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business
understanding financial accounting

Questions and Answers of Understanding Financial Accounting

(Effect of employee stock options, LO 5, 6) At its annual meeting in June 2005 the shareholders of Rusylvia Ltd. (Rusylvia) approved an employee stock option plan that allows the company’s board of
(Hybrid securities, LO 2) In May 2005 Kugluktuk Ltd. (Kugluktuk) sold $200,000 in convertible bonds to investors. The bonds have a coupon rate of 9% and mature in May 2015. The bonds are convertible
(Hybrid securities, LO 2) In August, 2006 Ethelbert Ltd. (Ethelbert) issued 10,000 shares of cumulative, redeemable preferred stock to investors for $500,000. The preferred shares pay an annual
(Analyzing the effects of different financing alternatives, LO 2,6) Owakonze Inc.(Owakonze) is in need of $1,000,000 to finance an expansion of its operations.Management is considering three
(Different ways of looking at income, LO 2, 6) In the traditional income statement prepared in accordance with GAAP, net income is thought of as the increase of wealth that belongs to the owners of
(Assessing the payment of dividends, LO 6) Dunsinane Ltd. (Dunsinane) is a publicly traded manufacturing company that makes computer components for resale to end-product manufacturers. Extracts from
(Examining financial statements, LO 1, 6) The Convenience Store (or The Store)is a family-run, unincorporated business owned and operated by the Shar family.The Store offers food staples, basic
How much did shareholders contribute to MWW in money and property for the purchase of common stock in the company as of January 27, 2001? What is the average amount paid per share by investors?
What was MWW’s authorized capital stock on January 27, 2001? What is the par value of the authorized capital stock? How many shares were outstanding on January 27, 2001?
How many shares of its own stock did MWW purchase in fiscal 2000 and 2001? How much did it pay in each year for the shares? What amount is reported in the statement of cash flows for the repurchase
Calculate basic earnings per share and return on equity for fiscal 2000 and fiscal 2001.
Use the information in Note 12 (page A-57) to reconcile the number of common shares outstanding on January 29, 2000 to the number outstanding on January 27, 2001.
How many MWW shares were purchased during fiscal 2001 by employees exercising their stock options? What was the average price paid for each share purchased?How much did MWW receive in total from the
How many stock options did MWW grant its employees in fiscal 2001? What was the weighted-average exercise price of the options awarded in fiscal 2001? What entry did MWW make to record the granting
Describe how corporations account for their subsidiaries.
Discuss the accounting for investments where there is significant influence.
Explain the accounting for passive investments.
Why is understanding the extent to which one corporation influences another important for accounting purposes? What impact does the degree of influence an entity has over another have on accounting?
Why do companies invest in other companies? Explain.
What is meant by the term “non-controlling interest”? What does the noncontrolling interest on a company’s balance sheet represent? What does noncontrolling interest on the income statement
Why is non-controlling interest added back to net income when calculating cash from operations using the indirect method?
When a subsidiary is acquired, the managers of the parent must allocate the purchase price to the specific identifiable assets and liabilities. Because the subsidiary’s assets and liabilities are
Describe the similarities and differences between consolidation and equity accounting.
Explain the usefulness of the consolidated financial statements of a parent corporation for the following stakeholders:a. shareholder of the parent corporationb. major supplier of one of the
What are passive investments? Why do companies make passive portfolio invest- ments? What are the differences between portfolio investments and temporary investments? What are the differences in how
Explain why consolidated financial statements are not just the sum of the amounts reported on the parent’s and subsidiaries’ financial statements.Explain the following terms:a. investor
Explain why the following adjustments must be made each time consolidated financial statements are prepared:. amortization of fair value adjustments. elimination of intercompany transactions.
Explain why the following adjustments must be made when preparing the consolidated balance sheet on the date a subsidiary is purchased:a. elimination of the equity accounts of the subsidiaryb.
Usually, passive investments are reported at cost on the investor corporation’s balance sheet. However, for passive investments in public corporations, market values are readily available. Why do
(Accounting for different types of investments in securities, LO 1, 2,3) State how the investor corporation would account for the following investments. Explain your choice.a. Purchase of $1,000,000
(Calculation of goodwill, LO 1) On December 31, 2005 Resolute Inc. (Resolute)purchased 100% of the common shares of Uno Ltd. (Uno) for $22,000,000. At the time of the purchase, Resolute’s
(Calculate the amount of goodwill, LO 1) On April 15, 2003 Cashtown Inc.(Cashtown) purchased 100% of the common shares of Shakespeare Ltd.(Shakespeare) for $16,000,000. At the time of the purchase,
(Calculation of goodwill when the parent purchases less than 100% of a subsidiary, LO 1) On July 31, 2005 Janow Inc. (Janow) purchased 80% of the common shares of Worby Ltd. (Worby) for $5,200,000.
Investments in Other Companies (Non-controlling interest, LO 1) On December 31, 2005, Kootuk Inc. (Kootuk) purchased 80% of the common shares of Grimmer Ltd. (Grimmer) for $3,500,000. At the time of
(Calculate the amount of goodwill, LO 1) On August 31, 2006 Hoselaw Inc.(Hoselaw) purchased 100% of the common shares of Upsalquitch Ltd.(Upsalquitch) for $16,000,000. At the time of the purchase,
(Accounting for passive investments, LO 3) Chockpish Inc. (Chockpish) has provided you with the following list of transactions and economic events that involved its investment portfolio in 2005. For
(Accounting for portfolio investments, LO 3) Yellek Inc. (Yellek) is a private corporation owned by the Yellek family. Yellek maintains a significant investment portfolio of publicly traded shares as
(Comparison of equity and cost methods of accounting, LO 2, 3) On January 1, 2005 Fletwode Corp. (Fletwode) purchased 2,250,000 common shares of Irvine Ltd. (Irvine) for $10,000,000. The investment
(The equity method of accounting, LO 2) On June 1, 2006 Wostok Corp. (Wostok)purchased 1,000,000 common shares of Griffin Ltd. (Griffin) for $2,000,000. The investment represents a 40% interest in
(Investments with significant influence, LO 2) On May 1, 2006 Owlseye Inc.(Owlseye) purchased 25% of the voting shares of Wyse Ltd. (Wyse) for $2,000,000 cash. As a result of the purchase, Owlseye
(Investments with significant influence, LO 2) On October 1, 2005 Rowanton Inc.(Rowanton) purchased 40% of the voting shares of Durward Ltd. (Durward) for$1,000,000 cash. As a result of the purchase,
(Consolidated income statement, LO 1) Explain how the following items would affect consolidated net income in the year the subsidiary is purchased and the year after it is purchased:a. Impairment of
(Problems with cost, LO 3) In June 2004 Jolicure Inc. (Jolicure) and Horsefly Inc.(Horsefly) each began operations. Each company was formed with an initial capital contribution of $100,000. During
(Preparation of a consolidated balance sheet on the date a subsidiary is purchased, LO 1) On August 31, 2007 Pacquet Inc. (Pacquet) purchased 100% of the common shares of Schwitzer Ltd. (Schwitzer)
(Preparation of a consolidated balance sheet on the date a subsidiary is purchased, LO 1) On January 31, 2006, Paju Inc. (Paju) purchased 100% of the common shares of Shellmouth Ltd. (Shellmouth) for
(Preparation of a consolidated balance sheet on the date a subsidiary is purchased when less than 100% of the subsidiary is purchased, LO 1) On March 31, 2005 Popkum Inc. (Popkum) purchased 60% of
(Preparation of a consolidated balance sheet on the date a subsidiary is purchased when less than 100% of the subsidiary is purchased, LO 1) On October 31, 2006, Pahonan Inc. (Pahonan) purchased 75%
(Intercompany transactions, LO 1) Vonda Inc. (Vonda) is a 100%-owned subsidiary of Atik Ltd. (Atik). During the year ended March 31, 2006, Vonda sold, on credit, merchandise costing $1,000,000 to
(Intercompany transactions, LO 1) Batteau Inc. (Batteau) is a 100%-owned subsidiary of Castaway Ltd. (Castaway). During the year ended May 31, 2006, Batteau sold, on credit, merchandise costing
(Intercompany transactions, LO 1) Guilds Inc. (Guilds) is a 100%-owned subsidiary of Nutak Ltd. (Nutak). During the year ended August 31, 2006, Guilds sold merchandise costing $200,000 to Nutak for
(Intercompany transactions, LO 1) Dozois Inc. (Dozois) is a 100%-owned subsidiary of Yarbo Ltd. (Yarbo). During the year ended July 31, 2006, Dozois sold merchandise costing $2,200,000 to Yarbo for
(Investments in public companies, LO 3) In July 2005 Roddickton Ltd.(Roddickton) purchased 100,000 shares of Kola Inc. (Kola), a publicly traded company, for $37 per share. From the time of purchase
(Consolidated income statement, LO 1) The summarized income statements for Pakan Ltd. (Pakan) and Shemogue (Shemogue) Corp. for the fiscal year ended September 30, 2005 are shown below:The following
(Consolidated income statement, LO 1) The summarized income statements for Pirogue Ltd. (Pirogue) and Seaview (Seaview) Corp. for the fiscal year ended April 30, 2005 are shown below:The following
What are the companies that Brascan consolidates into its financial statements?What is Brascan’s ownership interest in each of these companies? Why are these companies consolidated?
What are the companies that Brascan accounts for using the equity method of accounting? What is Brascan’s ownership interest in each of these companies? Why are these companies accounted for using
On Brascan’s consolidated statement of income, why are group revenues of$13,524,000,000 reported, but only $1,194,000,000 included in the calculation of consolidated net income?
How much did Brascan receive in dividends from companies that it accounts for using the equity method? (This question is tricky and requires that you use information from the consolidated statement
The following questions pertain to Brascan’s non-controlling (minority) interest:a. What amount of minority interest is reported on Brascan’s December 31, 2000 balance sheet? What does this
Examine Note 19 to Brascan’s financial statements and answer the following questions on segment disclosure:a. Identify the business segments in which Brascan operates. Which segment has the most
What are the problems and limitations of analyzing financial ratios based on Brascan’s consolidated financial statements?
You are considering purchasing a Work World franchise from Mark’s Work Wearhouse. Are MWW’s consolidated financial statements useful to you in making your decision? Explain. What financial
What would MWW’s net income for fiscal 2001 and 2002 be if the new accounting standard that does not require that goodwill be amortized were in effect? How is cash from operations affected by this
Examine Notes 2 and 8 to MWW’ss financial statements (pages A-51 and A-54). The following questions pertain to MWW’s purchase of Paul John Enterprises Ltd.(Paul John) in fiscal 1999.a. Describe
Examine Note 3 to MWW’s financial statements (page A-52). The following questions pertain to MWW’s purchase of franchise stores in fiscal 2001.a. How many franchise stores did MWW buy in fiscal
Examine Note 18 to MWW’s financial statements (see page A-63). These questions pertain to MWW’s segment disclosures.a. Identify the different segments that MWW reports. What were the sales and
Distinguish between permanent and transitory earnings, and discuss the concept of earning quality.
Analyze and evaluate entities through the use of financial ratios.
Recognize the limitations of using financial statements and ratio analysis for evaluating an entity.
What is a contribution margin? Why can it be important to determine an entity’s contribution margin? Why is it often difficult to determine an entity’s contribution margin from its financial
Suppose you were considering making an investment in one of Canada’s major department store chains. You narrowed your choice to Hudson’s Bay Company(The Bay) and Sears Canada Inc. (Sears) and
Would it be possible to gain useful insights into making a loan to an entity by looking only at the entity’s financial statements? Explain. Assume that, except for what you could obtain from the
For each of the following situations, explain why GAAP-transactions-based financial statements would be of limited use for predicting the entity’s future performance:a. The entity purchases a major
Identify and explain the limitations and caveats associated with using financial ratio the Canadian market.c. The entity just began operations and is growing rapidly.e. The entity is a producer of
What are the implications for financial statement analysis of the fact that preparers of financial statements can often choose among different, acceptable accounting methods? Provide examples of some
How do different objectives of financial reporting affect financial statement analysis?
Explain how the follow events would affect the usefulness of current earnings as a basis for predicting future earnings:a. An entity has a two-month strike during the year.b. An entity writes off a
Explain the following and explain why it might be useful for a user of financial statements to have information about these items separately disclosed in the financial statements:a. extraordinary
Describe a situation where the user of a private corporation’s financial statements would be interested in segregating permanent and transitory earnings. Explain why the separation of the two types
Explain how each of the following would affect the quality of an entity’s earnings:a. Management decides to increase advertising in the current period as part of a special event. Management expects
Explain the significance of the fact that over the life of an entity, the accruals that are made must add up to zero.
Why is it not adequate for stakeholders to focus their analyses of entities only on the financial statements? What type information about an entity that is not included in financial statements might
Explain the two broad concerns that creditors have about the credit they provide to entities. Describe the different types and sources of information that creditors would require to evaluate these
What is the difference between short-term and long-term creditors? Why would each approach financial statement analysis differently? What type of information would each require for making a decision
The text states, “In many ways equity investors need to know everything.” Explain why this is the case.
Would information about each of the following be useful to a prospective long-term creditor in an entity? Explain. Would information about each item be available from the financial statements?
Would information about each of the following be useful to a prospective equity investor in an entity? Explain. Would information about each item be available from the financial statements?
Explain the implications of using only the financial statements when analyzing an entity.
What are factors that allow managers to manage earnings? What is it about these factors that allows for the management of earnings?
Why is it not possible to carry out an effective financial analysis without knowing the decision that the decision-maker is making?
(Interpreting a write-down, LO 4, 6, 7,.9) Fiscal 2005 was an outstanding year for Schmevan Inc. (Schmevan). For a variety of reasons, the company’s sales surged and net income was going to exceed
(Interpreting a write-down, LO 4, 6, 7, 9) In fiscal 2004 Redlax Technologies Inc. (Redlax) purchased a company that owned a technology that Redlax believed was extremely valuable for its future
(Calculate missing information, LO 2, 3, 6) Use the following information and determine the NBV of the capital assets of June Inc. (June) on September 30, 2005, the end of its 2005 fiscal year. An
(Calculate missing information, LO 2, 3, 6) Use the following information and determine the NBV of the capital assets of Ziska Ltd. (Ziska) on July 1, 2003, the first day of its 2004 fiscal year. An
(Effect of capitalizing versus expensing R&D costs, LO 3, 4, 8, 9) Utopia Inc.(Utopia) is a biotechnology company located in Montréal. Utopia has successfully marketed a number of products since
(Effect of capitalizing versus expensing R&D costs, LO 3, 4, 8, 9) Florze Software Inc. (Florze) is a software development company located in Kanata, Ontario.Software is a highly competitive
(Effect of a recording error on the financial statements, LO 2, 3, 8, 9) In 2001 Zumbro Ltd. (Zumbro) purchased a large delivery truck for $72,000. In error, Zumbro’s bookkeeper recorded the
(Effect of a recording error on the financial statements, LO 2, 3, 8, 9) In 2004 WeNon-Cha Forest Products Ltd. (We-Non-Cha) purchased and installed a new stateof-the-art lathe line in its lumber
(Accounting for a change in accounting estimate, LO 3, 7) On October 1, 2001 Independent Manufacturing Inc. (Independent) purchased a state-of-the-art mould-casting machine for its manufacturing
(Accounting for a change in accounting policy, LO 3,7) On October 1, 2001, Eureka Corp. (Eureka) purchased state-of-the-art equipment for $10,200,000. Eureka’s management estimated that the machine

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