corporation, a partnership doesn’t pay tax. A partnership’s income is included is included in the partners’ incomes. A partnership isn’t a separate legal entity.

Q1-15.
The shares of a public corporation can be bought or sold in a public market without permission of the other shareholders, which isn’t true of a private corporation. The ownership of the shares of private corporations is limited. Shares of private corporations can only be purchased with the agreement of the existing shareholders.

Q1-16.
A not-for-profit organization is organized for some purpose other than the earning of profit. Many examples are possible. For example, Habitat for Humanity is organized for the purpose of providing affordable housing for those who otherwise could not afford to purchase a home. Universities and colleges are organized as not for profit organizations as are charities and many clubs and associations.

Q1-17.
Information is crucial for decision-making. Without information decision making is simply guessing. Relevant information lets us know which alternatives are preferable based on the criteria that are being used. Information lets decision makers know what the alternatives are and the strengths and limitations of each alternative.

Q1-18.
Your friend should be informed that information can be presented in various ways depending on the user of the information without breaching ethics. If you were preparing a résumé /cover letter for a job as a waiter, you would focus on their customer service skills and previous experience in this field. If you were also applying for a job as a data analyst, you would want to focus on your education and knowledge in this field as well as relevant work experience.

Q1-19.
When we make decisions, we gather information so the decisions are informed; this results in better decisions. However, additional information has a cost, whether it’s the time to obtain the information or to consider its implications for the decision at hand, or the amount of money that has to be paid for the information. While more information will lead to better decisions, it’s necessary to consider the cost. There is no point spending a dollar for information that will give a benefit of $0.50. While this comparison is expressed in dollar terms, the idea applies to all costs (monetary, time, etc.) and all benefits (monetary, satisfaction, etc.).

Q1-20.
No, you should not gather all possible information before making a decision. People have a limited capacity to process information and after some point additional information doesn’t improve the decision (information overload). One should also stop searching for more information when it’s apparent that the incremental benefit from gathering more information is less than the incremental cost of obtaining that information (cost-benefit tradeoff). The incremental benefit is a better decision (and the benefits that come from the better decision) and the incremental cost is the cost incurred to obtain the additional information (time spent gathering information, money spent buying information, goodwill with friends or contacts expended by using them as a resource).

Q1-21.
A stakeholder’s objective may not align with management’s objectives. For example, when preparing financial statements managers will have choices that could impact the net income of the entity. In turn, this figure may impact the amount of bonus paid to managers. If the main objective of the stakeholders is to reduce taxes paid by minimizing income reported, the objectives of management and the stakeholders would be in direct conflict. Stakeholders need to be aware of this to ensure that their information needs are being properly addressed. Stakeholders also need to be aware that managers can impose negative economic consequences on them because as the people responsible for preparing the financial statements they can make choices that serve their own interests at the expense of other stakeholders.

Q1-22.
An external audit involves examining an entity’s financial statements and the data supporting the information in the financial statements to determine whether the financial statement adhere to a specified standard, such as IFRS or ASPE. External audits are conducted by individuals who are independent of the entity and its management, which adds credibility to the financial statements. Financial statements are prepared by the managers of an entity so an external audit by independent people helps to overcome any bias or self-interest the managers may introduce into the statements.

Q1-23.
It would be a poor decision to accept the financial statements as they are given. Since the current owner is considering selling his business, there is a potential that the financial statements are biased or misleading because the current owner has an incentive to make his business as financially appealing as possible to obtain a higher selling price. To obtain additional assurance, you could ask the owner to provide audited financial statements prepared in accordance with an agreed-upon set of accounting standards. The audit would provide some assurance that the financial statements haven’t been manipulated by the current owner and that they reflect the underlying economic activities of the business.

*Q1-24
Public companies in Canada have to follow IFRS. Private companies don’t have to follow any set of accounting standards but ASPE for private enterprises have been developed to provide a basis for private companies to prepare their financial statements. Private companies can also choose to follow IFRS. Private companies may elect to follow ASPE if there are external stakeholders – such as bankers and shareholders – who are not involved in the daily operations. If an entity doesn’t follow ASPE it may present its financial information however its managers decide. It may tailor this information to suit its own needs for assessing the company’s performance or to comply with the income tax laws.

EXERCISES

E1-1.
This is a good critical thinking question. Many students will assume an answer and provide it. The key is understanding the factors that go into the choice that person is making—the objectives she has in making the trip and the constraints she faces. The purpose of the question is to realize that solutions are context based. You really can’t provide an answer that you can be sure is helpful until you ask some questions. Does she intend to drive, in which case she wants to know the best route? If so, does she prefer the scenic route or the route that will get her there in the shortest time, or the least distance? Other modes of transportation can be introduced (train, plane, bus, roller skates). The solution should consider constraints (does she have the money for a plane ticket, the time for the scenic route, a driver’s license if a drive is recommended). Many variations are possible, but the point is that no useful answer can be given without knowing more about the criteria she will apply in making the decision. The key is getting students to recognize the assumptions they’re making and to learn to state them explicitly.

E1-2
a) It would be hard to measure how happy employees of a company are. Feelings of happiness and contentment are subjective characteristics and it’s difficult to measure such things. A measurement scale would have to be developed, which would be subjective and placing an employee on that scale would be subjective as well.
b) This would be very easy to measure. An examination of an appropriate bank record—online account, bank statement—would determine the amount. Cash is the easiest thing to measure in accounting terms.
c) The measurement of how much you could sell your car could be estimated but it isn’t as straightforward as determining the amount of money in a bank account. You could look in the classifieds and online to find what similar cars are being sold for, which would give you an idea of the car’s market value. Market values are estimates and thus are subject to subjectivity. The exact price a car will sell for will be affected by its condition and features, the negotiating ability of the buyer and seller, market conditions in your area, and the urgency the buyer and seller have to make a deal.
d) The measurement of how well you understand accounting is complex. You would get information from your performance on assignments and exams. But different professors have different ways of measuring student’s abilities (multiple choice questions, case studies, etc.) and that can alter a student’s performance on a test. Also, exams aren’t a good indicator of performance for all students (some may not be good exam writers). Self-evaluation would be very difficult for most.

E1-3.
a) When the land was originally purchased for $1 million, it had the expectation of being rezoned for residential construction. The implication is the land would be more valuable if used for building homes. If the government passes a law that this land must remain undeveloped, the value of the land would decrease because it wouldn’t be available for development. If the developer knew with 100 % certainty that this land would remain as green space she surely wouldn’t have paid $1 million for it (or bought it at all).
b) If the government agrees to rezone the land the value of the piece of land would likely increase. Originally, the land was purchased with the expectation that it would be rezoned for residential construction. Now it’s known for certain the land will be rezoned for residential construction, thereby making it more valuable as houses will likely be built on it in the future.
c) When a large land development company begins buying land in the area, then there is even more certainty that this piece of land will be built upon. This certainty would bring the value of the land higher and we would now have a greater idea of what the land could be sold for by examining how much the land development company paid for similar pieces of land in the area.

E1-4.
Various answers might be provided, but stakeholders would include students, faculty and staff, government agencies who provide funding, potential donors, alumni, and potential students. • Students/potential students may want to know whether the university has above average library or computing facilities. They may want to know the quality of the programs, the reputation of the faculty, the availability of fitness facilities, or even whether it’s a “party school.” Various sources of information could be consulted. University calendars, university fairs, discussions with current students, faculty, and alumni, and independent rankings may provide useful information. • Faculty will want to know that the university is committed to excellence in teaching and research and will provide the needed resources, particularly for the programs they value. They will want to detect trends in funding of programs, resources for research and teaching or salaries. They will look at proposed budgets and hiring plans as well as financial statements of recent periods. • Governments want to assess the financial needs of universities to determine their funding requirements. They will look to determine how past funding amounts have been used, projected enrolments and budgets and the participation of other sources of funding. They will examine performance targets to assess how the university is performing. • Potential donors want to know that the money they give will be used for the purpose for which it’s given. They will look for accountability for past donations as well as the plans for the future. • Alumni might be interested in the perceived success or prestige of the university.

E1-5.
Claims made by a company in newspaper advertisements lack credibility since the motivation for a company to statements favourable to its products is strong. Most wouldn’t base a decision only on the claims in the ad. The shopper may gather information on the prices and specifications of tablets from other producers, look to knowledgeable friends for their opinions, or read reviews of various vendors in a computer magazine or online forums.

E1-6.
A claim by a chain of donut shops that they serve the best coffee in the world isn’t very credible since it’s very unlikely they have evaluated even all coffee shops in their own community let alone the country or the world. The claim would be more credible, for example, if they reported that some independent organization had awarded them first prize in a contest, which had received entries from many countries. To determine whether the chain had the world’s best coffee would be very difficult, since “best” is a subjective matter with differing tastes across countries and individuals. Conceivably one could sample the coffee served by the best-known chains or look to the opinions of experts. Perhaps one of the internet websites that invites everyone’s opinion might provide helpful information. Most people wouldn’t consider the cost of obtaining a high level of certainty about the claim to be worth the benefits of finding out.

E1-7.
Many answers are possible to this question. Even if I had sufficient funds to lend $5,000, I may be reluctant to lend to a relative, since my relationship may be impaired if the loan isn’t repaid. On the other hand, I might want to help my brother out even if I thought there was a high risk of not being paid back. Unlike a bank, I wouldn’t want to repossess the car as a means of settling the obligation. My decision would be primarily determined by my assessment of the likelihood that he will repay the loan, so I will want to know what sources of income he has and what other commitments he has made. I would also try to assess his character and consider his track record in honouring other commitments that he has made in the past. Some students may respond on an emotional level rather than on a strictly business one. This would be a reasonable approach as well.

E1-8.
Individual responses will vary considerably to this question. However, it’s necessary to clearly establish the criteria applied for selecting a university and those criteria should be tailored to the circumstances of the cousin. Then consideration can be given to what and how relevant information should be gathered and then to how the universities will be ranked. Considerations would include areas of interest (science, arts, business), career goals, academic performance, resources to pay for university and accommodation away from home if appropriate, extra-curricular and social interests, and any other personal interests. This question has no right answer. What is crucial is the approach that is used to solve the problem and to recognize that a “one-size fits all” approach isn’t appropriate. It would be appropriate to tell your cousin that you can help him/her on the process but that the details will differ as he/she will have likely have different criteria.

E1-9.
a. The useful piece of information would be what your car could be sold for now, its net realizable value.
b. The useful piece of information in this case is the cost of the television at the competing store. If you provide the electronics store where you originally purchased the TV from with the cost of the identical TV, you would be eligible to receive double the difference.
c. Since there is no such thing as a new 2004 Mustang, the only amount that is relevant is the cost of another 2004 Mustang in similar condition (replacement cost).
d. Assuming you kept your DVDs in excellent condition, you would likely want to find out how much it would cost to replace the collector set of James Bond DVDs new (replacement cost new).
e. In this case, there is likely a very high “sentimental” value that would be very difficult to measure. The Elvis poster that had a personal message to your father was likely something that was more valuable to you than anyone else. The above measures wouldn’t be able to be used. It’s impossible to replace them item as Elvis is (probably) no longer alive. It’s also likely you were never interested in selling the item because of its high sentimental value, so net realizable value is irrelevant.

E1-10.
Many different measurements might be suggested. The following list isn’t complete: • Class size indicates how much attention an individual student will receive from their professors • Distance from home indicates whether accommodations will need to be sought or whether commuting is possible • Cost of tuition indicates whether the student will be able to afford his education • Scholarships and financial aid available also indicate whether the student will be able to afford her education • Employment levels and average salaries of alumni will indicate the students potential for success after university • Research funding indicates how much support a professor will receive in their desired projects • Number of students indicates requirements for food services, security, residence space, lecture halls, etc. • Quality of student experience gives an indication of how well students perceive their time at the university.

Most of these measures are fairly straightforward to measure. Quality of student experience is multi-dimensional and more difficult to measure. The measure of a particular university that is best depends on the needs and priorities of the user. Different measurements are appropriate for different purposes and so the “best” measurement can’t be identified. Only the best measurement for a particular purpose can be identified.

E1-11.
Many different measurements could be suggested. The following list isn’t necessarily complete: • Cost of meals at the restaurant indicates how often you can afford to eat at the restaurant • Quality of the ingredients can help to measure the quality and “taste” of the food • Number of waiters per table indicates the level of service you can expect at a restaurant • Amount of food per plate indicates whether your appetite would be satisfied after eating at the restaurant • Location of the restaurant (uptown, downtown, etc.) could also play a factor • The ambience and décor of the restaurant can also be a factor in how much one prefers a restaurant over another • How “trendy” the restaurant is. This would be tricky to measure. Perhaps the lines to get in, its recognition in the media, or if it’s has famous customers

The measure of a particular restaurant that’s best depends on the needs and priorities of the user. Different measurements are appropriate for different purposes and so the “best” measurement cannot be identified. Only the best measurement for a particular purpose can be identified. Cost, number of waiters, amount of food, and location would be easier to measure. The others more subjective and difficult to measure.

E1-12.
The books could simply be arranged by title, by author, by subject, by size, by date of publication. If you organized the books by subject, you could more easily research a subject area, but might have difficulty locating all books by a particular author. Sorting by title would make it difficult to research topics or search by author. Sorting by size would permit shelf spacing to be designed to best utilize space but make any type of search time-consuming. The best method would be to catalogue the books to permit search by several criteria. The benefits for organizing the books would relate to the intended manner of accessing them. If the intent was to hold them for a time and then sell or donate the books, or if all you want to do is fill shelves with books as a decorating technique, there is no need to organize them at all.

E1-13.
|Expense |Old Car |New Car |
|Cost of New Car |$ | $ 19,000.00 |
|Sale of Old Car | | (14,700.00) |
|Insurance (Over 5 Years) | 5,125.00 | 4,375.00 |
|Lifetime Service Costs (Over 5 years) | 1,750.00 | 1,125.00 |
|Cost of Gas Required (Over 5 years)* | 19,800.00 | 13,200.00 |
|Cash Expended | 26,675.00 | 23,000.00 |
| | | |
|*Old Car = 22,000 km x 12 litres/100 km x 5 years x $1.50 per litre |
|New Car = 22,000 km x 8 litres/100 km x 5 years x $1.50 per litre |

Financially it’s worth it to buy the new car given the cost savings over the five year period that the car will be kept for. Additional financial considerations may include (but are not limited to) the likelihood that gas prices will remain the same, the potential that you may drive more/less, the resale values of the car. Non-financial considerations include (but are not limited to) the styling of the car, safety features and the functionality of the car (i.e. if one a small car and the other a large SUV and you require additional space for transporting people/objects).

E1-14
|Item |Year 1 |Year 2 |Year 3 |Year 4 |Total |
|Revenue* |$43,400 |$43,400 |$43,400 |$43,400 |$173,600 |
|Proceeds from sale of cart | | | |1,000 |1,000 |
|Total revenue/proceeds |43,400 |43,400 |43,400 |44,400 |174,600 |
| | | | | | |
|Expenses | | | | | |
|License |1,250 |1,250 |1,250 |1,250 |5,000 |
|Cart |7,500 | | | |7,500 |
|Annual maintenance |900 |900 |900 |900 |3,600 |
|Operating expenses* |26,660 |26,660 |26,660 |26,660 |106,640 |
|Total expenses |36,310 |28,810 |28,810 |28,810 |122,740 |
|Net Income (revenue-expenses) |$7,090 |$14,590 |$14,590 |$15,590 |$51,860 |
| | | | | | |
| | | | | | |
|Opportunity Cost** |$13,640 |$13,640 |$13,640 |$13,640 |$54,560 |
| | | | | | |
|*From May 15th to September 15th there are 124 days. Student’s answers may vary depending on their start/end dates. |
|**11 hour days x $10 minimum wage rate x 124 days per season | | | |
|Additional Notes: | | | | | |
|Calculations are made on cash basis. | | | | | |
|The minimum wage rate is assumed to be $10 per hour. | | | | | |

If you assume that the minimum wage rate is $10 per hour and you are planning to work 77 hours (7 days * 11 hours per day) per week, then it would be more profitable to work at a minimum wage job. However, other factors should be considered such as the freedom of operating your own business, the availability of jobs, the hourly wage you could potentially make (perhaps your qualified for jobs paying more than minimum wage), and how many hours you wish/are able to work per week.

E1-15.
The questions that could come to mind as one reads financial statements are unlimited. Any questions at this stage of the book are valid and reasonable. The key is to try to identify what types of users of the financial statements were envisioned when they were prepared, and what decisions the users would make. The questions then should focus on why the information in the financial statements might be relevant to these decisions.

PROBLEMS

P1-1.
There is no correct answer but responses must be reasonably supported. Managers know the entity best and so should be in the best position to choose the most appropriate accounting methods. Managers are responsible for managing the entity so why shouldn’t accounting be in their hands as well? On the other hand managers have strong economic incentives to manage the accounting information and so can introduce bias into accounting choices. Possibly the decision could be left up to the public accountants/auditors as they are professionals and have an understanding of the accounting principals and how they should be applied. Their independence would reduce the amount of bias in accounting choices. Others that could possibly fill these tasks are governments (have a standardized accounting policy for all companies).

P1-2.
a. The partners in an accounting firm want to know how the partnership is performing. The partners’ income will be related to the partnership’s performance as will the value of their investment.
b. The supplier wants to assess the likelihood that the company will pay for purchases within the allowed time (60 days). The supplier may also want to assess the company’s financial situation to asses the amount of credit to offer.
c. A member of a labour union wants to assess how well the union is representing his or her interests. A member would want to know the results the union has achieved and any items on its future action plan. A member wants to evaluate the financial stewardship of the union by the leadership.
d. A competitor wants to assess how the company is performing financially relative to its own performance. They also want information about certain parts of the competitor’s business that are being performed more efficiently/effectively than their own. They could use that type of information for benchmarking purposes.
e. A customer wants information about the company’s product quality to assess how long the equipment will last. The customer would also want to assess the stability of the company’s financial position to gauge whether it will survive to support the five year warranty.

P1-3. a. Donors to a charity want to know that the donation is needed, how it will be used, how efficiently the charity operates, and how effective it is in meeting the needs it targets. b. Factories are often unpopular neighbours. People who live near existing factory want to ensure the factory is being managed responsibly and that they will be able to carry any future obligations in terms of potential contamination of factory grounds. They may want to know how the company has dealt with pollution issues in the past. c. The minister would want to know that the assistance is necessary and that the company has a reasonable likelihood of success if the request is granted. In some circumstances, the assistance may be linked to specific hiring commitments, in which case the government would want to know if the hiring would have occurred without the assistance. The minister would want to know the political implications of a decision. d. The head of a labour union would require a company’s financial information so he could adequately prepare his arguments regarding staff wages and benefits (the statements might not be available if the company is private). The head of a labour union would also require information regarding how well the company was following health and safety policies and any disputes between the company and its employees. A lot of qualitative information may be obtained about the general treatment of employees around the organization. e. Canada Revenue Agency wants to assess the amount of taxable income earned by the entity in the period and that the entity has complied with the Income Tax Act.

P1-4.
a. A shareholder not involved in the running of the company would want to assess how well the company is performing and evaluate if they will be receiving dividends and how much. As a family member they may be able to ask questions of management so they can understand performance better. Some decisions they would make include: whether existing management should be replaced, management compensation, whether to hold their current investment in the company, perhaps to invest more in the company if possible. b. The company president has to make decisions regarding the strategic direction of the company. Should the company invest more in capital assets? How should this investment be funded? Should the company expand? Many different strategic decisions would be made by the president. The president would also be involved in operating decisions, especially if the company isn’t large.
c. The CRA assesses whether the company is paying the appropriate amount of tax, which is based on compliance with the Income Tax Act.
d. A banker would decide whether to continue the existing financing to the company and if it would provide more if asked. This would be based on an evaluation of the financial statements and other criteria (perhaps information about how the company will perform in the future). If there are loan covenants the bank would want to ensure compliance.
e. The head of the union would want information to decide whether Osoyoos’ employees wage rates and benefits are fair. The union head would also make decisions as to whether Osoyoos has complied with health and safety regulations and is treating employees fairly in general.

P1-5.
(The solutions below identify major stakeholders and some minor ones. It’s possible that other minor stakeholders exist.)

a. The primary stakeholders for Research In Motion Limited (RIM) are: shareholders, lenders, suppliers, customers, employees, the CRA, securities regulators, stock exchanges and prospective shareholders and lenders. Shareholders decide whether RIM is still worth investing in or whether they should sell their stake and invest elsewhere. Lenders want to decide whether they should continue to offer financing to RIM or whether it are in danger of breaching bank covenants. Customers decide whether RIM is a solid company whether they should be repeat buyers (customers require ongoing support from RIM). The CRA decides if RIM has complied with the Income Tax Act. Securities regulators (the Ontario Securities Commission (Ontario) and the Securities and Exchange Commission (US)) administer and enforce securities laws so they want to ensure RIM has complied with the laws and regulations pertaining public companies. Stock exchanges that RIM trades on (TSX and NASDAQ) want to ensure compliance with their rules and requirements. Prospective shareholders would decide if RIM is worth investing in. Prospective lenders would make decisions in whether to offer financing to RIM and perhaps how much financing to offer.

b. The stakeholders of the government of Canada include citizens, creditors, agencies that rely on the government for funding, foreign governments, provincial governments, businesses, etc. (the stakeholders in a national government are vast). Citizens decide whether the spending and taxation decisions of the government reflect their own priorities and whether government programs are efficient and effective. Creditors assess the ability of the government to meet its commitments for future payments and agencies look to changes in the ability of the government to support increased levels of funding for their programs. Provincial governments rely on transfers of money. Foreign governments consider Canada’s position on various international issues. Businesses are affected by policies such as tax rates, trade policies, and regulation over business activities.

c. Wikipedia is part of the Wikimedia Foundation, which is a non-profit entity. Stakeholders of Wikimedia include their donors, users, volunteers, and employees. Donors (past and future) want to ensure their donations are being put to good use and whether they should make donations in the future. Volunteers decide whether to continue to make contributions to the Wikipedia encyclopaedia through their own updates to various topics. Wikipedia users rely on the information provided by the resource. Employees make decisions on whether to continue working for Wikimedia, how long they plan to stay employed at Wikimedia, etc.

d. Important stakeholders of McCain Foods Limited include shareholders, lenders and creditors, communities, customers and suppliers, employees, and CRA. Shareholders make decisions to increase or decrease their ownership share and evaluate the performance of management. Lenders and suppliers make decisions about credit and credit terms. Customers rely on McCain for its products and decide on whether to use McCain and/or other suppliers to meet their needs. CRA ensures compliance with tax laws. Employees and communities where McCain Foods Limited is a major employer rely on McCain for jobs and economic well being. Governments rely on McCain for tax revenue. Because it’s a private company McCain Foods doesn’t distribute its financial information widely but there are still many stakeholders of the company.

P1-6.
(The solutions below identify major stakeholders and some minor ones. It’s possible that other minor stakeholders exist.)

a. The stakeholders of a privately owned convenience store include its owners, customers, suppliers, the CRA employees, and lenders (if any). Owners of this type of business usually rely on if for their livelihoods so their performance is paramount. The owners make operating decisions such as pricing, products, and hours of operations. Customers make decisions whether to continue to buy from the store or not. Suppliers decide whether to supply the store and the terms of sale they offer. Employees decide to whether they want to continue working for the convenience store and for how long. Lenders make decisions whether to lend or not. The CRA decides whether the convenience store has paid the right amount of taxes.

b. The primary stakeholders of a major Canadian bank include customers (depositors, borrowers, users of various services), employees, the government, bank regulators the CRA, and shareholders. Customers make the decision whether to continue to come to the bank with their business. The government is interested in the bank because of their significant influence on the Canadian economy. The regulator (Office of the Superintendent of Financial Institutions) enforces and administers the laws and regulations that apply to the Canadian banking industry. The CRA decides if the bank has complied with the income tax act. Employees decide whether to continue working for the bank or to look elsewhere for employment. Shareholders decide whether to continue to invest in the bank or perhaps to buy more shares in the bank.

c. The stakeholders of a national fast food franchisor would include franchisees, employees of franchisees, shareholders, lenders, suppliers, customers, and the CRA. Franchisees are concerned with the ongoing support provided by the franchisor and reputation of the franchise name. They might also be concerned with the value of the franchise (if they chose to sell) and whether to sell or continue operating. Employees decide whether to continue working for the fast food company and how long they plan to work there. Shareholders decide whether to hold their investment or sell it. If shareholders aren’t the managers they will want to evaluate the performance of the franchisor and its management. Lenders decide whether to lend money and the terms of loans. Suppliers are concerned about the franchisor/franchisees ability to pay for purchases and their relationships with the company. Customers expect franchise restaurants to meet their expectations. The CRA decides whether the fast food franchisor has complied with the Income Tax Act.

d. The stakeholders of the transit commission of the city include customers (transit riders), the government (local and provincial), and the transit employee union. Customers decide whether to ride public transit and will be concerned with fares, schedules, safety, and other conditions. The government decides whether the local transportation ministry has complied with laws and regulations and has provided effective transportation for transit riders. Government has to make decisions about funding the transit system. The union must negotiate contract terms with the transit commission and tries to get the best deal possible for the employees. The union is concerned with wages, working conditions, benefits, and so on. Employees decide whether to continue working for the transit commission or to look for other work.

P1-7.
a. The decision of whether to expand to a new part of the country would be made by management of the firm so it would be considered a managerial accounting decision.
b. Since the lender is someone external to the company, this would be considered a financial accounting decision.
c. Management would decide whether to donate to a particular charity so this would be considered a managerial accounting decision.

P1-8.
a. The decision to make or buy a component part used in a production process would be made by the production manager along with senior management. These are all internal members of the firm so this is a managerial accounting decision.
b. Sales management, who are internal to the firm, would make the decision of whether to offer the good on credit or not. This is a managerial accounting decision.
c. Senior management, who are internal to the firm, would decide whether or not to acquire a competitor. This is a managerial accounting decision.

P1-9.
A decision to invest in this business would only be made after a careful investigation, assuming that you haven’t ruled out any business relationship with the friend. You would want answers to many questions, including the viability of the business itself, the ability of your friend to successfully manage the company, the additional funding needed and the expected sources of funds. Has your friend had any business management experience and/or experience operating a lawn care business? What is the market for environmental lawn care services? What is the competition in that market? Does your friend’s business have advantages over the competition? What proportion of the business will you own for your investment? Will you be able to participate in management/decision making? The riskiness of small business ventures may discourage you, although the potential profits can be high. There are many more questions that could be asked.

P1-10
A decision to invest in the business would only be made after a careful investigation, assuming that you haven’t ruled out any business relationship with the friend. Examples of information that would be helpful to make an investment decision could include: your friend’s experience managing a business, the cost of books and the price the books would be sold for, the advertising strategy, projected operating expenses, projected revenue, how profits would be split, what your personal liability would be, whether your friend is financially stable, whether the business will be a corporation or a partnership, and information regarding how the campus bookstore operates. There is a significant amount of information that could be useful in making a decision.

P1-11.
Since your friends have an existing business, you would want to evaluate how it has performed since it started. Has it been profitable? How much money have your friends been able to take out of the business? You would also want to see the expansion plans and understand the expected impact of the expansion on the profits and riskiness of the business. What exactly do they plan to do with the money (more skates, etc.)? What will you receive for your $8,000 (how much of the business will you own?) and how much say will you have in its operations? Will you be able to work in the business like your friends (and draw a salary)? You might ask about competitors and their likely actions, and trends in consumer demand for the rentals. There are many other questions that could be asked and with a lot of detail.

P1-12.
Different classifications might be chosen. Since his motivation for tracking his expenditures is to guide a reduction in spending, he might sort necessities from luxuries, but only Khaleel can decide which he can eliminate. Here is one classification:

| | |
|Education-related expenses & laundry |$29.75 |
|Cell Phone (includes new phone app) |35.89 |
|Food and Vitamins |89.00 |
|Concerts and Music |58.25 |
|Gifts and charitable donations |27.50 |
|Hockey Stick |175.00 |
|Total |$415.39 |

(The amount borrowed and repaid from Lisa isn’t included in the table)
The idea is to indicate the proportions of spending on essentials such as education and a cell phone relative to non-essentials such as concerts and a hockey stick. Khaleel may not agree that concerts and hockey is discretionary, but he may try to reduce these costs. The important focus is on serving the decision needs of Khaleel. The classification tells Khaleel where his money is going and he can assess places he might be able to save. Alternatively, he could decide to get a part-time job so he has more cash. Without the classification above and his record keeping for the month he wouldn’t be able to make any type of assessment.

Beginning cash $24.50
Plus cash from AM 400.00
Less spending 415.39
Equals ending cash 9.11

P1-13.
Different students would choose different classifications. Fatima wants a guide to vary spending depending on the money she has available, so she might rank expenditures by how necessary they are. Here is one classification:

|Rent and Utilities |$512.75 |
|Groceries |227.50 |
|Lunches |70.90 |
|School-related expenses |60.90 |
|Cell Phone |42.75 |
|Toiletries, dry cleaning, medicine |33.80 |
|Gifts |25.00 |
|Shopping (non-necessity) |130.50 |
|Partying, eating out |63.84 |
|Total |$1,167.94 |

The challenge is to classify these items in a manner that serves Fatima’s decision needs. That is a difficult task for someone other than Fatima. In general, the classification shows Fatima how she is using her money. By looking at such a summary she may be surprised by the amount of spending in certain categories. What we do know is that Fatima has $8,000 to last her from October to May (8 months). If she were to continue her current spending pattern, she would run out of money before the end of May. This statement is useful to Fatima so she can look at where she can cut her expenditures on non necessities like shopping or partying. Some costs are likely fixed and can’t be changed (rent and utilities). She could consider not buying lunch and bring something from home instead. She could spend less on partying and perhaps get a less expensive cell phone plan. She could also avoid making large expenditures like the purchase of new running shoes. Only Fatima can decide where she can reduce her spending but we do know that if she spends the same amount from November through May she will spend almost $1,400 more than she has ($8,000 - $1,167.94*8). To stay with in her means her spending from November on would have to be decreased by almost $200 per month.

P1-14.
a. Rajiv might be curious about how good an investment his home has been compared with other investments.
b. The selling price of a similar home is of interest to Rajiv if he is thinking of selling or to a prospective buyer who wants to know how much to offer. It’s also relevant to the company that holds the mortgage on the home, since it indicates the likely proceeds if the home was repossessed.
c. A prospective buyer who was trying to decide how much to offer Rajiv for the house would find this information helpful since it indicates that Rajiv would probably not sell unless he received a higher offer. It indicates something about his minimum acceptable price. The buyer wouldn’t want to offer a higher price than necessary.
d. This information would be useful to an insurance company (and Rajiv) since it indicates the amount of insurance needed and the appropriate insurance premium that should be charged.

P1-15.
a. The price of the vintage auto in 1983 has limited significance now except to indicate whether it has been a good investment. The potential decision for Otto is whether to invest in more vintage autos or to sell it now and look for other more profitable investments.
b. The price one year ago may be of some value as an indicator of the long-term trend in prices for this vehicle. If the auto is so rare that sales are infrequent, anyone considering buying or selling this vehicle or a similar one would find the information helpful in predicting the current likely selling price. It’s also a recent (but not current) measure of the market value of the car. Since market values can change dramatically for some items this may not be a good indication of the market value today of the car.
c. The fact that $95,000 was offered lets us know that at least one person thinks it was worth at least that much and that Otto would require more to sell it. Anyone who hopes to persuade Otto to part with the Ford must offer at least that much to be successful. This may give Otto some information about the market value of the car. However, the offer may have been lower than what the car could actually be sold for (which is one reason why Otto may not have sold).
d. It’s hard to imagine many decisions for which the price in 1925 is relevant. Sometimes we see the high selling prices of vintage automobiles and speculate how rich we might be today if we had only had the foresight to acquire one when it was new. If we randomly selected a number of automobiles from 1925 and compared their prices today with the original cost, we might discover that an investment in the stock market or bonds would have been a better investment.

P1-16
The $725 is the historical cost (purchase price of the tablet). It’s relevant if, for example, you were reimbursed the cost of the tablet from your employer because you used it for work. The $610 price is the market value of a tablet if purchased new. This could be relevant in the case of an insurance claim involving the tablet. To replace the tablet new, the insurance company would have to pay $610 (replacement cost new). The $250 is the potential selling price of the tablet, its market value as is (used). This would be relevant if you were interested in selling your tablet to get a newer, improved model. Which measure is best depends on what your needs are.

P1-17.
a. An audit in this situation would be useful. It’s unlikely that a government agency would admit to misspending money. In Canada, the Office of the Auditor General is in charge of holding the government and their agencies accountable for how they spend taxpayer’s money.
b. An independent audit in this situation would be very useful as it would provide additional confirmation that the airline’s statement of 90 % is accurate. How do we know if the airline’s statement was perhaps based on an unrepresentative sample? They could have purposely excluded certain airports from the sample because they know of difficulties they had in the past of ensuring flights are on time. An independent auditor wouldn’t have these biases. A person knowledgeable of the airline industry and external to the airline could conduct the audit.
c. An independent audit in this situation would be very useful. Farmers have incentives or motivations to label their crops as “organic” as this label leads to higher prices. There is a potential for the farmer to allow his or her motivations to exaggerate the organic nature of the food he or she is growing. If his or her crops were reviewed by the Canadian Food Inspection Agency, they would be able to attest to whether the crops qualify as organic or not. They are not biased like the farmer as they are external and completely independent of the farmer. There are private organizations that can provide assurance of this type.
d. An independent audit in this situation would be useful. The decision to admit a student into a graduate program is based largely off the student’s undergraduate marks. Graduate programs require an official transcript from the undergraduate university. The official transcript is effectively an audited document as it’s provided by the university and provides assurance regarding the student’s courses and grades. If the student submitted grades, he or she could be tempted to lie about grades to obtain admission into the graduate program.

P1-18.

a. A charity would likely be required to produce externally audited financial statements. Donors and potential donors would want information on how their contributions are used. For example, how much the charity spends on administration costs is important because donors want to know that their money is being used to help people, not pay for office expenses and salaries. An accountant could do this work.
b. Given the temptation for individuals to underreport income, the Canada Revenue Agency (CRA) would find an audit useful for two reasons. The audit may uncover income that wasn’t accurately reported (revenues understated, expenses overstated) and the expectation that an audit may occur will deter many from trying to get away with it. The CRA’s auditors would need to have detailed knowledge of the tax act and accounting. CRA auditors are accountants or are trained with the necessary accounting related skills.
c. An audit may be useful here. The only difficulty is that it involves predicting the future. Audits are typically done to review the accuracy of current or past information. However, an auditor could provide additional assurance as to the current income figures used to predict the future (financial auditor). Also, a person knowledgeable of the company’s industry may be able to provide additional insight as to the legitimacy of the projections made by the corporation. Crucial to this type of audit would be an assessment of the reasonableness of the assumptions that went into the forecast. Stock analysts can help with this kind of insight.
d. An audit would be useful in this situation. Job applicants have motivations to exaggerate their experience so as to put them in a better light for acquiring a good job. The Human Resources Manager would want to conduct reference checks with past employers to verify experience. If it’s a new graduate position, the HR manager may also want to obtain an official transcript of the applicant’s grades.
e. Restaurants make a lot of claims. Advertising the “world’s best coffee” is very difficult, if not impossible to prove. It’s an advertising ploy to try and get people to come. If there were awards in the community for “best coffee”, this may give some assurance to potential customers that the coffee served is of good quality.

P1-19.
It isn’t possible to provide an answer to this question since it depends on the entities selected. Many varied responses are possible. The most insightful ones will be those that examine very different entities, with different industries, ownership, and other characteristics as shown in figure 1-1. The significance is that the characteristics of the accounting environment for one entity will differ from those of others in ways that have important implications for the determination of appropriate accounting policies. The objective of this problem is to get students thinking about the characteristics of entities and what makes them different.

P1-20.
It isn’t possible to provide an answer to this question since it depends on the corporations selected. The idea is to recognize that even firms in the same industry will differ significantly in other respects. Most importantly, they will differ in many dimensions identified in figure 1-1, which suggests that different firms in the same industry should choose different accounting policies. Examples of pairs of companies that could be selected include Sears and Hudson’s Bay Corporation, Home Depot, Lowes, and RONA, and Sleeman’s and Brick Brewing, two of the major banks, to name a few. The objective of this problem is to get students thinking about characteristics of corporations and what makes them different.

P1-21.
Stakeholders and their stake
Partners – they are the owners of BBB and this is their investment;
Employees – depend on BBB for income;
Regulator (professional accounting organization) and government regulator such as Public Accounting Licensing Board) – Will want to ensure BBB partners operate their business at a high professional level and conduct business in the best interests of the public and their profession;
CRA – The CRA has three interests: first that BBB does proper payroll deductions, second that it prepares its clients tax forms correctly and comply with the provisions of the Income Tax Act, and third that partnership income is properly determined and that the partners include the appropriate amounts in their tax returns;
Small and medium size businesses – The services they receive are performed by competent and professional people;
Third parties relying on BBB’s work (lenders to clients or prospective investors in clients) – they depend on BBB to maintain and comply with proper accounting and auditing standards and procedures. They want to be confident that information that is examined by BBB meets the appropriate standards;
Creditors – want to assess that BBB will be able to repay any loans/amounts owing;
Other independent accounting firms – Will want to ensure BBB partners operate their business at a high professional level and conduct business in the best of the public and their profession. Their (other partnerships) reputations are at risk if BBB does a poor job;
Future partners and exiting partners– To pay or receive a fair unbiased amount for their stake or future stake in BBB.

P1-22.
Homeless and runaway youths – Safe, secure, clean and healthy environment is provided;
Provincial government – The money they provide is used properly and for its intended purpose;
Governments and public – To learn and become aware of the problems facing youths;
Governments and social services – To work as a team with Safety House to improve the lives of children;
Managers – To effectively manage the money they receive, effectively manage the entity, and ensure all of the stakeholders needs are being addressed;
Employees- depend on Safety House for income;
Community – Ensure that the children in the community are taken care of and the streets become a safer place for everyone;
Donors – want insurance that their donations are being used effectively and efficiently.

P1-23.
Family shareholders outside the entity – The family shareholders not involved in the day to day operations have an investment and are looking for a return on their investment.
Family shareholders involved in operations – The family shareholders involved in operations (Lars Sedley and his two sons) depend on the farm for a steady income and they are also shareholders so they desire the business to be successful and deliver a high return on their investment.
Regulatory Bodies – Various private and public agencies that are responsible for ensuring that the standards that define organic foods are meet. These agencies’ reputations and credibility are affected by the behaviour of producers of organic foods that fall under their auspices.
CRA – The CRA has two interests: first that Alder Flat Farms does proper payroll deductions, that income is properly determined and second that it calculates its income properly in accordance with the Income Tax Act and pays the correct amount of tax.
Lenders – The lenders want to assess whether Alder Flat Farms can repay any loans outstanding or the probability of repayment of future loans.
Grocery stores and chains – Grocery stores and chains buy products from the farm and resell to their customers so they want to ensure produce is indeed organic and is delivered on time.
Customers – The customers that buy directly from the farm eat their food and are interested in the “certified organic” stamp the farm’s food boasts. They want the food to be organic and fairly priced.