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business
understanding financial accounting

Questions and Answers of Understanding Financial Accounting

Explain the historical cost convention. Why is historical cost the primary valuation method used under GAAP?
Explain conservatism. Which accounting concepts are sometimes violated when conservative accounting is used?
Why does making accounting choices conservative today sometimes result in nonconservative effects in later periods?
Explain the conflict that sometimes exists between relevance and reliability. Provide examples of the conflict.
Identify and explain the four assumptions that underlie GAAP accounting.
Explain how the going-concern assumption is used as a justification for using historical cost for valuing capital assets.
What is the unit of measure that is typically used in the financial statements of Canadian companies? What are the some of the benefits and drawbacks of using the Canadian dollar as the unit of
Identify and explain the characteristics that make information (i) relevant and(ii) reliable.
What do accountants mean when they say that an accounting change is made retroactively? What kinds of accounting changes are made retroactively?
What do accountants mean when they say that an accounting change is made prospectively? What kinds of accounting changes are made prospectively?
What is the Efficient Market Hypothesis (EMH)? Explain why the EMH does not apply to situations where the numbers in the financial statements are used to determine an outcome such as a manager’s
According to the Efficient Market Hypothesis (EMH), does it matter whether an entity provides information to the capital markets in the financial statements or the notes to the financial statements?
Identify and explain each of the audit opinions that an auditor can express on an entity’s financial statements.
As a prospective investor in a company, would you be concerned if the company did not receive an unqualified audit opinion? Explain.
What is comparability? Why is it important to users that financial statements be comparable?
One of the qualitative characteristics of GAAP accounting is that financial information must be understandable. Should financial information be tailored such that it is understandable to the most
Accounting by Canada’s big banks for the costs of their aborted mergers was discussed in this chapter. As a user of financial statements, do you think that it makes sense that the different banks
Suppose you learned that the same auditor audited more than one of these banks, and the banks that this firm audited used different accounting treatments for the merger costs. Do you think that the
Neutral information is sometimes interpreted to mean that the information does not influence the decisions made by the users of the information. Why is this not a sensible definition to use for
Based on what we have discussed thus far in the book, do you think that accounting information is likely to be neutral? Explain.
(Examining relevance and reliability, LO 3) You are trying to decide which business school to attend. You receive a package of information from one of the schools that contains the following:a. A
(Examining relevance, LO 3) For each of the following situations, indicate the information that the specific user would require. Explain. Do you think the information required would be available in
(Examining the entity assumption, LO 2) Mazeppa Ltd. (Mazeppa) is a producer of electronic parts that it sells to manufacturers of electronic equipment. Mazeppa has organized itself by setting up a
(Examining neutrality, LO 3) In each of the following situations, indicate whether the information being provided is neutral. Explain your reasoning.a. A newspaper publishes an editorial recommending
(Examining historical cost, LO 4) For each of the following situations, determine what amount Sangudo Ltd. (Sangudo) should record as the cost of the asset. Explain your reasoning and indicate any
(Identifying accounting assumptions, qualitative characteristics, and measurement conventions, LO 2, 3, 4) For each of the following situations, identify the accounting assumptions, qualitative
(Identifying accounting assumptions, qualitative characteristics, and measurement conventions, LO 2, 3, 4) Identify the accounting assumption, characteristic, or convention that best suits each of
(Examining verifiability, LO 3) For each of the following transactions and economic events involving Hybla Ltd. (Hybla), indicate whether you think the amounts involved are easy to verify, moderately
(Examining the periodic reporting assumption, LO 3) For each of the following situations, explain the accounting problems and difficulties created because of the requirement for periodic reporting.
(Examining materiality, LO 4) For each of the following situations, explain whether you think the amount involved is material.a. Students in an accounting course receive a grade of A if they get 80%
(Examining non-arm’s length transactions, LO 4) For each of the following transactions entered into by Nootka Ltd. (Nootka), indicate whether it should be considered a non-arm’s length
(Applying accounting assumptions, characteristics, and measurement conventions, LO 2, 3, 4) What accounting assumption, characteristic, or measurement con- vention would Pilger Ltd. (Pilger) use to
(Examining conservatism, LO 4) Anvil Ltd. (Anvil) adheres to GAAP in its financial statements. For each of the following independent situations, explain how Anvil should account for the transaction
(Audit opinions, LO 5) For each of the following situations, indicate the type of audit opinion that you think would be appropriate. The possible audit opinions are unqualified, qualified, adverse,
Explain accounting and its uses, and differentiate between financial and managerial accounting.
Describe the accounting environment.
Discuss how the interests of the people who prepare accounting information can conflict with the interests of the people who use the information.
Understand the importance of accounting information for measuring the attributes of an entity.
Describe generally accepted accounting principles in basic terms.
Explain why it is important when studying business and accounting to make links between the classroom and the real world.
There are many different stakeholders in an entity. Explain why the same information may not be suitable or appropriate for all stakeholders.
Distinguish between preparers and users of accounting information.
Explain why the self-interests of accounting information preparers can affect what information is reported to stakeholders and how it is reported.
What is a not-for-profit organization? Give an example of a not-for-profit organization. What is the purpose of the organization you identified?
What are some of the benefits of measuring things in terms of a single unit of measure such as money? What are the drawbacks?
When you make a decision, should you collect all possible related information? What limits would you set on the information you gather?
What are generally accepted accounting principles (GAAP)?
Why is it useful to have a set of rules such as GAAP to guide preparers of account- ing information?
Why is it necessary for a user of accounting information to understand the rules (such as GAAP) that the preparer used when preparing the information?
According to the CICA Handbook, what are the four qualitative characteristics that financial statement information must have to be useful to users?
Describe and explain some of the limitations of GAAP that were described in this chapter.
What is an external audit of financial information and why can it be important for many stakeholders of an entity?
(Consider the information relevant for making a decision, LO 2) You meet a stranger on a street corner in Edmonton. She asks you for instructions on the best way to get from Edmonton to Ottawa. What
(Understanding the qualitative characteristics of accounting, LO 5) According to the CICA Handbook there are four qualitative characteristics that financial statement information must have if it is
(Considering the stakeholders in a university or college, LO 2) Consider the university or college you attend. Who are the stakeholders in your university? Explain the interest or “stake” each
(Assessing the credibility of information, LO 3) You are looking to buy a new computer. You read an advertisement in a computer newspaper that describes Aylsham Computer Products Inc.’s (Aylsham)
(Assessing the credibility of information, LO 3) A chain of donut shops claims to have the world’s best coffee. Do you believe the claim? Explain. How would you go about determining whether the
(Consider the information relevant for making a decision, LO 2) Your brother has just asked you to lend him $5,000 to help him buy a car. Would you lend him the money? How would you decide? What
(Consider the information relevant for making a decision, LO 2) Your cousin is in her last year of high school and is in the process of deciding which university to attend. Since you went through the
(Considering different ways of measuring, LO 4) For each of the following situations, explain which method of valuing the item in question would be most useful:a. You lost your favourite CD and want
(Consider the different ways of measuring the attributes of a car, LO 4) There are many attributes of an item that you can measure. For a car you could measure how fast it can go, its gas mileage,
(Consider different ways of organizing information, LO 4) Your 99-year-old grandfather died recently and he left you his beloved library of books. At the time of his death your grandfather’s
(Take a first look at an annual report, LO 1, 2, 3, 4, 5) Read the Mark’s Work Wearhouse annual report for 2001 provided in Appendix A. List seven questions that came to mind while reading the
(Explain the reason stakeholders would want information about an entity, LO 2)Consider the following stakeholders in an entity. Why would the stakeholder want information about the entity? Explain.a.
(Explain the reason stakeholders would want information about an entity, LO 2)Consider the following stakeholders in an entity. Why would the stakeholder want information about the entity? Explain.a.
(Identify the stakeholders in an entity and the decisions they make, LO 2) Consider the following entities. Identify the stakeholders in each of these entities. What types of decisions would each of
(Identify the stakeholders in an entity and the decisions they make, LO 2) Consider the following entities. Identify the stakeholders in each of these entities. What types of decisions would each of
(Consider the decisions stakeholders make and the nature of the information they require, LO 1, 2) Consider the following decisions that a stakeholder of an entity might have to make. For each
(Consider the decisions stakeholders make and the nature of the information they require, LO 1, 2) Consider the following decisions that a stakeholder of an entity might have to make. For each
(Considering the information needed to decide whether to invest in a business, LO 1, 2, 4) A friend of yours has just called you up with “a great business opportunity.” Your friend is starting up
(Considering the information needed to decide whether to invest in a business, LO 1, 2, 4) Two of your friends own and operate a business that rents bicycles and inline skates at a local lake. They
(Classify and organize information so that it is useful for decision making, LO 1, 4)Mike is a university student who is often short of cash. A month may pass and he has no idea where his money went.
(Classify and organize information so that it is useful for decision making, LO 1, 4)Mei is a university student who has been unable, so far, to find a summer job. While she has enough money to pay
(Evaluate different ways of measuring the value of a house, LO 4) Rajiv owns a home in suburban Ottawa. You obtain the following information about the home:a. Purchase price in 1978 $175,000b.
(Evaluate different ways of measuring the value of a vintage automobile, LO 4) Otto Collector owns a vintage 1925 Ford automobile. You obtain the following information about the car:Required:Explain
(Consider the usefulness of audited information, LO 1, 2,3) For each of the following situations explain whether and why having an independent review of the information provided—that is, an
(Consider the usefulness of audited information, LO 1, 2, 3) For each of the following situations explain whether and why having an independent review of the information provided—that is, an
(Identify the characteristics of different entities, LO 2, 3) Identify two separate entities. These could be corporations, partnerships, proprietorships, not-for-profit organizations, or any other
(Identify the characteristics of different entities, LO 2, 3) Identify two different corporations that are in a similar business. Identify the characteristics of each corporation. (You can use the
Recognize the components of a set of general purpose financial statements.
Describe the accounting equation and be able to record transactions by adjusting the accounting equation.
Explain the nature of assets, liabilities, owners’ equity, revenues and expenses.
Characterize the accounts that are reported on entities’ financial statements.
Prepare simple financial statements.
Differentiate between accrual-basis and cash- Bae accounting.
Use financial statement information to assess the liquidity, risk and profitability of an entity.
Why is it important for direct and indirect investments by a corporation’s shareholders to be reported separately on the balance sheet?
Explain each of the following terms in your own words and give an example of each:asset liability owners’ equity dividend revenue expense
Explain the following accounting measurements and explain how and why they would be used when evaluating an entity:a. working capitalb. current ratioc. debt-to-equity ratiod. gross margine. gross
Explain why each of the following would be classified as assets on an entity’s balance sheet:a. cashb. rent paid for in advancec. landd. shares of other corporations owned by the entity
Explain why each of the following would be considered liabilities on an entity’s balance sheet:a. amounts owing to suppliers of inventoryb. advances received from customers for services to be
Under GAAP, money spent on research by companies in the biotechnology, pharmaceutical, high technology, and other industries is not reported on the balance sheet as an asset. In your opinion, is the
Explain the difference between capital stock and retained earnings in the share- holders’ equity section of a corporation’s balance sheet.
Readers of financial statements are always encouraged to read the notes to the statements. Why do you think the notes are considered so important? What impact would not reading the notes have on a
Why is knowing the ability of an entity to generate cash flow so important to assessing the survival of the entity?
Virtually all entities prepare financial statements on an annual basis. For example, MWW prepares its statements for the 52 or 53 weeks ending on the last Saturday in January. Other entities prepare
It is normal for entities to present financial statements for more than one year rather than for just the most recent year. Provide three reasons why it is useful to users of financial statements to
(Classification of balance sheet accounts, LO 1, 4) Classify each of the following balance sheet accounts as a current asset, non-current asset, current liability, or noncurrent liability. Briefly
(Prepare a statement of retained earnings, LO 1, 5) On December 31, 2004, Canmore Inc. (Canmore) reported retained earnings of $120,000. For the year ended December 31, 2005, Canmore had net income
(Preparea statement of retained earnings, LO 1,5) Minden Corporation was incorporated on August 1, 2005 by five shareholders who each invested $50,000 in cash in exchange for common shares.

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