LAST (Family) NAME: _____________________________________

FIRST (Given) NAME: ______________________________________

STUDENT NUMBER: _______________________________________

UNIVERSITY OF TORONTO

Faculty of Arts & Science

& Rotman School of Management

DECEMBER 2019 EXAMINATIONS

RSM320H1F - Intermediate Financial Accounting III

Duration: 3 hours

Aids Allowed: Non-Programmable Calculator

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RSM 320H1F 2019– Final Exam Page 1 of 20

Exam Format and Grading Scheme:

THIS EXAMINATION CONSISTS OF THREE PARTS AND 20 PAGES. PART A, WORTH 45

MARKS, INCLUDES FIVE COMPULSORY SHORTER ESSAY-TYPE QUESTIONS. PART B,
WORTH 25 MARKS, CONSISTS OF TWO COMPULSORY TECHNICAL QUESTIONS. PART
C, WORTH 30 MARKS, CONTAINS A CHOICE: OF THE TWO AVAILABLE QUESTIONS IN
PART C, DO ONLY ONE.

Students must hand in all examination materials at the end

RSM 320H1F 2019– Final Exam Page 2 of 20

PART A OF THE EXAMINATION: FIVE COMPULSORY QUESTIONS
A TOTAL OF 45 MARKS ARE AVAILABLE IN THIS PART OF THE EXAMINATION

QUESTION 1A [9 MARKS]

Are sustainability reports a useful part of corporate reporting? Explain. Should such reports be
audited? Explain with reasons and consider the benefits and costs of doing so. Use examples etc.
from Teck in your answer.

QUESTION 2A [9 MARKS]

Explain the significance of a CD&A in corporate disclosure. What value over and above the
audited financial statements does a CD&A provide? Should the CD&A be audited? Explain.

Explain the significance of an MD&A in corporate disclosure. What value over and above the
audited financial statements does a MD&A provide? Should the MD&A be audited? Explain.

QUESTION 3A [9 MARKS]

Beginning on page 56 of its MD&A, Teck explains its use of 22 non-GAAP financial measures in
its financial reporting:

“Use of Non-GAAP Financial Measures

Our financial results are prepared in accordance with International Financial Reporting Standards
(IFRS).
This document refers to a number of Non-GAAP Financial Measures, which are not measures
recognized under IFRS in Canada and do not have a standardized meaning prescribed by IFRS or
Generally Accepted Accounting Principles (GAAP) in the United States.
The Non-GAAP Measures described below do not have standardized meanings under IFRS, may
differ from those used by other issuers, and may not be comparable to such measures as reported
by others. These measures have been derived from our financial statements and applied on a
consistent basis as appropriate.
We disclose these measures because we believe they assist readers in understanding the results of
our operations and financial position and are meant to provide further information about our
financial results to investors. These measures should not be considered in isolation or used in
substitute for other measures of performance prepared in accordance with IFRS.”

Among these measures Teck included the following, as defined by the company:

Adjusted profit: For adjusted profit, we adjust profit attributable to shareholders as reported to
remove the after-tax effect of certain types of transactions that in our judgment are not indicative
of our normal operating activities or do not necessarily occur on a regular basis.

RSM 320H1F 2019– Final Exam Page 3 of 20

EBITDA: EBITDA is profit attributable to shareholders before net finance expense, provision for
income taxes, and depreciation and amortization.

Adjusted EBITDA: Adjusted EBITDA is EBITDA before the pre-tax effect of the adjustments
that we make to adjusted profit attributable to shareholders as described above.

“The above adjustments to profit attributable to shareholders and EBITDA highlight items and
allow us and readers to analyze the rest of our results more clearly. We believe that disclosing
these measures assists readers in understanding the ongoing cash generating potential of our fund
working capital needs, service outstanding debt, fund future capital expenditures and investment
opportunities, and pay dividends.”

Unit costs: Unit costs for our steelmaking coal operations are total cost of goods sold, divided by
tonnes sold in the period, excluding depreciation and amortization charges. We include this
information as it is frequently requested by investors and investment analysts who use it to assess
our cost structure and margins and compare it to similar information provided by many companies
in the industry.

Adjusted site cost of sales: Adjusted site cost of sales for our steelmaking coal operations is
defined as the cost of the product as it leaves the mine excluding depreciation and amortization
charges, outbound transportation costs and any one-time collective agreement charges and
inventory write-down provisions.

REQUIRED:

In your supported opinion, is the use of non-GAAP measures in financial reporting, as exemplified
by Teck, justifiable?

QUESTION 4A [9 MARKS]

Assume that creating “trust” is an important goal of financial reporting, including the preparation
and dissemination of financial statements. The word “trust” has many definitions – in RSM 320’s
CLASS 2 the following definition was introduced:

‘‘the willingness of a party to be vulnerable to the actions of another party based on the expectation
that the other will perform a particular action important to the trustor, irrespective of the ability to
monitor or control that other party’’.

The technology of financial accounting and reporting has evolved over many millennia, and has
changed from the pre-history use of clay tokens in a crude form of single-entry, through the
formalization of double-entry bookkeeping in Renaissance Italy due largely to Luca Pacioli, to the
rise of Internet-based financial accounting and reporting, and most recently Bockchain and Big
Data analytics.

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REQUIRED:

Markets and social interaction are more effective and efficient if trust exists: people are more
willing to enter into contracts and transactions more generally. Explain how the evolution of the
technology of financial accounting and reporting has contributed the enhancement of “trust”.
Could there be a downside, as well?

QUESTION 5A [9 MARKS]

Uber has been described as follows:

“Uber Technologies, Inc. is an American multinational ridesharing company offering services that include peer-to-
peer ridesharing, ride service hailing, food delivery, and a bicycle-sharing system. The company is based in San
Francisco and has operations in over 785 metropolitan areas worldwide. Its platforms can be accessed via its websites
and mobile apps.

As of 2019, Uber is estimated to have 110 million worldwide users a 69% market share in the United States for ride-
sharing, and a 25% market share for food delivery.[6] Uber has been so prominent in the sharing economy that the
changes in industries as a result of it have been referred to as uberisation…

…Uber has been criticized for unfair treatment of drivers, for disrupting the taxicab business, and for increasing traffic
congestion. The company has also been criticized for its aggressive strategy in dealing with regulators and for other
unlawful practices.” (source: Wikipedia)

In May 2019, Uber’s shares were listed publically for the first time. In the registration statement
that the company had to file with the SEC, Uber’s CEO published the following CEO letter:

Letter from Dara Khosrowshahi

Chief Executive Officer

Ten years ago, Uber was born out of a watershed moment in technology. The rise of smartphones, the advent of app
stores, and the desire for on-demand work supercharged Uber’s growth and created an entirely new standard of
consumer convenience. What began as “tap a button and get a ride” has become something much more profound:
ridesharing and carpooling; meal delivery and freight; electric bikes and scooters; and self-driving cars and urban
aviation.

Of course, in getting from point A to point B we didn’t get everything right. Some of the attributes that made Uber a
wildly successful startup—a fierce sense of entrepreneurialism, our willingness to take risks that others might not, and
that famous Uber hustle—led to missteps along the way. In fact, when I joined Uber as CEO, many people asked me
why I would leave the stability of my previous job for one that was anything but. My answer was simple: Uber is a
once-in-a-generation company, and the opportunity ahead of it is enormous.

Today, Uber accounts for less than one percent of all miles driven globally. Just a small percentage of people in
countries where Uber is available have ever used our services. And we are still barely scratching the surface when it
comes to huge industries like food and logistics, and how the future of urban mobility will reshape cities for the better.

RSM 320H1F 2019– Final Exam Page 5 of 20

Building this platform has required a willingness to challenge orthodoxies and reinvent—sometimes even disrupt—
ourselves. Over the last decade, as the needs and preferences of our customers have changed, we’ve changed too.
Now, we’re becoming something different once again: a public company.

Taking this step means that we have even greater responsibilities—to our shareholders, our customers, and our
colleagues. That’s why, over the past 18 months, we have improved our governance and Board oversight; built a
stronger and more cohesive management team; and made the changes necessary to ensure our company culture
rewards teamwork and encourages employees to commit for the long term.

Because we are not even one percent done with our work, we will operate with an eye toward the future. We will
optimize for the happiness and loyalty of our customers rather than marginal trip or transaction growth. And we will
not shy away from making short-term financial sacrifices where we see clear long-term benefits.

Our continued success will come from stellar execution and the strength of the platform we have worked so hard to
build. Our network spans tens of millions of consumers and partners and represents one of the world’s largest platforms
for independent work. Our engineering and product teams are solving some of the most difficult problems at the
intersection of the physical and digital worlds. And our regional operations teams let us build and run our business as
true citizens of the cities we serve.

I want to close with my commitment to you: I won’t be perfect, but I will listen to you; I will ensure that we treat our
customers, our colleagues, and our cities with respect; and I will run our business with passion, humility, and integrity.

Dara Khosrowshahi

REQUIRED:

Critically evaluate the letter from a potential shareholder’s perspective.

PART B OF THE EXAMINATION: TWO COMPULSORY TECHNICAL

QUESTIONS
A TOTAL OF 25 MARKS ARE AVAILABLE IN THIS PART OF THE EXAMINATION

QUESTION 1B [10 MARKS]

CASH FLOW TECHNICAL QUESTION 10 MARKS

Comparative balance sheet information for ABC Company is as follows ($ Canadian):

DECEMBER 31

2018 2017

RSM 320H1F 2019– Final Exam Page 6 of 20

Additional Information for ABC for 2018:
-Net income was $250,000; there were no extraordinary gains or losses, and everything was
accounted for as being due to operations.
-Issued $100,000 in common shares for notes payable; a major supplier had accepted the notes
payable last year in lieu of payment.
-Land was sold for $70,000 cash.
-Depreciation expense of $20,000 was recorded.
-Depreciable capital assets that were fully depreciated were sold for $30,000.
-The "Investments" account consists mainly of "blue-chip" common shares that had provided a
steady if unspectacular stream of dividend income to ABC over the years. They had been sold for
$75,000 just after the stock market went into a tailspin.
-Sales were $1,500,000, ten percent higher than in 2017. The increase was attributable to ABC’s
new policy of granting extended credit terms of eighteen months to selected customers.
-All of the $1,500,000 in sales was on account.

REQUIRED:

Compute “net cash flow from operations” for 2018. Show the details of your calculation and make
assumptions explicit.

QUESTION 2B [15 MARKS]

PENSION AND OTHER POST-EMPLOYMENT PLANS ACCOUNTING TECHNICAL

QUESTION 15 MARKS

RSM 320H1F 2019– Final Exam Page 7 of 20

The Canadian Broadcasting Corporation, known popularly as CBC for its English language service
and as Radio-Canada for its French language service, is a Canadian federal Crown corporation that
serves as the national public broadcaster for both radio and television. Note 16 (“Pension Plans
and Employee-Related Liabilities”) from CBC’s audited financial statements for the year ended
March 31, 2019, includes the following information:

CBC’s independent audit report concluded as follows:

RSM 320H1F 2019– Final Exam Page 8 of 20

“In our opinion, the accompanying consolidated financial statements present fairly, in all material
respects, the consolidated financial position of the Group as at 31 March 2019, and its consolidated
financial performance and its consolidated cash flows for the year then ended in accordance with
International Financial Reporting Standards (IFRSs).”

REQUIRED:

Prepare reconstructed journal entries, in as much detail as possible given the available information,
to record pension expense and other employee-related costs, including financial expense, for the
year ended March 31, 2019.

PART C OF THE EXAMINATION: DO ONLY ONE OF THE AVAILABLE

TWO QUESTIONS
A TOTAL OF 30 MARKS ARE AVAILABLE IN THIS PART OF THE EXAMINATION

QUESTION 1C (30 MARKS) DO THIS QUESTION OR 2C, BUT NOT

BOTH

AMAZON’S INCOME TAX FINANCIAL REPORTING

AMAZON.COM, INC. describes its policy for accounting for income taxes as follows in its
2018 audited financial statements accounting policy note as follows:

RSM 320H1F 2019– Final Exam Page 9 of 20

The company’s audited income tax note was as follows:

RSM 320H1F 2019– Final Exam Page 10 of 20

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RSM 320H1F 2019– Final Exam Page 13 of 20
RSM 320H1F 2019– Final Exam Page 14 of 20
REQUIRED:

(a) Reconstruct, in as much detail as possible based upon the information provided, Amazon’s
2018 current income tax journal entry. (6 marks)

(b) Reconstruct, in as much detail as possible based upon the information provided, Amazon’s
2018 deferred income tax journal entry. (8 marks)

(c) Explain how the deferred assets for loss carry forwards and for stock-based compensation were
created as of the start of 2018, and what happened to these items in 2018. (8 marks)

(d) Explain why income tax computed at the U.S. statutory rate versus income tax recorded is so
different between 2018 and 2017. Explain why understanding this is important to a user. (8 marks)

QUESTION 2C (30 marks) DO THIS QUESTION OR 1C, BUT NOT BOTH

TESLA, INC. AND STOCK-BASED COMPENSATION

Tesla, Inc. is described as follows in its 2018 10-K report:

We design, develop, manufacture and sell high-performance fully electric vehicles (“EVs”)
and energy generation and storage systems, and also install and maintain such energy
systems and sell solar electricity. We are the world’s first vertically integrated sustainable

RSM 320H1F 2019– Final Exam Page 15 of 20

 energy company, offering end-to-end clean energy products, including generation, storage
and consumption. We have established and continue to grow a global network of stores,
galleries, vehicle service centers, Mobile Service technicians, body shops, Supercharger
stations and Destination Chargers to accelerate the widespread adoption of our products, and
we continue to develop self-driving capability in order to improve vehicle safety. Our
sustainable energy products, engineering expertise, intense focus to accelerate the world’s
transition to sustainable energy, and business model differentiate us from other companies.
We currently produce and sell three fully electric vehicles: the Model S sedan, the Model X
sport utility vehicle (“SUV”) and the Model 3 sedan. All of our vehicles offer high
performance and functionality as well as attractive styling.

The following information was disclosed on page 41 of the company’s 2018 10-K report:

RSM 320H1F 2019– Final Exam Page 16 of 20

The following information was disclosed on pages 60 and 61 in Tesla, Inc.’s proxy statement
(Management Information Circular) for fiscal 2018:

RSM 320H1F 2019– Final Exam Page 17 of 20

In Note 23, “Equity Incentive Plans”, of its audited 2018 financial statements, Tesla
disclosed the following:

RSM 320H1F 2019– Final Exam Page 18 of 20

The following information was also disclosed in the audited note:

RSM 320H1F 2019– Final Exam Page 19 of 20

REQUIRED:

Critically evaluate the company’s CEO compensation financial reporting.

--END OF EXMINATION—

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