, Solutions Manual
to accompany
Accounting:
Building Business
Skills
Fourth Edition
Prepared by
Shirley Carlon, Rosina Mladenovic-
McAlpine and Chrisann Palm
, Chapter 1: Introduction to accounting
CHAPTER 1 – INTRODUCTION TO ACCOUNITNG
ASSIGNMENT CLASSIFICATION TABLE
Brief
Learning Objectives Exercises Exercises Problems
1. Define accounting, describe the accounting 1
process and define the diverse roles of
accountants.
2. Explain the characteristics of the main forms 1 1A; 1B
of business organisation.
3. Understand the Conceptual Framework and
the purpose of financial reporting.
4. Identify the users of financial reports and 3 8 2A; 2B
describe users’ information needs.
5. Identify the elements of each of the four main 4,5,6 2,3,4,5, 3A,4A,5A,6A
financial statements. 7,9,10 7A;8A;3B,4B
5B,6B,7B,8B
6. Describe the financial reporting 2 1
environment.
7. Explain the accounting concepts, 6 3A; 3B
principles, qualitative
characteristics and constraints
underlying financial
statements
8. Calculate and interpret ratios for 7 11,12,13 9A,10A
analysing an entity’s 9B,10B
profitability, liquidity and solvency.
1.1
, Solutions manual to accompany Accounting: building business skills 4e
CHAPTER 1 – INTRODUCTION TO ACCOUNTING
ANSWERS TO QUESTIONS
1. Advantages of company structure are limited liability (shareholders not being
personally liable for corporate debts), indefinite life, easy transferability of ownership
(through selling shares), and greater ability to raise funds. Disadvantages of a
company are the establishment costs and ongoing fees and increased government
regulations.
2. External users are those outside the business who have an interest in knowing about
the activities of the entity as resource providers, recipients of goods or services or
parties performing a review of oversight function. Examples include investors,
creditors such as banks and suppliers, taxing authorities, regulatory agencies, trade
unions and customers.
3. (a) Income statement.
(b) Statement of financial position.
(c) Income statement.
(d) Statement of financial position.
(e) Statement of financial position.
(f) Statement of financial position.
4. The Conceptual Framework consists of a set of concepts to be followed by preparers
of financial statements and standard setters. The Conceptual Framework provides
guidance to preparers of financial information by defining who is required to report
and who the users are likely to be.
5. It is important to determine if a business is a reporting entity as it is only reporting
entities that are required to prepare general purpose financial reports in accordance
with the accounting standards.
Three main indicators determine which of the forms of business organisation fall into
the category of a reporting entity. That is, an entity is more likely to be classified as a
reporting entity if it is (1) managed by individuals who are not owners of the entity, (2)
politically or economically important, and (3) sizable in any of the following ways —
sales, assets, borrowings, customers or employees.
6. The three categories in the statement of cash flows are operating activities, investing
activities and financing activities. The categories were chosen because they
represent the three principal types of business activity.
7. Retained earnings is the profit retained in a company. Retained earnings is increased
by profit and is decreased by dividends and by losses.
8. The going concern principle lends credibility to the cost principle; otherwise items
would be reported at liquidation value. By assuming the entity will continue to
operate, assets can continue to be reported at cost because they are expected to
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