2100 Solutions - CH2

Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
CHAPTER 2
A Further Look at Financial Statements
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives 1. Describe the basic objective of financial reporting, and the qualitative characteristics of accounting information. 2. Identify the two constraints in accounting. 3. Identify the sections of a classified balance sheet. 4. Identify and calculate ratios for analysing a company's profitability. 5. Explain the relationship between a statement of retained earnings, a statement of earnings, and a balance sheet. 6. Identify and calculate ratios for analysing a company's liquidity and solvency. Questions 1, 2, 3 Brief Exercises 1, 2, Exercises A Problems 1A B Problems 1B
4, 5
2A
2B
6, 7, 8, 9
4, 5
1, 2, 3, 4, 5 6
3A, 4A, 5A, 3B, 4B, 5B, 6A 6B 7A, 8A, 9A, 7B, 8B, 9B, 10A 10B 5A, 6A 5B, 6B
10, 12, 13, 14, 15, 16 11
12, 13, 14, 15, 16
7, 8
7A, 8A, 9A. 7B, 8B, 9B, 10A 10B
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Copyright 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
ASSIGNMENT CHARACTERISTICS TABLE

Problem Number 1A 2A 3A 4A 5A 6A 7A 8A 9A 10A 1B 2B 3B 4B 5B 6B 7B Description Comment on objective and qualitative characteristics of financial reporting. Comment on the constraints of accounting. Classify accounts. Prepare classified balance sheet. Prepare financial statements. Prepare financial statements and discuss relationships. Calculate ratios and comment on profitability, liquidity, and solvency. Calculate profitability, liquidity, and solvency ratios. Calculate profitability, liquidity, and solvency ratios and discuss results. Calculate profitability, liquidity, and solvency ratios and discuss results. Comment on the objective and qualitative characteristics of accounting information. Comment on the constraints of accounting. Classify accounts. Prepare classified balance sheet Prepare financial statements. Prepare financial statements and discuss relationships Calculate ratios and comment on profitability, liquidity, and solvency.
2-2
Difficulty Level Moderate Moderate Simple Moderate Moderate Moderate Moderate Simple Moderate Moderate Moderate Moderate Simple Moderate Moderate Moderate Moderate
Time Allotted (min.) 20-30 10-20 10-20 10-20 20-30 20-30 20-30 10-20 15-25 15-25 20-30 10-20 10-20 10-20 20-30 20-30 20-30
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Chapter 2
Problem Number 8B 9B 10B
Description Calculate profitability, liquidity, and solvency ratios. Calculate profitability, liquidity, and solvency ratios and discuss results. Calculate profitability, liquidity, and solvency ratios and discuss results.
Difficulty Level Simple Moderate Moderate
Time Allotted (min.) 10-20 15-25 15-25
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ANSWERS TO QUESTIONS
1. (a) Generally accepted accounting principles (GAAP) are a set of rules and practices, having substantial support, that are recognized as a general guide for financial reporting purposes. (b) The primary objective of financial reporting is to provide information useful for decision-making. (c) The qualitative characteristics are (1) understandability, (2) relevance, (3) reliability, and (4) comparability. Erhardt is correct. Consistency means using the same accounting principles and accounting methods from period to period within a company. Without consistency in the application of accounting principles, it is difficult to determine whether a company is better off, worse off, or in the same position from period to period. When a change is made in accounting principles or methods a company is required to disclose information about the change. Comparability results when different companies use the same accounting principles. Consistency means using the same accounting principles and methods from year to year within the same company. The two constraints are cost-benefit and materiality. The cost-benefit constraint means that information will be presented only when the benefit associated with it exceeds the cost of producing it. The materiality constraint means that an item may be so small that failure to follow generally accepted accounting principles will not influence the decision of a reasonably prudent investor or creditor. The accountant is correct in saying that the rounded financial figures provide useful information to external users for decision making. This is supported by the concept of materiality. When investors are making decisions they are not concerned with immaterial dollar values or cents. In fact, presenting rounded information may make it easier for investors to focus on the big picture. Current assets are cash and other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year of the balance sheet date or the company's operating cycle, whichever is longer. Current assets are listed in the order of liquidity. That is, in the order in which they are expected to be converted into cash. Long-term investments are generally investments in debt and equity of other corporations that are normally held for many years. They also include investments in long-term assets such as land and buildings that are not currently being used in the organizations operating activities. Intangible assets are assets that do not have any physical substance and yet add value to the company. Intangible assets include items such as trademarks, copyrights and goodwill.
2.
3.
4.
5.
6.
7.
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Questions (Continued)
8. The major differences between current liabilities and long-term liabilities are: Difference Source of payment. Time of expected payment. Nature of items. Current Liabilities Existing current assets or other current liabilities. Within one year or the operating cycle. Debts pertaining to the operating cycle and other short-term debts. Long-term Liabilities Other than existing current assets or creating current liabilities. Beyond one year or the operating cycle. Mortgages, bonds and other long-term liabilities.
9.
The two parts of shareholders' equity and the purpose of each are: (1) Share capital is used to record investments of assets in the business by the owners (shareholders). If there is only one class of shares it is known as common shares. (2) Retained earnings is used to record net earnings retained in the business. Amod is correct. A single ratio by itself may not be very meaningful and is best interpreted by comparison with (1) past ratios of the same enterprise, (2) ratios of other enterprises, or (3) industry norms or predetermined standards. In addition, other ratios of the enterprise are necessary to determine overall financial well being. The statement of retained earnings is interrelated with both the statement of earnings and the balance sheet. The statement of earnings reports the net earnings for the period. This figure is then used in the statement of retained earnings, along with dividends to calculate the amount of retained earnings at the end of the period. The retained earnings figure is used in the balance sheet to complete the accounting equation. (a) (b) Tia is not correct. There are three characteristics: liquidity, profitability, and solvency. The three parties are not primarily interested in the same characteristics of a company. Short-term creditors are primarily interested in the liquidity of the enterprise. In contrast, long-term creditors and shareholders are primarily interested in the profitability and solvency of the company. Liquidity ratios: Working capital, current ratio, and cash current debt coverage. Solvency ratios: Debt to total assets and cash total debt coverage. Profitability ratios: Earning per share and price-earnings ratio.
10.
11.
12.
13.
(a) (b) (c)
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Questions (Continued)
14. (a) (b) (c) 15. (a) Liquidity ratios measure the short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash. Profitability ratios measure the earnings or operating success of an enterprise for a given period of time. Solvency ratios measure the company's ability to survive over a long period of time. An increase in earnings per share usually signals good new for the company because higher EPS will generally indicate to investors that the company is providing them with a higher return on their investment. This will cause the companys shares to become more attractive and hopefully increase in price. An increase in the current ratio usually signals good news because the company improved its ability to meet maturing short-term obligations. It can also mean that some of the components of the current ratio (e.g. Accounts receivable, inventory) are slow moving. Further investigation is usually necessary to ensure that this is not the case. The increase in the debt to total assets ratio is bad news because it means that the company has increased its obligations to creditors and has lowered its equity "buffer." A decrease in the cash current debt coverage ratio usually signals bad news for the company because it means the company has been able to generate less cash to meet its short-term obligations. The debt to total assets ratio and cash total debt coverage ratio which indicate the company's ability to repay the face value of the debt at maturity and periodic interest payments. The current ratio, working capital, and cash current debt coverage, which indicate a company's liquidity and short-term debt-paying ability. The earnings per share ratio and the price-earnings ratio. The earnings per share measures the net earnings earned on each common share and the price-earnings ratio measures the relationship between the market price per share and the earnings per share.
(b)
(c) (d)
16.
(a) (b) (c)
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Chapter 2
SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 2-1
(a) (b) (c) (d) (e) (f) General business and economic conditions Predictive value Feedback value Verifiable Conservative Different companies use similar accounting principles
BRIEF EXERCISE 2-2

(a) (b) (c) (d) 1. 2. 3. 4. Predictive value. Neutral. Verifiable. Timely
BRIEF EXERCISE 2-3

(a) Cost-Benefit. (b) Materiality. (c) Materiality.
BRIEF EXERCISE 2-4

CL CA PPE PPE CA IA Accounts payable Accounts receivable Accumulated amortization Building Cash Goodwill CL LT I PPE CA IA CA Income tax payable Investment in long-term bonds Land Merchandise inventory Patent Supplies
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BRIEF EXERCISE 2-5

SWANN LIMITED Balance Sheet (Partial) Current assets Cash Short-term investments Accounts receivable Supplies Prepaid insurance Total current assets $18,400 8,200 16,500 5,200 3,600 $51,900
BRIEF EXERCISE 2-6

(a) 2002 Earnings per share: 2001 Earnings per share:
$38,520 19,956 shares = $1.93 per share
$36,323 19,926 shares = $1.82 per share
Price-earnings ratio:
$30.88 = 16 times $1.93
$23.00 = 12.6 times $1.82
(b) Given that the number of common shares outstanding increased during the year, the increase in earnings per share would indicate that profitability has improved in 2002. As well, investors appear to have more confidence in Leons earnings as indicated by the increase in the priceearnings ratio in 2002.
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BRIEF EXERCISE 2-7

Share Capital a. b. c. d. e. Issued common shares Paid a cash dividend Reported net earnings Paid cash to creditors Issued preferred shares + NE NE NE + Retained Earnings NE + NE NE
BRIEF EXERCISE 2-8

(a) Current ratio
$252,787 = 0.86:1 $293,625
(b) Debt to total assets

$376,002 = 85.5% $439,832
(c) Cash current debt coverage

$(2,574) $293,625 + $240,819 = (0.009) times 2
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SOLUTIONS TO EXERCISES
EXERCISE 2-1
CL CA PPE PPE CA CL IA CA Accounts payable and accrued liabilities Accounts receivable Accumulated amortization Buildings Cash and temporary investments Dividends payable Goodwill Income taxes receivable CA LTI PPE LTL CA PPE SC CA Inventories Investments Land Long-term debt Materials and supplies Office equipment and furniture Preferred shares Prepaid expenses and other
EXERCISE 2-2
JUMBO ENTERTAINMENT INC. Balance Sheet February 28, 2003 Assets Current assets Cash and short-term investments Accounts and current notes receivable Inventory Prepaid expenses Total current assets Property, plant and equipment DVD and video rental library Capital assets $1,001,640 Less: Accumulated amortization 429,241 Total property, plant, and equipment Intangible assets Trademarks, franchise licences and goodwill Total assets
$ 878,012 415,373 1,231,307 47,396 2,572,088 $166,994 572,399 739,393 3,789,744 $7,101,225
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EXERCISE 2-3
(a) Net earnings = = = = = = Revenues expenses $18,180 780 5,360 2,600 $9,440 Beginning retained earnings + net earnings dividends $40,000 + 9,440 0 $49,440 SUMMITS BOWLING ALLEY LTD. Balance Sheet December 31, 2004 Assets Current assets Cash Accounts receivable Prepaid insurance Total current assets Property, plant and equipment Land Building $105,800 Less: Accumulated amortization 45,600 Equipment $82,400 Less: Accumulated amortization 18,720 Total property, plant and equipment Total assets
Retained earnings
(b)
$20,840 14,520 4,680 $ 40,040 $61,200 60,200 63,680 185,080 $225,120
Liabilities and Shareholders' Equity Current liabilities Accounts payable $ 12,480 Interest payable 3,600 Current portion of long-term debt 13,600 Total current liabilities $ 29,680 Mortgage payable 80,000 Total liabilities 109,680 Shareholders' equity Common shares 66,000 Retained earnings 0 49,440 Total shareholders equity 115,440 Total liabilities and shareholders' equity $225,120
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EXERCISE 2-4
THE JEAN COUTU GROUP (PJC) INC. Balance Sheet May 31, 2002 Assets Current assets Accounts receivable Inventories Prepaid expenses Other current assets Total current assets Investments Property, plant and equipment Less: Accumulated amortization Total property, plant and equipment Intangible assets Less: Accumulated amortization Other assets Total assets $231,142 515,483 8,493 23,323 $ 778,441 236,679 $572,712 157,217 415,495 $265,743 60,479 205,264 25,726 $1,661,605
Liabilities and Shareholders' Equity Current liabilities Bank overdraft and bank loans Accounts payable Income taxes payable Current portion of long-term debt Total current liabilities Long-term debt Other long-term debt Total liabilities Shareholders' equity Capital stock Other shareholders equity Retained earnings Total shareholders equity Total liabilities and shareholders' equity $ 46,360 296,044 10,106 32,618 $ 385,128 324,083 6,335 715,546 $203,763 20,711 721,585 946,059 $1,661,605
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Chapter 2
EXERCISE 2-5
(a) BATRA CORPORATION Statement of Earnings Year Ended July 31, 2004 Revenues Commission revenue Rent revenue Total revenues Expenses Salaries expense Rent expense Utilities expense Amortization expense Total expenses Earnings before income taxes Income tax expense Net earnings BATRA CORPORATION Statement of Retained Earnings Year Ended July 31, 2004 Retained earnings, August 1, 2003 Add: Net earnings Less: Dividends Retained earnings, July 31, 2004 $25,200 15,025 40,22550 4,000 $36,225 $73,100 18,300 91,400 48,700 10,800 4,900 3,975 68,375 23,025 8,000 $15,025
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Chapter 2
EXERCISE 2-5 (Continued)

(b) BATRA CORPORATION Balance Sheet July 31, 2004 Assets Current assets Cash Short-term investments Accounts receivable Supplies Total current assets Property, plant and equipment Equipment Less: Accumulated amortization Total property, plant and equipment Total assets $12,795 20,000 18,780 1,500 $53,075 $19,875 7,950 11,925 $65,000
Liabilities and Shareholders' Equity Current liabilities Accounts payable Long-term note payable Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders equity Total liabilities and shareholders' equity $ 6,220 2,555 8,775 $20,000 36,225 56,225 $65,000
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Chapter 2
EXERCISE 2-6
(a) and (b) 2004 Earnings per share: 2003 Earnings per share:
$58,500 - $2,000 67,000 shares = $0.84 per share
$81,000 - $2,000 69,000 shares = $1.15 per share
$10.00 = 11.9 times $0.84
$9.00 = 7.8 times $1.15
(c)
The company was less profitable in 2004 than in 2003 as evidenced by its lower earnings and earnings per share. However, given the increase in the price-earnings ratio, investors still seemed to have a positive opinion about the future earnings prospects of the company despite the decline in the earnings per share. A potential investor may be more concerned about he decline in earnings per share and wonder if the higher price-earnings ratio might mean that the share price is to high and likely to fall in the near future.
(d)
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Chapter 2
EXERCISE 2-7
(a) 2003 Working capital Current ratio
$30,483 = 0.943:1 $32,617 $27,878 = 1.0402:1 $27,282
$30,483 $32,617 = $(2,134)
2002
$27,878 $27,282 = $596
(b) The decline in the working capital and current ratio indicate that Wal-Marts liquidity deteriorated in 2003. (c) For 2002, Wal-Marts current ratio is lower than the current ratio of both Sears and The Bay. Wal-Marts current ratio is also lower than the industry average. This would indicate that Wal-Mart is less liquid than Sears, The Bay and the industry as a whole.
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Chapter 2
EXERCISE 2-8
(a) Debt to total assets =
2002 =
Total debt Total assets
$564,821 = 34% $1,656,248
2001 =
$466,017 = 30.4% $1,532,557

Cash provided from operating activities Average current liabilities
(b)
Cash current debt coverage =
$117,716 $551,540 + $437,946 = 0.24 times 2
Cash total debt coverage =
Cash provided from operating activities Average total liabilities
$117,716 $564,821 + $466,017 = 0.23 times 2
(c) The Carnivals solvency, a measure of its ability to survive over the long-term, has deteriorated in 2002 versus 2001. Its debt to total assets ratio increased from 30.4% in 2001 to 34% in 2002. This means that in 2002, 34% of its assets were financed through debt compared to 30.4% in 2001. (d) In 2002, Carnival generated sufficient cash from its operating activities ($117,716) to provide for the full amount of cash used in investing activities in the year ($107,393). Had there been a deficiency, the deficiency could have been provided for out of cash the organization had on hand at the beginning of the year. Alternatively, any deficiency could have been covered through financing activities such as issuing debt.
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Chapter 2
SOLUTIONS TO PROBLEMS
PROBLEM 2-1A
(a) Generally accepted accounting principles are the accounting rules that have substantial authoritative support and are recognized as a general guide for financial reporting in Canada. In Canada, the primary responsibility for the development of the generally accepted accounting principles rests with the Canadian Institute of Chartered Accountants and is codified in the CICA Handbook. (b) Financial reporting is the term used to describe all of the financial information presented by a company both in its financial statements and in additional disclosures in the annual report. The basic objective of financial reporting is to communicate information that is useful to investors, creditors and others in making investment and lending decisions and in assessing management performance. (c) In order for information provided in financial statements to be useful, it must be understood by the users. Many investors may not understand detailed scientific findings. While scientific findings, knowledgeable employees and good customer relationships are important to business, these are nonfinancial performance measures. As such, they are not part of the financial report. The information is relevant to users, but may not necessarily be capable of being reliably measured. The fourth qualitative characteristic, comparability, is not specifically addressed here.
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PROBLEM 2-2A
(a) Sears may feel that reporting its cost of merchandise sold separately in its financial statements may provide its competitors with useful information. The lack of disclosure in this area makes it more difficult for users of the financial statements to evaluate the companys performance. (b) The two constraints in accounting are: 1. the cost-benefit constraint, which ensures that the value of the information exceeds the cost of providing it; and 2. materiality relates to a financial statement items impact on a companys overall financial condition and operations. Neither of these constraints likely impact Sears reporting policy with respect to cost of goods sold. Sears may round its financial statements to the nearest thousand dollars based on the materiality constraint. Sears could hire more security guards, put in more security monitors, count inventory daily, etc. as ways to monitor and control inventory theft. While they do some of these, at some point the cost exceeds the benefit.
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Chapter 2
PROBLEM 2-3A
Account Accounts payable Accounts receivable Accum. amortization, building Accum. amortization, equipment Amortization expense Building Cash Common shares Cost of goods sold Current portion of long-term debt Dividends Equipment Income tax expense Income taxes payable Interest expense Inventories Land Long-term debt Prepaid expenses Retained earnings, beginning of year Sales Selling expenses Short-term investments Wages payable
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Financial Statement Classification Balance Sheet: current liabilities Balance Sheet: current assets Balance Sheet: property, plant and equipment Balance Sheet: property, plant and equipment Statement of Earnings: expense Balance Sheet: property, plant and equipment Balance Sheet: current assets Balance Sheet: shareholders' equity Statement of Earnings: expense Balance Sheet: current liabilities Statement of Retained Earnings Balance Sheet: property, plant and equipment Statement of Earnings: expense Balance Sheet: current liabilities Statement of Earnings: expense Balance Sheet: current assets Balance Sheet: property, plant and equipment Balance Sheet: long-term liability Balance Sheet: current assets Statement of Retained Earnings Statement of Earnings: revenue Statement of Earnings: expense Balance Sheet: current assets Balance Sheet: current liabilities
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PROBLEM 2-4A
INTRAWEST CORPORATION Balance Sheet June 30, 2002 (thousands) Assets Current assets Cash and cash equivalents $ 76,689 Amounts receivable 109,948 Other current assets 495,170 Total current assets Investment properties Property, plant and equipment Ski and resort operations $1,125,603 Less: Accumulated amortization, Ski and resort operation 283,762 Total property, plant and equipment Goodwill Other noncurrent assets Total assets Liabilities and Shareholders' Equity Current liabilities Bank and other indebtedness, current portion $282,047 Amounts payable 195,254 Other current liabilities 99,484 Total current liabilities Long-term liabilities Long-term liabilities $138,991 Bank and other indebtedness, noncurrent portion 773,872 Total long-term liabilities Total liabilities Shareholders' equity Capital stock $466,899 Retained earnings 210,370 Total shareholders equity Total liabilities and shareholders' equity
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$ 681,807 468,218
841,841 15,985 159,066 $2,166,917
$ 576,785
912,863 1,489,648
677,269 $2,166,917
Chapter 2
PROBLEM 2-5A
(a) BEAULIEU LIMITED Statement of Earnings Year Ended December 31, 2004 Service revenue Expenses Repair expense Salaries expense Rent expense Utilities expense Insurance expense Amortization expense Total expenses Earnings before income taxes Income tax expense Net earnings BEAULIEU LIMITED Statement of Retained Earnings Year Ended December 31, 2004 Retained earnings, January 1 Add: Net earnings Less: Dividends Retained earnings, December 31 $14,000 6,400 20,400 2,200 $18,200 $82,000 3,200 36,000 18,000 3,700 1,200 7,000 69,100 12,900 6,500 $ 6,400
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PROBLEM 2-5A (Continued) (b) BEAULIEU CORPORATION Balance Sheet December 31, 2004 Assets Current assets Cash $ 8,200 Temporary investments 15,400 Accounts receivable 7,500 Prepaid insurance 1,800 Total current assets Property, plant and equipment Equipment $32,000 Less: Accumulated amortization 10,500 Total property, plant and equipment Total assets
$32,900
21,500 $54,400
Liabilities and Shareholders' Equity Current liabilities Accounts payable $12,000 Salaries payable 3,000 Income taxes payable 1,200 Total current liabilities $16,200 Shareholders' equity Common shares $20,000 Retained earnings 18,200 Total shareholders equity 38,200 Total liabilities and shareholders' equity $54,400
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Chapter 2
PROBLEM 2-6A
(a) COMMERCE CRUSADERS INC. Statement of Earnings Year Ended April 30, 2004 Sales Expenses Cost of goods sold Operating expense Wages expense Amortization expense Interest expense Total expenses Earnings before income tax Income tax expense Net earnings COMMERCE CRUSADERS INC. Statement of Retained Earnings Year Ended April 30, 2004 Retained earnings, May 1 Add: Net earnings Less: Dividends Retained earnings, April 30 $10,150 23,1503,350 33,30013,500 3,250 $30,05010,250 $34,000 9,900 4,400 7,000 4,000 4,000 29,300 24,5004,700 1,350 $ 23,1503,350
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PROBLEM 2-6A (Continued) (b) COMMERCE CRUSADERS INC. Balance Sheet April 30, 2004 Assets Current assets Cash $ 5,700 Short-term investments 12,000 Accounts receivable 8,100 Inventories 9,670 Prepaid expenses 120 Total current assets Property, plant and equipment Land Building $15,370 Less accumulated amortization, building 1,500 Equipment $12,200 Less accumulated amortization, equipment 5,000 Total property, plant and equipment Total assets
$35,590 14,000 13,870 7,200 35,070 $70,660
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Chapter 2
PROBLEM 2-6A (Continued) Liabilities and Shareholders' Equity Current liabilities Accounts payable $8,340 Wages payable 2,220 Income taxes payable 1,350 Current portion of long-term debt 4,500 Total current liabilities $16,410 Long-term liabilities Notes payable 35,000 Total liabilities 51,410 Shareholders' equity Common shares $ 9,000 Retained earnings 30,05010,250 Total shareholders equity 39,05019,250 Total liabilities and shareholders' equity $90,46070,660 (c) The statement of earnings reports the net earnings for the period. This figure is then used in the statement of retained earnings, along with dividends to calculate the amount of retained earnings at the end of the period. The retained earnings figure is used in the balance sheet to complete the accounting equation.
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Chapter 2
PROBLEM 2-7A
(a) Earnings per share:
Net earnings - Preferred dividends Average number of common shares
Belliveau
$36,000 = $0.18 per share 200,000 shares
$173,000 400,000 shares
Shields = $0.43 per share
Shields Corp. appears to be more profitable than Belliveau as it has higher earnings per share. Price-earnings Ratio:
Market price per share Earnings per share
Belliveau
$2.50 = 13.89 times $0.18
$7.00 $0.43
Shields = 16.3028 times
Investors appear to have more confidence in the earnings and profitability of Shields Corp. since the company has a higher earnings per sharepriceearnings ratio than Belliveau Corp. (b) Current Ratio:
Current assets Current liabilities

Belliveau
$130,000 = 2.2 : 1 $60,000
$700,000 = 2.8 : 1 $250,000
Shields
Shields 2004 current ratio of 2.8:1 is higher than Belliveaus current ratio of 2.2:1, which suggests that Shields is slightly more liquid than Belliveau.
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Chapter 2
PROBLEM 2-7A (Continued) (b) (Continued) Cash current debt coverage ratio:
Belliveau
$20,000 $60,000 + $52,000 2
Shields
$185,000 $250,000 + $275,000 2
= 0.4 times
= 0.7 times
Shields ratio of 0.7 times versus Belliveaus measure of 0.4 times suggests that Shields is the more liquid of the two companies. (c) Debt to total assets:
Total debt Total assets

Belliveau
$110,000 = 25.3% $435,000 a
Shields
$450,000 = 30% $1,500,000 b
Belliveau appears to be more solvent. Belliveaus 2004 debt to total assets ratio of 25.3% is lower than Shields ratio of 30%. The lower the percentage of debt to total assets, the lower the risk that a company may be unable to pay its debts as they come due.
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Chapter 2
PROBLEM 2-7A (Continued) (c) (Continued) Cash total debt coverage ratio:
Belliveau
$20,000 $110,000 + $120,000 c 2
Shields
$185,000 $450,000 + $425,000 d 2
= 0.2 times
= 0.4 times
Shields cash total debt coverage ratio of 0.4 times suggests that Shields is more solvent than Belliveau, which has a ratio of 0.2 times.
a
Total liabilities: $110,000 ($60,000 + $50,000) is Belliveaus 2004 total liabilities. Total assets: $435,000 ($130,000 + $305,000) is Belliveaus 2004 total assets.
Total liabilities: $450,000 ($250,000 + $200,000) is Shields 2004 total liabilities. Total assets: $1,500,000 ($700,000 + $800,000) is Shields 2004 total assets.
Total liabilities: $120,000 ($52,000 + $68,000) is Belliveaus 2003 total liabilities. Total liabilities: $425,000 ($275,000 + $150,000) is Shields 2003 total liabilities.
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Chapter 2
PROBLEM 2-8A
(a) Current ratio =
$246,500 = 2.21.55:1 $159,500
$55,600 (c) Cash current debt coverage = $159,500 + $156,000 = 0.52 35 times 2
(d) Debt to total assets = $811,800 = 35.9%

$55,600 (e) Cash total debt coverage = $291,500 + $276,000 = 0.29 20 times 2
$291,500
(f) Earnings per share = (g) Price-earnings ratio =
$82,900 = $1.1811.84 7,000 shares $34.00 = 28.82.9 times $11.84
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PROBLEM 2-9A
(a) 2004 1. Earnings per share: 2003 Earnings per share:
$46,000 76,000 shares = $0.60 per share

2. Price-earnings ratio:
$4.00 $0.60
$163,000 50,000 shares = $3.26 per share

$6.00 $3.26
= 6.6 times
= 1.8 times
3.
Working capital:
($50,000 + $90,000 + $80,000) $98,000 = $122,000
Working capital:
($24,000 + $65,000 + $75,000) $75,000 = $89,000
4.
Current ratio:
$220,000 $98,000
Current ratio:
$164,000 = $75,000
= 2.24:1
2.19:1
5.
Debt to total assets:

$98,000 + $105,000 $860,000

$75,000 + $75,000 $654,000
= 23.6%
= 22.9%
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Chapter 2
PROBLEM 2-9A (Continued) (b) The underlying profitability of the corporation has declined as indicated by the decline in earnings and earnings per share. However, the decline in earnings per share can also be attributed to some extent to the increase in the average number of common shares from 50,000 in 2003 to 76,000 in 2004. It seems investors still have confidence in the earnings of the company as the priceearnings ratio has improved despite the decline in profitability. However, the increase in the P/E ratio may just be indicative of the fact that the shares are overvalued and may decline in the future. Despite the decline in earnings, the companys liquidity position improved in 2004. Working capital increased by $33,000 ($122,000 - $89,000) and the working capital ratio increased from 2.19:1 to 2.24:1. This means the company now has more current assets on hand to repay its currently maturing obligations. Finally, Giasson Corporations solvency also appears to have remained fairly constant in 2004, as total assets are financed only 23.6% by debt in 2004 versus 22.9% in 2003.
Solutions Manual
2-32
Chapter 2
PROBLEM 2-10A
(a) ($ in millions) Abitibi Working Capital Current Ratio Debt to Total Assets Cash total debt coverage Earnings per share
$1,640 - $1,415 = $225
Tembec
$1,273.5 - $504.1 = $769.4
$1,640 $1,415
= 1.16:1
$1,273.5 $ 504.1
= 2.52:1
$8,442 $11,707
= 72.1%
$2,771.2 $4,138.8
= 67%
$1,037 = $8,301
0.125 times
$173.6 $2,303.8
= 0.08 times
$289 440 shares = $0.66 per share

$11.63 $0.66
$77.9 82 shares = $0.95 per share

$10.10 $0.95
Price -earnings ratio
= 17.6 times
= 10.6 times
Solutions Manual
2-33
Chapter 2
PROBLEM 2-10A (Continued) (b) (Continued) Liquidity With a current ratio of 1.16 Abitibi appears to be less liquid then both Tembec and the industry. Tembecs current ratio of 2.52:1 is better than the industry average of 1.23:1. Overall, Tembec is more liquid than both Abitibi and the industry. Profitability Tembec is more profitable than Abitibi in that it has higher earnings per share. Also, both companies have higher earnings per share than the industry. However, investors appear to have more confidence in the earnings of Abitibi as evidenced by Abitibis price-earnings ratio. However, a high price-earnings ratio may indicate that Abitibis shares are overpriced. Both companies have a lower price-earnings ratio than the industry. Solvency When looking at the debt to total asset ratio, Tembec appears to be more solvent than Abitibi as less of Tembecs assets are financed by debt. However, Abitibi seems to be able to generate more cash form operations that can be used to repay their liabilities as evidenced by Abitibis higher cash total debt coverage ratio.
Solutions Manual
2-34
Chapter 2
PROBLEM 2-1B
(a) The primary objective of financial reporting is to provide information for decision making. In reporting the financial results of the company the financial statements meet some of the investors need. There is other information that investors need that is not part of the financial reporting package such as plans for future growth and the experience of the management team. (b) Investors buy Net Nannys shares despite the losses because they expect the company to do well in the long-term. This does not mean that the information in the financial statements is not reliable or relevant. It does confirm that there is additional information, not contained in a companys financial statements, that investors use when making investment decisions. (c) The change in reporting currency will make the information easier for some investors to use. It will be easier to compare Net Nannys results to similar US companies. It will be necessary for Net Nanny to restate its previous years statements for comparability.
Solutions Manual
2-35
Chapter 2
PROBLEM 2-2B
The two constraints in accounting are: 1. the cost-benefit constraint, which ensures that the value of the information exceeds the cost of providing it; and 2. materiality relates to a financial statement items impact on a companys overall financial condition and operations. The Empire Company Limited has almost ten billion dollars in revenue. The type of information that Ryan is looking for, such as sales and cost data by various categories, is generally not disclosed in external financial statements. It would be prohibitively expensive to present such information to external users, and have it verified by external auditors. The company quite likely has internal reports with data on various ticket and concession sales. However, the information used by management is not always material to external users. As well, companies like to guard against disclosure of information if doing so would weaken their competitive position.
Solutions Manual
2-36
Chapter 2
PROBLEM 2-3B
Account Accounts payable and accrued liabilities Accounts receivable Buildings Cash and cash equivalents Common shares Customers deposits Dividends payable Future income tax liabilities Income taxes recoverable Inventory Land Leasehold improvements Long-term liabilities Marketable securities Retained earnings Vehicles Balance Sheet Category Current liabilities Current assets Property, plant and equipment Current assets Shareholders equity Current liabilities Current liabilities Current liabilities or long-term liabilities Current assets Current assets Property, plant and equipment Property, plant and equipment Long-term liabilities Current assets Shareholders equity Property, plant and equipment
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2-37
Chapter 2
PROBLEM 2-4B
YAHOO! INC. Balance Sheet December 31, 2002 Assets Current assets Cash and cash equivalents Short-term investments Accounts receivable Prepaid expenses and other current assets Total current assets Long-term investments Property and equipment, net Intangible assets, net Goodwill Other assets Total assets $310,972 463,204 113,612 82,216 $ 970,004 763,408 371,272 96,252 415,225 174,020 $2,790,181
Liabilities and Shareholders Equity Current liabilities Accounts payable $ 18,738 Deferred revenuecurrent 135,501 Accrued expenses and other current liabilities 257,575 Total current liabilities $ 411,814 Other liabilities 116,097 Total liabilities 527,911 Shareholders equity Common stock $2,270,845 Other shareholders equity (1,082) Deficit (7,493) Total shareholders equity 2,262,270 Total liabilities and shareholders equity $ 2,790,181
Solutions Manual
2-38
Chapter 2
PROBLEM 2-5B
(a) MBONG CORPORATION Statement of Earnings Year Ended December 31, 2004 Service revenue Expenses Repair expense Salaries expense Rent expense Utilities expense Insurance expense Amortization expense Supplies expense Total expenses Earnings before income taxes Income tax expense Net earnings MBONG CORPORATION Statement of Retained Earnings Year Ended December 31, 2004 Retained earnings, January 1 Add: Net earnings Less, Dividends Retained earnings, December 31 $16,000 6,000 22,000 2,000 $20,000 $65,000 1,800 35,000 12,000 1,700 2,200 2,600 700 56,000 9,000 3,000 $ 6,000
Solutions Manual
2-39
Chapter 2
PROBLEM 2-5B (Continued) (b) MBONG CORPORATION Balance Sheet December 31, 2004 Assets Current assets Cash $13,600 Accounts receivable 13,500 Supplies 1,000 Prepaid insurance 3,500 Total current assets Investments Property, plant and equipment Equipment $13,000 Less: Accumulated amortization 5,600 Total property, plant and equipment Total assets
$31,600 22,300
7,400 $61,300
Liabilities and Shareholders' Equity Current liabilities Accounts payable $13,300 Salaries payable 3,000 Total current liabilities $16,300 Note payable 5,000 Total liabilities 21,300 Shareholders' equity Common shares $20,000 Retained earnings 20,000 Total shareholders equity 40,000 Total liabilities and shareholders' equity $61,300
Solutions Manual
2-40
Chapter 2
PROBLEM 2-6B
(a) CHEUNG CORPORATION Statement of Earnings Year Ended April 30, 2004 Fee revenue Expenses Salaries expense Rent expense Interest expense Amortization expense Total expenses Earnings before income taxes Income tax expense Net earnings $32,590 6,840 6006,000 342 4,610 12,39217,792 20,19814,798 4,500 $15,69810,298
CHEUNG CORPORATION Statement of Retained Earnings Year Ended April 30, 2004 Retained earnings, May 1, 2003 Add: Net earnings Less: Dividends Retained earnings, April 30, 2004 $13,960 15,69810,298 29,65824,258 3,650 $26,00820,608
Solutions Manual
2-41
Chapter 2
PROBLEM 2-6B (Continued) (b) CHEUNG CORPORATION Balance Sheet April 30, 2004 Assets Current assets Cash $20,263 Short-term investments 16,40011,000 Accounts receivable 7,840 Prepaid rent 500 Total current assets $45,00339,603 Property, plant and equipment Equipment $23,050 Less: Accumulated amortization 9,220 Total property, plant and equipment 13,830 Total assets $58,83353,433 Liabilities and Shareholders' Equity Current liabilities Accounts payable $5,972 Interest payable 28 Income taxes payable 1,125 Total current liabilities $ 7,125 Notes payable 5,700 Total liabilities 12,825 Shareholders' equity Common shares $20,000 Retained earnings 26,00820,608 Total shareholders equity 46,00840,608 Total liabilities and shareholders' equity $58,83353,433 (c) The statement of earnings reports the net earnings for the period. This figure is then used in the statement of retained earnings, along with dividends to calculate the amount of retained earnings at the end of the period. The retained earnings figure is used in the balance sheet to complete the accounting equation.
Solutions Manual
2-42
Chapter 2
PROBLEM 2-7B
(a) Earnings per share:
Net earnings - Preferred dividends Average number of common shares
Chen
$311,630 =$3.12 100,000 shares
Cassie per share

$113,040 50,000 shares
= $2.26 per share
Chen Corporation appears to be more profitable than Cassie as it has higher earnings per share. Price-Earnings Ratio:
Market price per share Earnings per share
Chen
$25.00 = 8.0 times $3.12
$14.00 $2.26
Cassie = 6.2 times
Investors appear to have more confidence in the earnings and profitability of Chen Corporation since the company has a higher price-earnings ratio than Cassie Corporation. (b) Working Capital: Current assets current liabilities Chen
$425,975 $66,325 = $359,650
Cassie
$190,336 $35,458 = $154,878
Solutions Manual
2-43
Chapter 2
PROBLEM 2-7B (Continued) (b) (Continued) Current Ratio:
Current assets Current liabilities

Chen
$425,975 = 6.4 : 1 $66,325
Cassie
$190,336 = 5.4 : 1 $35,458
Chens 2004 current ratio of 6.4:1 is higher than Cassies current ratio of 5.4:1, which suggests that Chen is slightly more liquid than Cassie. Cash current debt coverage ratio:
Chen
$162,594 $66,325 + $75,815 2
Cassie
$24,211 $35,458 + $30,281 2
= 2.3
= 0.7
Chens cash current debt coverage ratio of 2.3 times is 3 times that of Cassie, showing that Chen is more liquid.
(c)
Total liabilities Total assets

Chen
$174,825 = 18.5% $947,285a
Cassie
$65,078 = 19.7% $330,064b
PROBLEM 2-7B (Continued)

Solutions Manual 2-44 Chapter 2
(c) (Continued) Chen appears to be slightly more solvent. Chens 2004 debt to total assets ratio of 18.5% is lower than Cassies ratio of 19.7%. The lower the percentage of debt to total assets, the lower the risk that a company may be unable to pay its debts as they come due. Cash total debt coverage ratio:
Chen
$162,594 $174,825 + $165,815c 2
Cassie = 0.95
$24,211 $65,078 + $55,281d 2
= 0.4
Chens cash total debt coverage ratio of 0.95 times also suggests that Chen is more solvent than Cassie, which has a ratio of 0.4 times.
a
Total liabilities: $174,825 ($66,325 + $108,500) is Chens 2004 total liabilities. Total assets: $947,285 ($425,975 + $521,310) is Chens 2004 total assets.
Total liabilities: $65,078 ($35,458 + $29,620) is Cassies 2004 total liabilities. Total assets: $330,064 ($190,336 + $139,728) is Cassies 2004 total assets.
Total liabilities: $165,815 ($75,815 + $90,000) is Chens 2003 total liabilities. Total liabilities: $55,281 ($30,281 + $25,000) is Cassies 2003 total liabilities.
Solutions Manual
2-45
Chapter 2
PROBLEM 2-8B
(a) Working capital = $444,900 $142,500 = $302,400 (b) Current ratio = $142,500 = 1.83.1:1
$74,900 (c) Cash current debt coverage = $142,500 + $107,400 = 01.09.60 times 2
$444,900
(d) Debt to total assets = $1,070,200 = 42.43%

$74,900 (e) Cash total debt coverage = $452,500 + $307,400 = 0.50 20 times 2
$452,500
(f) Earnings per share = 50,000 shares = $2.45 (g) Price-earnings ratio = $2.45 = 12.24 2.9 times
$7.00
$122,300
Solutions Manual
2-46
Chapter 2
PROBLEM 2-9B
(a) 2004 1. Earnings per share: 2003 Earnings per share:
$94,000 82,000 shares = $1.15 per share
$52,000 80,000 shares = $0.65 per share
2.
$66.00 $1.15
$44.00 $0.65
= 57.4 times
= 67.7 times
3.
Working capital:
$(25,000 + $70,000 + $90,000) - $75,000 = $110,000
Working capital:
$(20,000 + $65,000 + $70,000) - $80,000 = $75,000
4.
Current ratio:
$185,000 $75,000
Current ratio:
$155,000 = $80,000
= 2.46:1
1.94:1
5.

$75,000 + $86,000 $760,000

$80,000 + $110,000 $685,000
= 21.2%
= 27.7%
Solutions Manual
2-47
Chapter 2
PROBLEM 2-9B (Continued) (b) The underlying profitability of the corporation has improved as evidenced by the improvement in earnings and earnings per share. However, it seems investors have less confidence in the future earnings of the company as the price-earnings ratio has declined despite the increase in profitability. The companys liquidity position improved in 2004. Working capital increased by $35,000 ($110,000 - $75,000) and the current ratio increased from 1:94:1 to 2.46:1. This means the company now has more current assets on hand to repay its currently maturing obligations. Finally, Pitka Corporations solvency also appears to have improved in 2004, as total assets are financed only 21.2% by debt in 2004 versus 27.7% in 2003. The lower the percentage of debt to total assets, the lower the risk that a company may be unable to pay its debts as they come due.
Solutions Manual
2-48
Chapter 2
PROBLEM 2-10B
(a) ($ in thousands) Big Rock Working capital Current ratio Debt to total assets Cash current debt coverage Cash total debt coverage Earnings per share
$6,492.3 - $5,357.9 = $1,134.4
Sleeman
$44,511- $46,315 = $1,804
$6,492.3 $5,357.9
= 1.21:1
$44,511 $46,315
= 0.96:1
$11,276.6 $33,060.7
= 34.1%
$124,554 $197,642
= 63%
$2,580.5 = $4,916.8
0.52 times
$18,984 $43,044.5 = 0.44 times
$2,580.5 = $11,792.3
0.22 times
$18,984 $122,089.5
= 0.15 times
$1,217.8 5,167.7 shares

= $0.24 per share
$9,765 15,223 shares

= $0.64 per share
$9.73 $0.64
Price earnings ratio
$5.50 $0.24
= 22.9 times
= 15.2 times
Solutions Manual
2-49
Chapter 2
PROBLEM 2-10B (Continued) (b) Liquidity With a current ratio of 1.21 Big Rock appears to be more liquid than both Sleeman and the industry. Sleemans current ratio of 0.96 is even less than the industry average of 1.18:1. As well, Big Rock has been able to generate more cash to repay it current liabilities as indicated by Big Rocks higher cash current debt coverage ratio. Overall, it appears that Big Rock is more liquid than both Sleeman and the industry. Profitability Sleeman is more profitable than Big Rock in that it has a higher earnings per share. However, investors appear to have more confidence in the earnings of Big Rock as evidenced by Big Rocks higher price-earnings ratio. Both companies have higher earnings per share than the industry. However, both companies have a much lower price-earnings ratio than the industry. Solvency Big Rock appears more solvent than Sleeman. It betters Sleeman in the debt to total assets ratio and in the cash total debt coverage ratio.
Solutions Manual
2-50
Chapter 2
BYP 2-1 FINANCIAL REPORTING PROBLEM

(a) Total current assets were $3,526,000,000 at December 28, 2002, and $3,086,000,000 at December 29, 2001. (b) Current assets are properly listed in the order of liquidity. As you will learn in a later chapter, inventories are considered to be less liquid than receivables. They are listed below receivables and before prepaid expenses. (c) The asset classifications are similar to the text: current assets, followed by non-current assets such as fixed assets, goodwill, future income taxes and other assets. (c) Total current liabilities were $3,154,000,000 at December 28, 2002, and $2,796,000,000 at December 29, 2001.
Solutions Manual
2-51
Chapter 2
BYP 2-2 COMPARATIVE ANALYSIS PROBLEM

(a) Loblaw (millions) 1. Working capital 2. Current ratio 3. Debt to total assets 4. Earnings per share 5. Price-earnings ratio
$3,526 - $3,154 = $372
$3,526 $3,154 $6,986 $11,110 =1.12 :1
Sobeys (millions)
$1,094 - $1,180.5 = $86.1
$1,094.4 $1,180.5 $1,755.7 $3,192.5 = 0.93 : 1
= 63%
= 55%
$728 276.2 shares
= $2.64
$179.0 65.9 shares
= $2.72
$54.00 $2.64
= 20.5 times
$36.75 $2.72
= 13.5 times
(b) Sobeys has a negative working capital and a current ratio of less than one. Loblaw has a positive working capital and a current ratio which indicates the company has sufficient assets to cover its current liabilities. Using these ratios it appears that Sobeys is in worse condition based on relative liquidity. Based on the debt to total assets ratio it appears that Loblaw is less solvent than Sobeys. Because Sobeys debt to total assets ratio is lower than Loblaws, Sobeys would be considered better able to pay its debts as they come due. Based on earnings per share Sobeys appears to be more profitable than Loblaw. Sobeys has been able to generate $2.72 in earnings for each common share while Loblaw has only generated $2.64. However, as indicated by the higher price earnings ratio, investors appear to have more confidence in Loblaws earnings and relatively seem to be willing to pay more for Loblaws shares.
Solutions Manual
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Chapter 2
BYP 2-3 RESEARCH CASE

The students' answers depend on the company and article selected.
Solutions Manual
2-53
Chapter 2
BYP 2-4 INTERPRETING FINANCIAL STATEMENTS

(a) The percentage increase in The Gaps total assets during this period is calculated as:
$9,902 $3,964 = 150% $3,964
The average increase per year can be approximated as:

150% = 37.5% per year 4 years
(b) The Gaps working capital increased significantly during this period, while its current ratio also improved. The improvement in the current ratio would suggest that The Gaps liquidity improved. The current ratio is a better measure of liquidity because it provides a relative measure; that is, current assets compared to current liabilities. Working capital only tells us the net amount of current assets and current liabilities. It is hard to say whether a given amount of working capital is adequate or inadequate without knowing the size of the company. Another problem with interpreting The Gaps working capital is that it fluctuated considerably during the period. The Gaps current ratio may have improved because the clothing chain expanded rapidly during this period. With expansion comes the need to carry additional inventories which is a significant component of current assets. (c) The debt to total assets ratio suggests that The Gaps solvency declined during the period, as the percentage of debt used to finance its assets increased. However, this could be due to the additional funds required to finance the companys growth over the past several years. (d) The companys earnings per share have decreased over the past several years. The average earnings per share from 1998 to 2000 2002 was:
[$0.55 + $(0.01) + $1.03 + $1.32 + $0.95] = $0.77 5
On the average, earnings per share has declined which might cause some investors to have concerns about the companys future prospects. However, investors would need information concerning the change in the number of common shares outstanding to fully assess the earnings per share, as the decline in EPS could be related to increases in the number of shares rather than decreases in profitability.
Solutions Manual
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Chapter 2
BYP 2-5 A GLOBAL FOCUS

(a) By switching to US reporting standards, a companys statements would be more relevant to the companys US investors (present and potential). This may make it easier for them to raise funds in the US, a much larger capital base than Canada. It will make it easier for US investors to understand the statements because they will use standards that they are familiar with and it will be easier for them to make comparisons with US companies. Many non-US companies use US standards. The disadvantages associated with such a change include making it more difficult for Canadian investors to understand the statements and make comparisons to companys using Canadian standards. It will also increase the financial reporting coststhe company will be required to reconcile the statement prepared using the different standards. The impact of the switch on a companys net earnings could be either an advantage or disadvantage depending on the individual circumstance of the company. (b) The use of country specific accounting policies may hinder my comparison. When different standards are used the impact on reported earnings and financial performance can be significant. In order to compare apples and apples, a conversion of one of the sets of statements may be required. This may require significant time and expertise. Many Canadian companies include a reconciliation to US GAAP in their financial statements to help with this. (c) Comparison of Canadian companies that use different accounting policies would be difficult as the use of different standards policies can have a significant impact on reported earnings and financial performance. (d) There is no significant distinction between comparing statements prepared in different countries and statements prepared in the same country using different accounting policies. In either case the policies will have to be reconciled in order to make valid comparisons.
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2-55
Chapter 2
BYP 2-6 FINANCIAL ANALYSIS ON THE WEB

Due to the frequency of change with regard to information available on the World Wide Web, the Accounting on the Web cases are updated as required. Their suggested solutions are also updated whenever necessary, and can be found in the Instructor Resources section of our homepage (www.wiley.com/canada/kimmel
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Chapter 2
BYP 2-7 COLLABORATIVE LEARNING ACTIVITY

The current ratio increase is a favourable indication as to liquidity, but alone tells little about the prospects of the client. From this ratio change alone, it is impossible to know the amount and direction of the changes in individual accounts, total current assets, and total current liabilities. Also unknown are the reasons for the changes. The working capital increase is also a favourable indication as to liquidity, but again the amount and direction of the changes in individual current assets and current liabilities cannot be determined from this measure. The decrease in the debt to total assets ratio is a favourable indicator for solvency and goingconcern prospects. The lower the percentage of debt to total assets, the lower the risk that a company may be unable to pay its debts as they come due. A decline in the debt to total assets ratio is also a positive sign regarding going-concern potential. The increase in net earnings is a favourable indicator for both solvency and profitability prospects although much depends on the quality of receivables generated from sales and how quickly they can be converted into cash. Indirectly, the improved income picture may have a favourable impact on solvency and going concern potential by enabling the client to borrow currently to meet cash requirements. The earnings per share increase is a favourable indicator for profitability. The fact that the EPS more than doubled during the year indicates a significant increase in net earnings and provides a favorable sign regarding going concern potential. However, investors should check to ensure that the increase in earnings per share was not due to a major decrease in the average number of common shares outstanding The increase in price-earnings ratio indicates that investors have confidence in the earnings of the company and are willing to pay a premium for the shares. However, investors may be cautious about buying if the P/E ratio is too high as it may indicate that the companys shares are overpriced. Overall, Soukups liquidity, solvency, and profitability do appear to be improving. Its liquidity has improved, although further investigation is warranted into receivables and inventory turnovers before concluding on this matter. The companys solvency has improved, with the decline in the debt to total assets ratio. The companys profitability has also improved.
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Chapter 2
BYP 2-8 COMMUNICATION ACTIVITY

To: From: Subject: S.B. Barrett Accounting Major Financial Statement Analysis
Ratios can be classified into three types, which measure three different aspects of a company's financial health: (a) Liquidity ratiosThese measure a company's ability to pay its current obligations. Examples of liquidity ratios include the current ratio (current assets/current liabilities) and the cash current debt coverage ratio (cash provided by operating activities/average current liabilities). (b) Solvency ratiosThese measure a company's ability to pay its long-term obligations and survive over the long-term. Examples of solvency ratios include the total debt and total assets ratio (total liabilities/total assets) and the cash total debt coverage ratio (cash provided by operating activities/average total liabilities). (c) Profitability ratiosThese measure the ability of the company to generate a profit. Examples of profitability ratios include the earnings per share (net earnings - preferred dividends) (average number of common shares outstanding) and the price-earnings ratio (market price per common share earnings per share). There are three bases for comparing a company's results: (a) IntracompanyThis basis compares an item or financial relationship within a company in the current year with the same item or relationship in one or more prior years. (b) Industry averagesThis basis compares an item or financial relationship of a company with industry averages (or norms). (c) IntercompanyThis basis compares an item or financial relationship of one company with the same item or relationship in one or more competing companies.
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Chapter 2
BYP 2-9 ETHICS CASE

(a) The stakeholders in this case are: Kathy Johnston, controller. Redondos vice-president. Users of the company's financial statements. (b) The ethical consideration in the situation is whether or not the early implementation of the new standard would affect the decisions of the users of the financial statements. Because early adoption is only suggested and not required, the vice-president is fully within his rights to delay implementation of the standard. However, it is ethically preferable to disclose the most financially relevant information to the users of the financial statements so that they can make informed decisions. (c) As controller, by supporting early implementation Kathy could gain the trust and respect of the board of directors and the shareholders in general. The users of the companys financial statements will be affected by the decision against early implementation as their decision-making may be influenced by the presentation of the companys financial results using the old standards.
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2-59
Chapter 2
Legal Notice
Copyright
Copyright 2004 by John Wiley & Sons Canada, Ltd. or related companies. All rights reserved. The data contained in these files are protected by copyright. This manual is furnished under licence and may be used only in accordance with the terms of such licence. The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified, made available on a network, used to create derivative works, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of John Wiley & Sons Canada, Ltd.
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Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Second Canadian Edition

10, 12, 13, 14, 15, 16 11

12, 13, 14, 15, 16

7A, 8A, 9A. 7B, 8B, 9B, 10A 10B

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Second Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Second Canadian Edition

Problem Number 8B 9B 10B

Difficulty Level Simple Moderate Moderate

Time Allotted (min.) 10-20 15-25 15-25

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Second Canadian Edition

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Financial Accounting, Second Canadian Edition

(a) (b) (c)

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Financial Accounting, Second Canadian Edition

(a) (b) (c)

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Second Canadian Edition

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 2-2

BRIEF EXERCISE 2-3

BRIEF EXERCISE 2-4

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Second Canadian Edition

BRIEF EXERCISE 2-5

BRIEF EXERCISE 2-6

$38,520 19,956 shares = $1.93 per share

$36,323 19,926 shares = $1.82 per share

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Second Canadian Edition

BRIEF EXERCISE 2-7

BRIEF EXERCISE 2-8

(b) Debt to total assets

(c) Cash current debt coverage

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Second Canadian Edition

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Second Canadian Edition

$20,840 14,520 4,680 $ 40,040 $61,200 60,200 63,680 185,080 $225,120

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Second Canadian Edition

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Second Canadian Edition

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Second Canadian Edition

EXERCISE 2-5 (Continued)

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Financial Accounting, Second Canadian Edition

$58,500 - $2,000 67,000 shares = $0.84 per share

$81,000 - $2,000 69,000 shares = $1.15 per share

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Second Canadian Edition

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Second Canadian Edition

Total debt Total assets

$564,821 = 34% $1,656,248

$466,017 = 30.4% $1,532,557

Cash current debt coverage =