Accounting Principles 8th Canadian Edition By Jerry Weygandt, Donald Kieso, Paul
Kimmel, Barbara Trenholm, Valerie Warren, Lori Novak (Test Bank All Chapters,
100% Original Verified, A+ Grade) Answers At The End Of Each Chapter
CHAPTER 1
ACCOUNTING IN ACTION
CHAPTER LEARNING OBJECTIVES
1. Identify the use and users of accounting and the objective of financial reporting. Accounting is the
information system that identifies, records, and communicates the economic events of an organization
to a wide variety of interested users. Good accounting is important to people both inside and outside the
organization. Internal users, such as management, use accounting information to plan, control, and
evaluate business operations. External users include investors and creditors, among others. Accounting
data are used by investors (owners or potential owners) to decide whether to buy, hold, or sell their
financial interests. Creditors (suppliers and bankers) evaluate the risks of granting credit or lending
money based on the accounting information. The objective of financial reporting is to provide useful
information to investors and creditors to make these decisions. Users need information about the
business’s ability to earn a profit and generate cash. For our economic system to function smoothly,
reliable and ethical accounting and financial reporting are critical.
2. Compare the different forms of business organization. The most common examples of business
organization are proprietorships, partnerships, and corporations. Proprietorships and partnerships are
not separate legal entities but are separate entities for accounting purposes; income taxes are paid by
the owners and owners have unlimited liability. Corporations are separate legal entities as well as
separate entities for accounting purposes; income taxes are paid by the corporation and owners of the
corporation have limited liability.
3. Explain the building blocks of accounting: ethics and the concepts included in the conceptual
framework. Generally accepted accounting principles are a common set of guidelines that are used to
prepare and report accounting information. The conceptual framework outlines some of the body of
theory used by accountants to fulfill their goal of providing useful accounting information to users.
Ethical behaviour is fundamental to fulfilling the objective of financial accounting. The reporting entity
concept requires the business activities of each reporting entity to be kept separate from the activities of
its owner and other economic entities. The going concern assumption presumes that a business will
continue operations for enough time to use its assets for their intended purpose and to fulfill its
commitments. The periodicity concept requires businesses to divide up economic activities into distinct
periods of time. Qualitative characteristics include fundamental and enhancing characteristics that help
to ensure accounting information is useful.
Only events that cause changes in the business’s economic resources or changes in the claims on those
resources are recorded. Recognition is the process of recording items and measurement is the process of
determining the amount that should be recognized. The historical cost concept states that economic
resources should be recorded at their historical (original) cost. Fair value may be a more appropriate
measure for certain types of resources. Generally, fair value is the amount the resource could be sold for
in the market. The monetary unit concept requires that only transactions that can be expressed as an
1-1
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,Test Bank for Accounting Principles, Eighth Canadian Edition
amount of money be included in the accounting records, and it assumes that the monetary unit is stable.
The revenue recognition principle requires companies to recognize revenue when a performance
obligation(s) is satisfied. The matching concept requires that costs be recognized as expenses in the
same period as revenue is recognized when there is a direct association between the cost incurred and
revenue recognized.
In Canada, there are two sets of standards for profit-oriented businesses. Publicly accountable
enterprises must follow International Financial Reporting Standards (IFRS) and private enterprises have
the choice of following IFRS or Accounting Standards for Private Enterprises (ASPE).
4. Describe the components of the financial statements and explain the accounting equation. Assets,
liabilities, and owner’s equity are reported in the balance sheet. Assets are present economic resources
controlled by the business as a result of past events and have the potential to produce economic
benefits. Liabilities are present obligations of a business to transfer an economic resource as a result of
past events. Owner’s equity is the owner’s claim on the company’s assets and is equal to total assets
minus total liabilities. The balance sheet is based on the accounting equation: Assets = Liabilities +
Owner’s equity.
The Income statement reports the profit or loss for a specified period of time. Profit is equal to revenues
minus expenses. Revenues are the increases in assets, or decreases in liabilities, that result from business
activities that are undertaken to earn profit. Expenses are the cost of assets consumed or services used in
a company’s business activities. They are decreases in assets or increases in liabilities, excluding
withdrawals made by the owners, and result in a decrease to owner’s equity.
The statement of owner’s equity summarizes the changes in owner’s equity during the period. Owner’s
equity is increased by investments by the owner and profits. It is decreased by drawings and losses.
Investments are contributions of cash or other assets by owners. Drawings are withdrawals of cash or
other assets from the business for the owner’s personal use. Owner’s equity in a partnership is referred to
as partners’ equity and in a corporation as shareholders’ equity.
A cash flow statement summarizes information about the cash inflows (receipts) and outflows
(payments) for a specific period of time.
5. Analyze the effects of business transactions on the accounting equation. Each business transaction
must have a dual effect on the accounting equation. For example, if an individual asset is increased, there
must be a corresponding (1) decrease in another asset, (2) increase in a liability, and/or (3) increase in
owner’s equity.
6. Prepare financial statements. The income statement is prepared first. Expenses are deducted from
revenues to calculate the profit or loss for a specific period of time. Then the statement of owner’s equity
is prepared using the profit or loss reported in the income statement. The profit is added to (losses are
deducted from) the owner’s equity at the beginning of the period. Drawings are then deducted to
calculate owner’s equity at the end of the period. A balance sheet reports the assets, liabilities, and
owner’s equity of a business as at the end of the accounting period. The owner’s equity at the end of the
period, as calculated in the statement of owner’s equity, is reported in the balance sheet in the owner’s
equity section.
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,Test Bank for Accounting Principles, Eighth Canadian Edition
EXERCISES
Exercise 1
Mike Homes is a business owned by Mike Smith. The accounting for this business is done by Mike’s sister
Leigh. Leigh is currently preparing the 2021 year-end financial statements which Mike will use for three
purposes:
1. to submit with his tax returns;
2. to support a loan application; and
3. to help him evaluate the success of the business.
Instructions
a) For each of the three purposes identified, describe the information needs the user will fulfill based
on Mike Home’s financial statements.
b) Leigh has suggested that she can help Mike out by recording some January 2022 revenue in
December 2021. She feels this is reasonable because it is just a slight timing difference and so “not
really dishonest.” Comment on the ethical implications of this suggestion and explain how each of
the three users’ needs may be affected if Leigh implements her suggestion.
Solution Exercise 1 (10 min.)
a) Information needs for each of the three users:
1. The tax department will want to know whether the company respects the tax laws.
2. The bank’s loans officer will evaluate the risk of granting credit or lending money.
3. Mike will be able to assess whether the business is earning him the amount of profit he is
expecting in comparison with other similar businesses.
b) Leigh’s action would be unethical because it would be misrepresenting the true results of the
business operations for 2021. It would violate the trust each financial statement user places in the
accounting information. The effect on each of the needs identified in part a) would be:
1. The tax department might assess higher taxes than are really warranted.
2. The bank might lend more money to Mike than they would otherwise, based on expectations of
higher future profits than can actually be achieved because the bank’s projections are based on
incorrect historical information.
3. Mike might assume that past projects were more profitable than they really were. He might
therefore reject new projects based on the assumption that he does not need to increase his
sales above current levels in order to earn target profit levels.
Bloomcode: Comprehension
Difficulty: Medium
Learning Objective: Identify the use and users of accounting and the objective of financial reporting.
Section Reference: Why Is Accounting Important?
CPA: Financial Reporting
CPA: Problem-Solving and Decision-Making
CPA: Professional and Ethical Behaviour
AACSB: Ethics
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, Test Bank for Accounting Principles, Eighth Canadian Edition
Exercise 2
The following are six questions that users of accounting information might ask about Agusta Auto
Towing.
Instructions
For each question, indicate who the decision maker is and whether it is an external or internal user.
Decision Decision maker External or
internal
a) Can Agusta’s operations generate sufficient cash to
make payments on a term loan?
b) Does Agusta have sufficient assets to provide security
for a mortgage loan?
c) Should Agusta continue its current business, or look for
more profitable opportunities in a different line of
business?
d) Were the profit-sharing bonuses paid to unionized
employees equal to the percentage of profit stated in
the employment contract?
e) Was the amount of harmonized sales taxes (HST) that
Agusta remitted to the tax department equal to 13% of
its revenue, as required by law?
f) Does Agusta have enough money in the bank to pay out
drawings to the owner?
Solution Exercise 2 (10 min.)
Decision Decision maker External or
internal
a) Can Agusta’s operations generate sufficient cash to Banker External
make payments on a term loan?
b) Does Agusta have sufficient assets to provide security Banker/lender External
for a mortgage loan?
c) Should Agusta continue its current business, or look Management Internal
for more profitable opportunities in a different line of
business?
d) Were the profit-sharing bonuses paid to unionized Employee union External
employees equal to the percentage of profit stated in
the employment contract?
e) Was the amount of harmonized sales taxes (HST) that Tax assessor External
Agusta remitted to the tax department equal to 13% (Canada Revenue
of its revenue, as required by law? Agency)
f) Does Agusta have enough money in the bank to pay Owner Internal
out drawings to the owner?
Bloomcode: Comprehension
Difficulty: Easy
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