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Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Twelfth Canadian Edition
CHAPTER 5
FINANCIAL POSITION AND CASH FLOWS

Learning Objectives
1. Understand the statement of financial position and statement
of cash flows from a business perspective.
2. Identify the uses and limitations of a statement of financial
position.
3. Identify the major classifications of a statement of financial
position.
4. Prepare a classified statement of financial position.
5. Identify statement of financial position information that requires
supplemental disclosure.
6. Identify major disclosure techniques for the statement of
financial position.
7. Indicate the purpose and identify the content of the statement
of cash flows.
8. Prepare a statement of cash flows using the indirect and direct
methods.
9. Understand the usefulness of the statement of cash flows.
10. Identify differences in accounting between IFRS and ASPE
and identify the significant changes planned by the IASB for
financial statement presentation.
11. Identify the major types of financial ratios and what they
measure.
Solutions Manual 5-1 Chapter 5

Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Summary of Questions by Learning Objectives and Bloom’s Taxonomy
Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT

Brief Exercises
1. 1 C 5. 3 AP 9. 3,10 AP 13. 8 AP 17. 8,10 AP
2. 1 C 6. 3 AP 10. 3 AP 14. 8 AP 18. 11 AN
3. 2 C 7. 3 AP 11. 7 AP 15. 8 AP 19. 8,10,11 AP
4. 3 AP 8. 3,10 AP 12. 8 C 16. 8 AP 20. 11 AN
Exercises
1. 3 K 6. 3,4 AP 11. 4,8 AP 16. 8,9 AP 21. 11 AN
2. 3 K 7. 4 AP 12. 4,11 AP 17. 8,9 AP
3. 3 K 8. 4 AP 13. 5 AP 18. 8,9 AP
4. 3,4,11 AP 9. 4,5 AP 14. 8,9 AP 19. 11 AN
5. 3,4,11 AN 10. 4,5,6 AP 15. 7 K 20. 11 AN
Problems
1. 4 AP 4. 3,4 AP 7. 4,8,11 AP 10. 4,5 AP
2. 4,5 AP 5. 4,11 AP 8. 4,8,9,11 AN 11. 8,9 AP
3. 4,6 AP 6. 5 AP 9. 2,3,4 AP
Cases
CA1 5,6 S CA2 5,6 S IC1 5,6 S
Research and Analysis
RA1 3,6,7,11 AP RA3 9,11 AN RA5 9,11 AN RA6 9 AN RA7 3,6 C
RA2 3,9,11 AN RA4 11 S

Legend: The following abbreviations will appear throughout the solutions

manual file.
LO Learning objective
Bloom's
BT Taxonomy
K Knowledge
C Comprehension
AP Application
AN Analysis
S Synthesis
E Evaluation
Difficulty: Level of difficulty
S Simple
M Moderate
C Complex
Time: Estimated time to complete in minutes
AACSB Association to Advance Collegiate Schools of Business
Communication Communication
Ethics Ethics
Analytic Analytic
Tech. Technology
Diversity Diversity
Reflec. Thinking Reflective Thinking
CPA CM CPA Canada Competency Map
Ethics Professional and Ethical Behaviour
PS and DM Problem-Solving and Decision-Making
Comm. Communication
Self-Mgt. Self-Management
Team & Lead Teamwork and Leadership
Reporting Financial Reporting
Stat. & Gov. Strategy and Governance
Mgt. Accounting Management Accounting
Audit Audit and Assurance
Finance Finance
Tax Taxation

ASSIGNMENT CLASSIFICATION TABLE
Brief
Topics Exercises Exercises Problems
1. Classification and 1, 4, 5, 6 1, 2, 3, 6, 6, 10
disclosure of items 7, 9, 10
in the statement of
financial position
and other financial
statements.
2. Preparation of 3, 7, 8, 9, 4, 5, 6, 8 1, 2, 3, 4,
statement of 10 10, 11, 5, 7, 8, 9
financial position; 12, 13
issues of format,
terminology, and
valuation.
3. Statement of cash 2, 11, 12, 11, 14, 7, 8, 11

flows. 13, 14, 15, 15, 16,
16, 17, 19 17, 18
4. Review of Chapters 5
4 and 5.
5. Analysis* 18, 20 4, 5, 12, 7, 8

19, 20, 21
*This material is covered in an Appendix to the chapter.

ASSIGNMENT CHARACTERISTICS TABLE
Level of Time
Item Description Difficulty (minutes)
E5.1 Statement of financial position Simple 15-20

classifications.
E5.2 Classification of statement of financial Simple 15-20
position accounts.
E5.3 Classification of statement of financial Simple 15-20
position accounts.
E5.4 Preparation of a corrected statement of Moderate 35-40
financial position and analysis.
E5.5 Correction of a statement of financial Moderate 35-40
position and analysis.
E5.6 Preparation of a classified statement of Simple 25-30
financial position.
E5.7 Current vs. long-term liabilities. Moderate 15-20
E5.8 Preparation of a statement of financial Moderate 35-40
position.
E5.9 Current liabilities. Moderate 15-20
E5.10 Current asset section of the statement of Moderate 20-25
financial position.
E5.11 Preparation of a statement of financial Moderate 40-45
position and statement of cash flows.
E5.12 Current assets and current liabilities and Complex 30-35
analysis.
E5.13 Supplemental disclosures Moderate 20-25
E5.14 Statement of cash flow and comments. Moderate 25-30
E5.15 Statement of cash flows—classifications. Moderate 15-20
E5.16 Operating activities Moderate 30-35
E5.17 Statement of cash flow Moderate 30-35
E5.18 Statement of cash flow Moderate 25-30
*E5.19 Analysis. Moderate 15-20
*E5.20 Analysis. Moderate 20-25
*E5.21 Analysis. Complex 30-40
P5.1 Preparation of a classified statement of Moderate 30-35

financial position.
P5.2 Statement of financial position Moderate 35-40
preparation.
P5.3 Statement of financial position Moderate 40-45
adjustment and preparation.
P5.4 Preparation of a corrected statement of Complex 40-45
financial position.

ASSIGNMENT CHARACTERISTICS TABLE (CONTINUED)

Level of Time
Item Description Difficulty (minutes)
P5.5 Statement of income and statement of Moderate 30-40

financial position preparation.
P5.6 Reporting for financial effects of varied Moderate 25-30
transactions.
P5.7 Statement of financial position and cash Moderate 40-50
flow preparation and analysis.
P5.8 Preparation of a statement of financial Moderate 40-50
position, statement of cash flows and
analysis.
P5.9 Statement of financial position Complex 40-45
adjustment and preparation.
P5.10 Critique of statement of financial position Moderate 25-30
format and content.
P5.11 Preparation and analysis of a statement Moderate 25-30
of cash flows

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 5.1
(a) The statement of financial position provides information

about a company’s liquidity, solvency, and financial
structure. If Wong has poor liquidity, or poor coverage and
solvency, or if Wong is financed heavily by debt, lending
funds to (and investing in) the company more risky.
(b) The statement of cash flows provides information about the

company’s sources and uses of cash during the period. If
Wong relies significantly on external financing as a result of
negative cash flows from operations, lending funds to (and
investing in) the company is more risky. The statement of
cash flows also helps users assess earnings quality. For
example, if Wong’s net income is significantly higher than
cash flows from operations, this is a sign of poor earnings
quality, and a potential cause for concern to a possible
lender to the company.
LO 1 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5.2
The main purpose of the statement of cash flows is to help users

to assess the enterprise’s capacity to generate cash and cash
equivalents and to enable users to compare the operating
performance with other entities. It also helps users evaluate the
company’s liquidity, solvency, and financial flexibility.
Companies that are more financially flexible are better able to
survive economic downturns, and have lower risk of business
failure.
Users of Gator Printers’ statement of cash flows include

shareholders, creditors, potential bondholders, management,
employees, and customers. Shareholders, creditors, and
potential bondholders will analyze the company’s liquidity,
solvency, and financial flexibility in making their investment
decisions. Management will use the statement of cash flows to
analyze sources and uses of cash in deciding whether or not to
expand, and in deciding how to fund the expansion, if any.
Employees and customers may use the statement of cash flows
to assess the company’s liquidity, solvency, and financial
flexibility, if they are seeking a long-term employer or supplier.
BRIEF EXERCISE 5.3
Three examples of financial statement items which are omitted

from the statement of financial position because they cannot be
objectively measured, and therefore not recorded, include:
1. Internally-generated goodwill
2. Intellectual capital developed from research
3. Contingent liabilities that cannot be reasonably estimated
Note to instructor: This list is not a comprehensive list and
other acceptable options should be considered.

BRIEF EXERCISE 5.4
Current assets
Cash and cash equivalents $7,000
FV-NI investments 11,000
Accounts receivable $90,000
Less allowance for doubtful accounts (4,000) 86,000
Inventory 40,000
Prepaid insurance 5,200
Total current assets $149,200
Cash and cash equivalents and accounts receivable are monetary

assets. Fair value-net income investments could be monetary
assets depending on the nature of the investments.
LO 3 BT: AP Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 5.5
Long-term investments
FV – OCI investments $ 62,000
Land held for speculation 119,000
Total investments $181,000
Fair Value-OCI investments are financial instruments.

BRIEF EXERCISE 5.6
Property, plant, and equipment

Land $71,000
Buildings $207,000
Less accumulated depreciation (45,000) 162,000
Equipment 190,000
Equipment under lease 229,000
Total property, plant, and equipment $530,000
BRIEF EXERCISE 5.7
Intangible assets
Intangible assets - patents $33,000
Intangible assets - franchises 47,000
Intangible assets - trademarks 10,000
Total intangible assets $90,000
Note: Goodwill would be shown separately from intangibles.


BRIEF EXERCISE 5.8
(a)
Current liabilities
Accounts payable $251,000
Unearned revenue 141,000
Salaries and wages payable 127,000
Interest payable 42,000
Income tax payable 9,000
Notes payable __97,000
Total current liabilities $667,000
All of the above with the exception of unearned revenue are

monetary liabilities. Unearned revenue is non-monetary as it will
generally be satisfied by delivery of goods or services, rather than
monetary amounts.
Note: Any current portion for the Obligation under Lease and the
current portion of long term debt, such as Notes Payable,
would be included if listed in the balances.
Note: For the notes payable, as at statement of financial position

date, there is no unconditional right to defer payment of the
financial liability beyond one year. Therefore under IFRS,
the financial liability must be shown as a current liability.
(b) Under ASPE, since the notes payable are refinanced by the
issue date of the financial statements, with payment terms
beyond one year as at the statement of financial position
date, the notes payable may be presented as a non-current
liability. As a result, current liabilities would total $570,000
($667,000 - $97,000).
LO 3,10 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5.9
(a) Under IFRS
Non-current liabilities
Bonds payable $ 480,000
Obligations under lease 175,000
Total non-current liabilities $655,000
In each case, these amounts would be shown net of current

portion, if any.
(b) Under ASPE
Non-current liabilities
Bonds payable $480,000
Obligations under lease 175,000
Notes payable __97,000
Total non-current liabilities $752,000
In each case, these amounts would be shown net of current

portion, if any.
BRIEF EXERCISE 5.10
Shareholders’ equity
Share capital
Preferred shares $50,000
Common shares 700,000
Contributed surplus 200,000
Total share capital 950,000
Retained earnings 120,000
Accumulated other comprehensive income (loss) (150,000)
Total shareholders’ equity $920,000

BRIEF EXERCISE 5.11
The purpose of a statement of cash flows is to provide relevant

information about the cash receipts and cash payments of an
enterprise during a period, in order for users to determine the
significant operating, investing and financing items and amounts.
It differs from the statement of financial position and the income
statement in that it reports the sources and uses of cash by
operating, investing, and financing activity classifications. While
the income statement and the statement of financial position are
accrual basis statements, the statement of cash flows is a cash
basis statement—non-cash items are omitted.
BRIEF EXERCISE 5.12
Only the operating activities section of the statement of cash

flows differs if the statement is prepared using the indirect
method compared to one prepared using the direct method. If the
operating activities section of the statement is prepared under the
direct method, it reports the actual gross cash collections from
customers, cash payments to suppliers, cash payments to
employees, etc. It adjusts most of the individual items on the
statement of income from the accrual basis to the cash basis. The
indirect method arrives at the same total cash flow from
operations but starts with the net income for the period and
adjusts it for all non-cash items such as depreciation or
amortization and changes in the related current asset and current
liability accounts (working capital adjustments).
LO 8 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5.13
Investing activities:
Purchase of fair value through other
comprehensive income investments (47,000)
($120,000 - $96,000 + $23,000) = $47,000

Note: The fair value through OCI unrealized loss of $23,000 is not
an operating activity as it does not appear on the income
statement, and so net income need not be adjusted for this
non-cash item.
LO 8 BT: AP Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 5.14

Operating activities:
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization expense $6,000
Loss on impairment 20,000
BRIEF EXERCISE 5.15
Cash flows from operating activities

Net income* $200
net cash provided by operating activities
Increase in accounts receivable (150)
Decrease in accounts payable (400) (550)
Net cash used by operating activities $(350)
* Increase in Retained Earnings ($500 - $300)

BRIEF EXERCISE 5.16

Net income $151,000
Depreciation expense $44,000
Increase in accounts receivable (15,000)
Increase in accounts payable 9,000 38,000
Net cash provided by operating activities $189,000
BRIEF EXERCISE 5.17

Cash received from customers (1) $585,000
Cash paid to suppliers (2) $191,000
Cash paid to employees 157,000
Taxes paid 48,000 (396,000)
Net cash provided by operating activities $ 189,000
Computations:
(1) Cash received from customers
Sales $600,000
Less: Increase in accounts receivable (15,000)
Cash received from customers $585,000
(2) Cash paid to suppliers

Cost of goods sold $200,000
Less: Increase in accounts payable (9,000)
Cash paid to suppliers $191,000

BRIEF EXERCISE 5.18
Proceeds from sale of land and building $176,000

Purchase of land (44,000)
Purchase of equipment (35,000)
Net cash provided by investing activities $ 97,000
BRIEF EXERCISE 5.19
(a) Under ASPE, because payment of cash dividend is charged to

retained earnings, it would be treated as a financing activity.
Issuance of common shares $140,000

Repurchase of company’s own shares (25,000)
Payment of cash dividend (58,000)
Retirement of bonds (200,000)
Net cash used by financing activities $(143,000)
(b) Under IFRS
Issuance of common shares $140,000

Repurchase of company’s own shares (25,000)
Retirement of bonds (200,000)
Net cash used by financing activities $ (85,000)

BRIEF EXERCISE 5.20
Free Cash Flow Analysis

Less: Purchase of equipment (35,000)
Dividends (58,000)
Free cash flow $263,000
LO 8 BT: AN Difficulty: M Time: 5 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance

BRIEF EXERCISE 5.21

(a)
Operating Activities
Net income $40,000
Depreciation expense 4,000
Increase in accounts payable 7,000 ___1,000
Net cash provided by operating activities 41,000
Investing Activities
Financing Activities
Issuance of notes payable 20,000
Dividends paid (5,000)
Net cash provided by financing activities 15,000
Net change in cash ($41,000 – $8,000 + $15,000) $48,000
Free Cash Flow = $41,000 (Net cash provided by operating

activities) – $8,000 (Purchase of equipment) – $5,000 (Dividends
paid) = $28,000.
(b) Cash Flow per share = $41,000/100,000 = $0.41
(c) Midwest would be prohibited from providing cash flow per

share in its financial statements under ASPE. Under IFRS,
there is no explicit requirement that prohibits cash per share
information, so an entity could choose to voluntarily report
it.
LO 8,10,11 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting
and Finance

BRIEF EXERCISE 5.22
Melbourne’s liquidity is improving. The current and acid-test

ratios have current liabilities as the denominator in the
calculation. A higher multiple of the balance of current liabilities
is preferable for liquidity purposes. In the case of the acid-test
ratio, both inventory and prepaid expenses are omitted from the
numerator. This is because they are assets that are not available
to settle current liabilities. Therefore the result is a lower multiple.
LO 8,10,11 BT: AN Difficulty: S Time: 5 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance

SOLUTIONS TO EXERCISES
EXERCISE 5.1
1. Long-term investment. Fair Value-OCI investments are not

held with the intention of realizing direct investment gains.
They are acquired for longer term strategic purposes.
Nonmonetary and Financial Instrument.
2. Capital shares in shareholders’ equity.

Nonmonetary and Financial Instrument.
3. Current liability.
Monetary and Financial Instrument.
4. Property, plant, and equipment (as a deduction or contra

asset account).
Nonmonetary and not a Financial Instrument.
5. Property, plant, and equipment as a separate item

6. Current asset.
8. Retained Earnings with a debit balance in shareholders’

equity.
9. Current asset.
Nonmonetary and Financial Instrument. Fair value-net
income investments could be monetary depending on the
nature of the investments.

EXERCISE 5.1 (CONTINUED)

Monetary and not a Financial Instrument. The income tax
payable is an obligation that stems from regulatory
requirements and is not contractual in nature.
11. Property, plant, and equipment.

12. Current asset.



Nonmonetary and not a Financial Instrument. Could be seen
as a Monetary Financial Instrument in the event that the
company does not provide the goods or services (in which
case, the company owes the deposit back to the customer
in cash).

Nonmonetary and not a Financial Instrument. This is a
provision accrual for a likely loss.
LO 3 BT: K Difficulty: S Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 5.2
a. 8 l. 6
b. 4 m. 1
c. 6 n. 7
d. 6 o. 3
e. 3 p. 2
f. 1 q. 1
g. 6 r. 1
h. 6 s. 6
i. 1 t. 6
j. 1 u. 11
k. 7 v. 10

EXERCISE 5.3
Financial
Classification Monetary Instrument
a. 1.
b. 2. X
c. 6.
d. 1.
e. 7.
f. 4.
g. 1. X X
h. 6. X **
i. 1. X X
j. 6. X X
k. 1.*
l. 3.
m. 2. X X
n. 6. X X
o. X.
p. 3.
q. 11.
r. 6. X X
s. 2.
* Under IFRS, a non-current asset would typically be reclassified

as a current asset when it meets the criteria to be classified as
held for sale.
** Financial instruments are contracts between two or more
parties that create a financial asset for one party and financial
liability or equity instrument for the other. Therefore, non-
contractual items such as taxes payable and HST payable are not
financial instruments.

EXERCISE 5.4
a.
Bruno Corp.
Statement of Financial Position
December 31, 2020
Assets
Current assets
Cash $ 290,000
FV - NI Investments 120,000
Less allowance for doubtful accounts 17,000 340,000
Inventory, at lower of cost and net realizable value 401,000
Prepaid expenses 12,000
Total current assets 1,163,000
Land held for future use 175,000
Investment in bonds to collect cash flows 90,000 265,000

Buildings $730,000
Less accumulated
depreciation—buildings 160,000 570,000
Equipment 265,000
Less accumulated
depreciation—equipment 105,000 160,000 730,000
Goodwill 80,000
Total assets $2,238,000

a. (continued)
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable $ 195,000
Bank overdraft 30,000
Notes payable 125,000
Rent payable 49,000
Total current liabilities 399,000
Long-term debt
Bonds payable $553,000
Pension obligation 82,000 635,000
Total liabilities 1,034,000
Common shares, unlimited authorized
issued 290,000 shares 290,000
Contributed surplus 180,000
Retained earnings* 734,000
Total shareholders’ equity 1,204,000
Total liabilities and shareholders’ equity $2,238,000
*$2,238,000 – $1,034,000 – $290,000 – $180,000 = $734,000

*b . The bank overdraft is classified as a current liability, as

there is no legal right to offset the bank overdraft against the
positive cash balance. The bank accounts are at different
banks. Had the bank overdraft been offset (netted) against
the cash balance as originally prepared by the bookkeeper,
there would have been no effect on working capital. The net
amount of current assets, less current liabilities would not
change in absolute amount.
However, the classification change does affect the current

ratio (current assets / current liabilities):
Overdraft netted Proper classification

$1,163 – $30 $1,163
$399 – $30 $399
= 3.07 = 2.91
Those who prepared the statement of financial position

likely did not do the misclassification of the bank overdraft
on purpose. The bank account in overdraft is likely one of
several bank accounts used by Bruno Corp. This particular
account happens to fall in a temporary overdraft position, as
allowed by the bank, as of the fiscal year end of the
business.
LO 3,4,11 BT: AP Difficulty: M Time: 40 min. AACSB: Ethics CPA: cpa-t001 cpa-e0001 CM: Reporting and
Ethics

EXERCISE 5.5
a.
Garfield Corp.
As at July 31, 2020
Assets
Current assets
Cash $ 66,000*
Accounts receivable $ 46,700**
Inventory 65,300***
Total current assets 174,500
Bond sinking fund investment 12,000

Equipment 112,000
Less accumulated depreciation—
equipment 28,000 84,000
Intangible assets
Patents, net of accumulated amortization 21,000
Total assets $291,500
Current liabilities
Notes and accounts payable $ 52,000****
Bonds payable 75,000
Total liabilities 136,000
Common shares 105,000
Retained earnings 50,500 __155,500
Total liabilities and shareholders’ equity $291,500
* ($69,000 – $12,000 + $9,000) *** ($60,000 + $5,300)
** ($52,000 – $5,300) ****($44,000 + $8,000)

*b. Since there is no legal right to offset the credit balances in

accounts receivable against any other amounts owing from
customers, these balances need to be classified as a current
liability, unless the amounts are deemed to be immaterial. Had
the credit balances in accounts receivable been offset (netted)
against other debit balances as originally presented, there
would have been no effect on working capital. The net amount
of current assets, less current liabilities would not change in
absolute amount.
However, the classification change does affect the current
ratio (current assets / current liabilities) as demonstrated
below:
Credit balances netted Proper classification
$174,500 – $8,000 $174,500
$61,000 – $8,000 $61,000
= 3.14 = 2.86
The persons preparing the statement of financial position
likely did not feel that the credit balances in accounts
receivable warranted a reclassification. They likely were not
aware of the impact the credit balances would have on the
current ratio. Materiality would also be a basis for leaving the
credit balances to offset the debit balances in accounts
receivable.
The credit balances in accounts receivable represent amounts
owing to specific customers. Following are possible
conditions or situations that would give rise to a credit balance
in accounts receivable:
1. Customers have returned goods after paying for a

shipment and credit memorandums for the sales
returns have been applied subsequent to collection on
account.

b. (continued)
2. A customer has inadvertently overpaid an account.

3. Garfield’s policy on returned items does not allow a
cash refund. Instead the policy calls for the credit to be
applied to a future purchase on account.
4. Some accounting software packages treat customer
prepayments (unearned revenues) as credit balances
in accounts receivable, since the customer
information is part of the accounts receivable
subsidiary ledger.
LO 3,4,11 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance

EXERCISE 5.6
Lee Inc.
December 31, 20–
Assets
Current assets
Cash $XXX
Less cash restricted for plant expansion XXX $XXX
Accounts receivable XXX
Less allowance for doubtful accounts XXX XXX
Notes receivable XXX
Accounts receivable—officers XXX
Inventory
Finished goods XXX
Work in process XXX
Raw materials XXX XXX
Total current assets $XXX
FV - OCI Investments XXX
Land held for future plant site XXX
Cash restricted for plant expansion XXX
Total long-term investments XXX

Buildings XXX
Less accumulated depreciation—buildings XXX XXX
Intangible assets
Copyrights XXX
Goodwill XXX
Total assets $XXX


Current liabilities
Accounts payable $XXX
Salaries and wages payable XXX
Unearned revenue XXX
Unearned rent revenue XXX
Total current liabilities $XXX
Long-term liabilities
Bonds payable, due in four years XXX
Total liabilities XXX
Common shares $XXX
Retained earnings XXX
Total shareholders’ equity XXX
Total liabilities and shareholders’ equity $XXX
Note to instructor: The question notes that cash includes the cash
restricted for plant expansion. If it did not, then a subtraction from
cash would not be necessary, or the cash balance would be
“grossed up” and then the cash restricted for plant expansion
would be deducted.
LO 3,4 BT: AP Difficulty: S Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 5.7
a.
1. Dividends payable of $1,500,000 will be reported as a current
liability (1,000,000 X $1.50).
2. No amounts are reported as a current or long-term liability.

Stock dividends distributable are reported in the
shareholders' equity section.
3. Bonds payable of $25,000,000 and interest payable of

$1,750,000 ($100,000,000 X 7% X 3/12) will be reported as
a current liability. Bonds payable of $75,000,000 will be
reported as a long-term liability.
4. Customer advances of $27,000,000 will be reported as a
current liability ($12,000,000 + $40,000,000 – $25,000,000).
5. Demand bank loans must be classified as current liabilities.

6. Although the terms and condition of the guarantee for the
DD Ross Ltd. bank loan must be disclosed in the notes to
the financial statements, no amount of liability is reportable
on Samson’s statement of financial position.
b. Liabilities are a present duty or responsibility that obligates
the entity, arising from a past transaction or event. When
Samson accepts an advance from a customer, a duty or
responsibility arises that will be satisfied when Samson
provides the related goods or services. The obligation is a
present and enforceable until the related goods or services
are delivered. Samson has no practical ability to avoid the
obligation. Earned customer advances of $25 million no
longer represent a liability because the obligation has been
satisfied.


c. Samson may have a much stronger financial position than
its Associate and by providing the guarantee the bank would
be more confident that the loan and related interest will be
fully repaid on a timely basis. The guarantee would typically
lead to lower interest rates being charged on the loan. Since
Samson is associated with DD Ross, increased income of
the associate will benefit Samson indirectly.

EXERCISE 5.8
a.
Zhang Ltd.
December 31, 2020
Assets
Current assets
Cash $205,000
FV - NI investments 153,000
Less allowance for doubtful
accounts (25,000) 490,000
Inventory 687,000
Total current assets $1,535,000
Bond investments at amortized cost 299,000
FV - OCI Investments 345,000
Total long-term investments 644,000

Land 260,000
Buildings 1,040,000
Equipment 600,000
Total property, plant, and equipment 1,688,000
Intangible assets
Intangible Assets-Franchises 160,000
Intangible Assets-Patents 195,000
Total intangible assets 355,000

a. (continued)
Current liabilities
Dividends payable 36,000
Total current liabilities $ 875,000
Bonds payable 1,000,000
Total long-term liabilities 1,900,000
Common shares $ 809,000
Retained earnings** 490,000
Accumulated other comprehensive income 148,000*
* Unrealized gain or loss-OCI

($345,000–$277,000) $68,000
Add opening balance 80,000 $148,000
**Calculation of Retained Earnings:

Sales revenue $8,010,000
Investment income or loss 13,000
Gain on disposal of land 60,000
Cost of goods sold (4,800,000)
Selling expenses (1,860,000)
Administrative expenses (900,000)
Interest expense (211,000)
Net income $ 312,000
Beginning retained earnings $ 218,000

Net income (above) 312,000
Dividends (40,000)
Ending retained earnings $ 490,000

b. A classified statement of financial position requires the

reporting of current assets and liabilities, and the
classifications are used for measurement of liquidity. The
length of the operating cycle will determine what items are
classified as current where the operating cycle is longer
than one year. Brookfield Asset Management Inc. has
several segments including: asset management, property
operations, renewable power, infrastructure operations,
residential development and others. The operating cycles
for these segments are very different. Applying one cycle
length to all business segments becomes meaningless. In
cases such as this, the consolidated statement of financial
position may not be classified.

EXERCISE 5.9
1. Because the likelihood of payment is remote, accrual of a

liability is not required. Case by case examination is
required with respect to all lawsuits.
2. A current liability of $150,000 should be recorded and

reported for the year ended December 31, 2020.
3. A current liability for accrued interest of $3,750 ($900,000 X

5% X 1/12) should be reported. Any portion of the $900,000
note that is payable within one year from the statement of
financial position date should be shown as a current liability.
Otherwise, the $900,000 note payable would be a long-term
liability.
4. Although bad debts expense of $200,000 should be debited

and the allowance for doubtful accounts credited for
$200,000, this does not result in a liability. The allowance for
doubtful accounts is a valuation account (contra asset) and
is deducted from accounts receivable on the statement of
financial position.
5. A current liability of $80,000 ($2 X 40,000) should be reported

for the dividends payable. The liability is recorded on the
date of the declaration of the dividend.
6. Customer advances of $110,000 ($160,000 – $50,000) will be

reported as a current liability if the advances are expected
to be earned within one year.
7. Income tax payable in the amount of $6,000 should be

recorded and reported as a current liability.

EXERCISE 5.10
a.
Current assets
Cash $ 92,000*
Less cash restricted for plant expansion (50,000) $42,000
Accounts receivable (of which $50,000 is
pledged as collateral on a bank loan) 161,000
Less allowance for doubtful accounts (12,000) 149,000
Notes receivable 40,000
Interest receivable ** 1,600
Inventory at lower of FIFO cost and
net realizable value
Finished goods 152,000
Work-in-process 34,000
Raw materials 187,000 373,000
*($50,000 + $50,000 – $8,000)

** [($40,000 X 6%) X 8/12]
b. An alternative to the presentation of the details (for

example of the three categories of inventory) as shown
above is to provide disclosure in a table within the notes
to the financial statements. This provides a more
condensed format of the statement of financial position.
This allows easier comparisons of balances, especially
when presented on a comparative basis. References to
the notes containing the detail would be added to the
captions appearing on the face of the statement of
financial position as a cross-reference.

(b) (continued)
A second possible alternative to the presentation of
information is parenthetical disclosure on the face of the
statement of financial position. Although not a required
disclosure, the balance of accounts receivable could be
presented: “net of allowance for doubtful accounts of
$12,000.”
An acceptable alternative for cash is to report cash of

$42,000 and report the cash restricted for plant expansion in
the non-current investments section of the statement of
financial position.
LO 4,5,6 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 5.11
a.
Uddin Corp.
December 31, 2020
Assets
Current assets $1,380,500a
FV – OCI Investments 20,500
Land $ 30,000
Buildings ($1,120,000 + $31,000) $1,151,000
Less accumulated depreciation
($130,000 + $4,000) (134,000) 1,017,000
Equipment ($320,000 – $20,000) 300,000
Less accumulated depreciation
($11,000 – $8,000 + $9,000) (12,000) 288,000
Total 1,335,000
Intangible assets - Patents, net ($40,000
– $3,000) 37,000

Current liabilities ($1,020,000 + $13,000) $1,033,000
Bonds payable ($1,100,000 + $75,000) 1,175,000
Common shares $180,000
Retained earnings* 385,000
Total shareholders’ equity 565,000
* ($174,000 + $391,000 – $180,000)

a
The amount determined for current assets is calculated last and
is a derived or “plug” figure. That is, total liabilities,
shareholders’ equity and other asset balances are calculated
because information is available to determine these amounts.


b.
Uddin Corp.
Statement of Cash Flows
For the Year Ended December 31, 2020

Net income $391,000
Loss on disposal of equipment
[($20,000 – $8,000) – $10,000] $ 2,000
Depreciation expense
($4,000 + $9,000) 13,000
Amortization expense 3,000
Increase in current liabilities 13,000
Increase in current assets (other
than cash) (29,000) 2,000
Cash flows from investing activities
Proceeds from sale of equipment 10,000
Addition to buildings (31,000)
Purchase of FV-OCI investments (20,500)
Net cash used by investing activities (41,500)
Cash flows from financing activities
Issuance of bonds 75,000
Payment of dividends (180,000)
Net cash used by financing activities (105,000)
Net increase in cash $246,500b
b An additional proof to arrive at the increase in cash follows:
Total current assets—end of period [from part (a)] $1,380,500
Total current assets—beginning of period 1,105,000
Increase in current assets during the period 275,500
Increase in current assets other than cash 29,000
Increase in cash during year $ 246,500

EXERCISE 5.12
a. Agincourt Corp.
Partial Statement of Financial Position
As at December 31, 2020
Current assets
Cash1 $30,476
Accounts receivable2 $91,300
Less allowance for doubtful
accounts 7,000 84,300
Inventory3 161,000
Current liabilities
Accounts payable4 $112,300
Notes payable5 55,476
Total current liabilities $167,776
1
Cash balance $ 40,000
Add: Cash disbursement 34,300
74,300
Less: Cash sales in January
($30,000 – $21,500) (8,500)
Cash collected on account (23,800)
Bank loan proceeds ($35,324 – $23,800) (11,524)
Adjusted cash $30,476
2
Accounts receivable balance $ 89,000
Add: Accounts reduced from January
collection 23,800
112,800
Deduct: Accounts receivable in January (21,500)
Adjusted accounts receivable $ 91,300

a. (continued)
3
Inventory $171,000
Less: Consignment inv. included in count (10,000)
Adjusted inventory $161,000
4
Accounts payable balance $ 61,000
Add: Cash disbursements $34,300
Purchase invoice omitted
($27,000 – $10,000) 17,000 51,300
Adjusted accounts payable $112,300
5
Notes payable balance $ 67,000
Less: Proceeds of Jan. 2021 bank loan (11,524)
Adjusted notes payable $ 55,476
*b. Current ratio – Deteriorated dramatically
Before Restatement Restated

$302,000 $284,776
$128,000 $167,776
= 2.36 = 1.70
c. Adjustment to retained earnings balance:
Deduct:
January sales $30,000
December purchases
($27,000 – $10,000) 17,000
Consignment inventory 10,000
Decrease to retained earnings $57,000

d. Agincourt’s bank manager is relying on the information in

the statement of financial position as at December 31, 2020
to assess whether a new bank loan should be extended to
the company. Before restatement, Agincourt’s current ratio
is 2.36, and after restatement, Agincourt’s current ratio is
1.70. The adjustments are material because they result in a
current ratio that is much closer to the minimum required
current ratio, and would likely affect the bank manager’s
decision to extend a new bank loan to Agincourt. In order
for financial statements to be useful, relevant, and faithfully
representative, they must be free from error and bias.
Recording of the adjustments is necessary in order to
provide financial statement users with useful and complete
information for their investment and credit decisions.
e. The likelihood that the bank manager will suspect the

statement of financial position is incorrect is quite strong.
Two of the balances reported on the statement of financial
position represent accounts with the bank. One is the Cash
balance and the other is the Notes Payable balance which is
a loan from the bank. Both balances would not be in line with
the records of the bank at December 31, 2020, and the most
noticeable one would be the Notes Payable balance. This is
the case because an additional $12,000 loan was made in
the first few days of January 2021 (refer to part (a) above). In
the case of the Cash account balance, it would less
noticeable as the bank understands that there are
outstanding cheques which make the bank and book
balances different. The manager is nonetheless aware and
monitors the flow of cash in the bank account.
LO 4,11 BT: AP Difficulty: C Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 5.13
1. Contingency. Under IFRS, a provision is recognized in income

and as a liability if it is probable (more likely than not) that the
confirming future event will occur. In this example, it is not
likely that damages will be awarded to the plaintiff, and so it is
considered a contingent loss that is not accrued. However, the
contingency would be disclosed in the notes to financial
statements if the possibility of an outflow of company
resources is not remote.
2. Subsequent event. This event provides evidence about

conditions that did not exist at the statement of financial
position date, but arose subsequent to that date, and therefore
adjustment of the statement of financial position as at
December 31, 2020 is not required. However, this event may
have to be disclosed in the notes to financial statements to
keep the financial statements from being misleading.
3. Provision. Under IFRS, a provision is recognized in income and

as a liability if it is probable (more likely than not) that the
confirming event will occur. According to Janix’s legal
counsel, Janix will likely lose the lawsuit; therefore a provision
should be recognized. IFRS requires that the “expected value”
of the loss be used to measure the liability. If $850,000 payout
and $950,000 payout are equally probable, the liability should
be measured at $900,000.
4. Commitment. Under IFRS, if the unavoidable costs of

completing the contract are higher than the benefits expected
from receiving the contracted goods or services, a loss
provision is recognized (onerous contract). In this example, the
cost per inventory unit has decreased, therefore under IFRS, if
the contract is non-cancellable, or if the cancellation
provisions are severe, a loss provision should be recognized
in the amount of $400,000 (200,000 X [$12 - $10]).

5. Commitment. Commitments that obligate a company must be

disclosed if they are material. A restriction on payment of
dividends should be disclosed in the notes to financial
statements, because it is likely to be considered material and
potential shareholders would be very interested in being aware
of this restriction.
6. Subsequent event. This event provides evidence about

conditions that did not exist at the statement of financial
position date, but arose subsequent to that date, and therefore
adjustment of the statement of financial position as at
December 31, 2020 is not required. However, this event should
be disclosed in the notes to financial statements to keep the
financial statements from being misleading. Potential
shareholders would be very interested in being aware of the
additional share issue and its effect on earnings per share as
the issuance of common shares is dilutive. In addition,
creditors would be interested in knowing of the additional
financing that will likely help Janix’s liquidity and solvency.
7. Subsequent event. Because the lump sum payment is for

retroactive pay that covers a period of time that involves an
expense in the 2020 and 2021 fiscal periods, an accrual for the
portion of the expense that relates to 2020 must be reflected in
the statement of comprehensive income for 2020.

EXERCISE 5.14
a. Carmichael Industries Inc.

Net income $129,000
Gain on disposal of land (5,000)
Increase in inventory (31,000)
Decrease in accounts payable (7,000) (66,000)
Proceeds from sale of land* 44,000
Cash flows used by financing activities
Payment of cash dividends (60,000)
Net decrease in cash (13,000)
Cash at beginning of year 34,000
Cash at end of year $21,000
Note: During the year, Carmichael retired $50,000 in bonds

payable by issuing common shares.
* ($110,000 - $71,000 + $5,000 gain) = $44,000
b. Carmichael managed to generate sufficient cash from

operations to finance a strong dividend payout ratio of 46.5%
($60,000 divided by $129,000). The cash generated from the
sale of land was used to purchase equipment. There are some
indications that too much cash is tied up in current assets,
from the dramatic increase in both the accounts receivable
and the inventory balances over the year.

EXERCISE 5.15
Indirect method
a. 3.
b. 2.
c. 3.
d. 2.
e. 1.
f. 1.
g. 4.
h. 3.*
i. 4.
j. 1.
k. 1.
l. 1.
m. 1.*
n. 1.**
* Under ASPE, interest and dividends paid are operating activities

if recognized in net income. If charged directly to retained
earnings, they are presented as financing activities. (Under IFRS,
interest and dividends paid may be presented as either operating
or financing activities.)
** Under ASPE, interest and dividends received are presented as

operating activities. (Under IFRS, interest and dividends received
may be presented as either operating or investing activities.)
LO 7 BT: K Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 5.16
a. 1.
Kneale Transport Inc.
Partial Statement of Cash Flows

Net income $148,000
Gain on disposal of equipment (25,000)
Decrease in accounts receivable 10,000
Increase in prepaid insurance (3,000)
Decrease in accounts payable (11,000)
Increase in interest payable 1,250
Increase in income taxes payable 3,500
Decrease in unearned revenue (4,000) 41,750
2.
Kneale Transport Inc.
Partial Statement of Cash Flows

Cash payments
For operating expenses (2) $314,000
For interest (3) 8,750
For income tax (4) 38,500 361,250

a. 2. (continued)

Revenues from services $545,000
Add: Decrease in accounts receivable
($60,000 – $50,000) $10,000
Less: Decrease in unearned revenue
($14,000 – $10,000) (4,000)
Cash receipts from customers $551,000
(2) Cash payments for operating expenses

Operating expenses $300,000*
Add: Increase in prepaid insurance ($5,000 – $8,000) 3,000
Decrease in accounts payable ($41,000 – $30,000) 11,000
Cash payments for operating expenses $314,000
* $370,000 – $70,000 = $300,000
(3) Cash payments for interest

Interest expense $10,000
Less: Increase in interest payable ($2,000 – $750) (1,250)
Cash payments for interest $ 8,750
(4) Cash payments for income tax

Income tax expense $42,000
Less: Increase in income tax payable ($8,000 – $4,500) (3,500)
Cash payments for income tax $38,500

b. Whether the operating activities of the statement of cash

flows are reported using the direct or the indirect method,
the statement of cash flows allows the external users to
assess Kneale’s capacity to generate cash and allows those
users to compare the operating performance and cash flows
with other businesses. The indirect method focuses on the
differences between net income and cash flow from
operating activities. A user of Kneale’s financial statements
would find this information useful in that it provides a useful
link between the statement of cash flows, the statement of
income, and the statement of financial position. The direct
method shows operating cash receipts and payments,
which is more consistent with the objective of the statement
of cash flows (that is, to provide information about the
company’s sources and uses of cash). An external user of
Kneale’s financial statements would find this information
useful in estimating future cash flow from operating
activities.

EXERCISE 5.17
a. Dropafix Inc.
For the Year Ended June 30, 2020
Net income $13,000
Decrease in prepaid expenses 4,000
Increase in accounts payable 15,000
Decrease in income tax payable (1,000) 15,000
Purchase of equipment (6,000)*
Payment of cash dividends (4,000)**
Repayment of notes payable (43,000)***
Issuance of common shares _7,000
Net cash used by financing activities _(40,000)
Net decrease in cash (18,000)
Note: During the year, equipment with a cost of $8,000 was

purchased in exchange for a note payable.
* Increase in equipment $14,000 less $8,000 non-cash
purchase
** Increase in retained earnings, less net income plus
dividends payable increase ($4,000 - $13,000 + $5,000) =
($4,000)
*** Decrease in notes payable plus non-cash purchase
($35,000 + $8,000) = $(43,000)

b. Dropafix Inc.
For the Year Ended June 30, 2020
Cash paid to suppliers (2) $161,000
Cash paid for operating expenses (3) 106,000
Interest paid 9,000
Taxes paid (4) 7,000 (283,000)
Net cash provided by operating activities $ 28,000
Computations:
Net sales $323,000
(2) Cash paid to suppliers

Add: Increase in inventory 1,000
Purchases 176,000
Cash paid to suppliers $161,000
(3) to and
Cash paid for on behalf
operating of employees
expenses
Operating expenses $120,000
Less: Depreciation expense (10,000)
Decrease in prepaid rent (4,000)
Cash paid for operating expenses $106,000
(4) Taxes paid

Decrease in income tax payable 1,000
Income taxes paid $ 7,000

c. As one of Dropafix’s creditors, holding notes receivable of

substantial amounts, I would review the statement of cash
flow with particular attention to the amount of cash flows
generated from operating activities. This section of the cash
flow statement provides a perspective on the past
performance of Dropafix in generating cash from its main
activities and provides some predictive value in the likely
amount of cash Dropafix will be able to generate in the future
to meet the payment deadlines on its notes payable.
The second item of the statement of cash flow which would

be of particular interest to the creditor holding notes is the
amount of repayment of notes in the financing activities
portion of the statement of cash flows. In the case of
Dropafix, the amount of $43,000 for the repayment of notes
payable stands out as the largest amount on the statement
of cash flows. This large repayment was achieved, in part,
by the reduction of cash balances by about one third. Some
cash was also obtained from the issuance of common
shares. If the amounts due on notes payable for the next
fiscal year are near the $43,000 level, Dropafix will need to
seriously look at the refinancing of the notes or the issuance
of additional common shares to meet those repayments.
The remaining cash should not be depleted to the point
where day-to-day operations are affected by cash
shortages.

EXERCISE 5.18
Sensify Corporation

Net income $37,000
Gain on disposal of equipment (3,000)2
Increase in accounts payable 5,000 5,000

Purchase of equipment (17,000)3

Issuance of common shares 20,000
Net increase in cash 40,000
1
$10,000 + $7,000 - $11,000
2
$8,000 - $5,000
3
$27,000 + $12,000 - $22,000

*EXERCISE 5.19
a. Current Ratio :
2020 2019
$53,000 + $91,000 $13,000 + $88,000
$20,000 $15,000
= 7.20 = 6.73
Debt to total assets ratio:

2020 2019
$20,000 $15,000
$161,000 $112,000
= 12.4% = 13.4%
Free cash flow:

2020
Less: Purchase of equipment (17,000) *
Free cash flow $12,000
*Some companies may use the net investing cash outflow

of $9,000, which would increase the amount of free cash
flow to $20,000. It is important to understand how
companies define free cash flow when interpreting the ratio.
b. Sensify’s current ratio has increased slightly from 2019 to

2020, and remains in excess of 6, which is very high. The debt
to total assets ratio has declined and remains at a very low
percentage. The accounts receivable are climbing slightly and
could be investigated. The company has excellent liquidity
and financial flexibility.
LO 11 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance

*EXERCISE 5.20
a. 2020 2019
Current ratio* 6.63 4.69
Acid test ratio** 2.40 1.49
* 2020: ($21,000 + $104,000 + $220,000)/$52,000
2019: ($34,000 + $54,000 + $189,000)/$59,000
** 2020: ($21,000 + $104,000)/$52,000
2019: ($34,000 + $54,000)/$59,000
b. Current cash debt coverage – Net cash provided from

operating activities divided by average current liabilities:
$63,000
Its current cash debt coverage is 1.14 to 1
$55,500
($52,000 + $59,000) ÷ 2 = $55,500
c. Carmichael’s current and acid test ratios are both in excess

of 1 and they both exhibit an increasing trend from 2019 to
2020. Its current cash debt coverage is excellent at 1.23 to 1.
However, free cash flow ($63,000 - $60,000 - $60,000) is
negative in 2020. Note also that accounts receivable and
inventories have increased substantially from 2019 to 2020.
While these increases might be an indication of growth in
sales, if Carmichael has difficulty in collecting receivables
or if sales slow and the inventory is not converted to cash,
Carmichael’s liquidity and financial flexibility will be
negatively affected.

*EXERCISE 5.20 (continued)
d. Carmichael’s payout ratio of 47% is too high.

Cash dividends $60,000
Payout ratio = = = 47%
Net income $129,000
If we were to use net cash provided by operating activities
of $63,000 as the denominator, we would get close to 100%
payout. In other words, all of the cash generated by
operating activities is used up to satisfy shareholders. Very
few growing businesses can afford this high a ratio when
inventory and accounts receivable are increasing at such a
high pace. A ratio of 30% to 40% is more reasonable.
LO 11 BT: AN Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance

*EXERCISE 5.21
a. 2020 2019
Current ratio* 1.73 2.14
Acid test ratio** .87 1.09
* 2020: ($20,000 + $86,000 + $103,000 +$2,000)/($115,000 +
$2,000 + $5,000)
2019: ($38,000 + $74,000 + $102,000 + $6,000)/($100,000 +
$3,000)
**2020: ($20,000 + $86,000)/($115,000 + $2,000 + $5,000)
2019: ($38,000 + $74,000)/($100,000 + $3,000)
b. Current cash debt coverage – Net cash provided from

operating activities divided by average current liabilities:
$28,000
Its current cash debt coverage is .25 to 1
$112,500
($122,000 + $103,000) ÷ 2 = $112,500
c. Cash debt coverage – Net cash provided from operating

activities divided by average total liabilities:
$28,000
Its cash debt coverage is .13 to 1
$214,000
[($122,000 + 84,000) + ($103,000 + $119,000)] ÷ 2 = $214,000
d. Dropafix’s times interest earned ratio is 3.1 times.

Income before
Times interest
= interest and taxes = $28,000 = 3.1
earned
e. Dropafix’s current and acid test are not very strong and both
exhibit a decreasing trend from 2019 to 2020. Accounts
receivable have increased substantially from 2019 to 2020.
While these increases might be an indication of growth in
sales, if Dropafix has difficulty in collecting receivables or if
sales slow and accounts receivable are not converted to
cash, Dropafix’s liquidity and financial flexibility will be
further negatively affected. As at June 30, 2020, even if
Dropafix collected all of its receivable, it would not be in a
position to pay all of its accounts payable.

*EXERCISE 5.21 (CONTINUED)
e. (continued)
Dropafix’s ability to repay current and all liabilities from its

operations is very poor. Its current cash debt coverage is
very low at .25 to 1 and its cash debt coverage is extremely
low at .13 to 1. On the other hand, its times interest earned
ratio is reasonable at 3.1 times.
f. The following recommendation is based on the financial

statements as a whole, and the conclusions reached in the
analysis of parts (a) though (e) above. To improve Dropafix’s
financial performance and particularly its ability to pay
liabilities as they come due, Dropafix should consider
maintaining its investments as FV-NI rather than FV-OCI
investments. As at June 30, 2020 Dropafix has cumulative
unrealized gains of $11,000. This balance is taken from the
accumulated other comprehensive income balance of the
statement of financial position. If the maturity dates of the
notes payable are large and imminent, it would seem
reasonable to actively manage its investments. If these
were actively managed and considered FV-NI then some (or
all) of the investments could be sold rather than refinancing
debt or having shareholders invest more cash into the
business in exchange for common shares.
LO 11 BT: AN Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance

TIME AND PURPOSE OF PROBLEMS

Problem 5.1
Purpose—to provide the student with the opportunity to prepare a statement of

financial position, given a set of accounts. No specific amounts are to be reported.
Problem 5.2
Purpose—to provide the student with the opportunity to prepare a complete

statement of financial position, involving dollar amounts. A unique feature of this
problem is that the student must solve for the retained earnings balance. Providing
additional disclosure is also required.
Problem 5.3
Purpose—to provide an opportunity for the student to prepare a statement of

financial position in good form. Emphasis is given in this problem to additional
important information that should be disclosed. For example, an inventory
valuation method, bank loans secured by long-term investments, and information
related to the share capital accounts must be disclosed.
Problem 5.4
Purpose—to provide the student with the opportunity to analyze a statement of

financial position and correct it where appropriate. The statement of financial
position as reported is incomplete, uses poor terminology, and is in error. This is
a challenging problem.
Problem 5.5
Purpose—to review Chapters 4 and 5. The student must prepare an income

statement and statement of financial position using information from records
prepared on a cash basis.
Problem 5.6
Purpose—to provide a varied number of financial transactions and events and then
determine how each of these items should be reported in the financial statements.
Accounting principle changes, additional assessments of income taxes,
corrections of prior years’ errors, and changes in estimates and subsequent events
are some of the financial transactions presented.

TIME AND PURPOSE OF PROBLEMS (CONTINUED)
Problem 5.7
Purpose—to provide the student with an opportunity to prepare a condensed

statement of financial position and a more complex statement of cash flows from
selected transactions and perform some ratio analysis. The student is also
required to explain the patterns of the cash flows that are being reported.
Problem 5.8
Purpose—to provide the student with an opportunity to prepare a complete

statement of cash flows. A condensed statement of financial position is also
required along with selected ratios. The student is also required to explain the
usefulness of the statement of cash flows and discuss the patterns of the cash
flows that are being reported. Problem areas flagged on the cash flow must be
discussed and addressed. Because the textbook does not explain in Chapter 5 all
of the steps involved in preparing the statement of cash flows, assignment of this
problem is dependent upon additional instruction by the instructor or knowledge
gained in introductory financial accounting. This is a comprehensive problem.
Problem 5.9
Purpose—to provide the student with the opportunity to prepare a statement of
financial position in good form. Additional information is provided on each asset
and liability category for purposes of preparing the statement of financial position.
Students are also asked about the appropriateness about possible condensed
formats of presenting information on the statement of financial position. This is a
challenging problem.
Problem 5.10
Purpose—to present a statement of financial position that must be analyzed to

assess its deficiencies. Items such as improper classification, terminology, and
disclosure must be considered.
Problem 5.11
Purpose—to provide the student with an opportunity to prepare a complete

statement of cash flows. A comparative statement of financial position is
provided. The student is also required to analyze the statement of cash flows
from the perspective of a shareholder.

SOLUTIONS TO PROBLEMS
PROBLEM 5.1
Company Name
December 31, 20XX
Assets
Current assets
Cash*
Less restricted cash
FV - NI investments
Accounts receivable
Less allowance for doubtful accounts
Interest receivable
Advances to employees
Inventory
Prepaid rent
Total current assets
Notes receivable due in five years
Land held for future plant site
FV – OCI investments
Restricted cash
Total long-term investments
Land
Buildings
Less accumulated depreciation—buildings
Equipment
Less accumulated depreciation—equipment
Total property, plant, and equipment
Intangible assets
Patents (net of amortization)
Copyrights (net of amortization)
Total intangible assets
Total assets
PROBLEM 5.1 (CONTINUED)

Current liabilities
Notes payable
Income tax payable
Salaries and wages payable
Dividends payable
Unearned revenue
Total current liabilities
Bonds payable
Pension obligation
Total long-term liabilities
Total liabilities
Capital shares
Preferred shares (description)
Common shares (description)
Total capital shares
Retained earnings
Accumulated other comprehensive income
Total shareholders’ equity
Total liabilities and shareholders’ equity
* Cash includes cash, restricted cash and petty cash


PROBLEM 5.2
a.
Montoya Inc.
December 31, 2020
Assets
Current assets
Cash $ 360,000
FV - NI Investments 121,000
Notes receivable 445,700
Income tax receivable 97,630
Inventory 239,800
Total current assets 1,352,050

Land $ 480,000
Buildings $1,640,000
Less accumulated
depreciation—buildings 270,200 1,369,800
Equipment 1,470,000
Less accumulated
depreciation—equipment 292,000 1,178,000 3,027,800
Goodwill 125,000
Current liabilities
Bank loan 177,591
Rent payable 45,000
Total current liabilities 1,075,953

a. (continued)
Notes payable $1,600,000
Bonds payable, (due 2024) 270,000
Rent payable 480,000 2,350,000
Capital shares
Preferred shares; 20,000
shares authorized, 15,000
shares issued 150,000
Common shares; unlimited
shares authorized, 20,000
shares issued 200,000 350,000
Retained earnings 728,897*
Total shareholders’ equity 1,078,897**
* ($1,078,897 – $350,000)
** ($4,504,850 – $3,425,953)
Note to Instructor: Income tax receivable and payable have not been
netted as taxes could be owed federally and provincially in which case
netting is not allowed. However, if owed to the same taxation authority
then could be netted.
b. In order to allow the reader of the statement of financial position

to assess the timing of the future cash outflows concerning
future rentals, (predictive value) a table illustrating the amount
and the timing of the cash flows for each of the next five years
and amounts beyond five years would be provided in the notes
to the financial statements.

PROBLEM 5.3
a.
Eastwood Inc.
December 31, 2020
Assets
Current assets
Cash $ 41,000
Less allowance for doubtful 8,700
accounts 154,800
Inventory—at lower of FIFO cost and 208,500
NRV
Total current assets $ 410,200
FV – OCI investments, of which investments carried
at $120,000 have been pledged as security for
notes payable to the bank 378,000

Cost of uncompleted plant facilities
Land $ 85,000
Building under construction 124,000 209,000
Equipment 400,000
Less accumulated depreciation 240,000 160,000 369,000
Intangible assets
Patents (net of accumulated amortization of $4,000) 36,000

a. (continued)
Current liabilities
Notes payable to bank, secured by FV-OCI
investments with carrying amount $120,000 $ 94,000
Accounts payable 148,000
7% bonds payable, $200,000, due January 1, 2032 180,000
Capital shares
Common shares; unlimited shares authorized,
500,000 shares issued and outstanding 500,000
Accumulated other comprehensive income 84,000* 722,000
* Opening balance of $45,000 + $39,000 ($378,000 – $339,000) for unrealized

holding gain – OCI on FV-OCI investments.
b. If the Construction in Process account represents the costs of

construction of a building for resale, the account is an inventory
account, and a current asset. However, the Construction in
Process account in Eastwood’s trial balance represents the costs
of construction of a building for use by Eastwood, which is a
property, plant, and equipment account, and a long-term asset.
Incorrect classification of the Construction in Process account as
an inventory account would overstate current assets, which is a
measure that a potential creditor would use in evaluating
Eastwood’s liquidity. Incorrect classification of accounts presents
biased and misleading information on the statement of financial
position. Proper classification of accounts is necessary in
presenting a statement of financial position that is useful and
faithfully representative.

PROBLEM 5.4
a.
Delacosta Corporation
December 31, 2020
Assets
Current assets
Cash $175,900
Accounts receivable 170,000
Inventory 312,100
FV - OCI investments 200,000
Assets allocated to trustee for
plant expansion:
Cash $120,000
Treasury notes, at fair value 138,000 258,000
Total long-term investments 458,000

Land 950,000
Buildings a
$1,070,000
Less accumulated
depreciation—buildings 410,000 660,000 1,610,000

Current liabilities
Accounts payable $420,000
Current portion of notes payable 100,000
Notes payable 500,000 b

a. (continued)
Common shares
Unlimited number of shares authorized,
500,000 shares issued $730,000
Retained earnings 863,000 c
Accumulated other comprehensive income 113,000 d
a
$1,640,000 – $570,000 (to eliminate the excess of appraisal value
over cost from the Buildings account. Note that the Appreciation
Capital account is also deleted.)
Note: If the company followed IFRS and the IAS 16 revaluation model
of accounting for property, plant, and equipment was used, then it may
be appropriate to revalue the building to its fair value. However, the
depreciation would be based on the new revaluation model carrying
amount, not on the original cost.
b
$600,000 – $100,000 (to reclassify the currently maturing portion of
the note payable as a current liability.)
c
$958,000 – $70,000 – $25,000 (to remove the gain on goodwill from
retained earnings and to reflect the unrealized holding loss on FV-NI
investments of $25,000. Note that the goodwill account is also
deleted.)
d
$113,000 (to reflect the unrealized holding gain of $113,000 on FV-
OCI investments.)
Note: As an alternative presentation, the cash restricted for plant

expansion could be added to the general cash account and then
subtracted. The amount reported in the long-term investments section
would not change.

b. Goodwill that is internally generated is not capitalized in the

accounts, because measuring the components of internally
generated goodwill is simply too complex and subjective, and
because no transaction has taken place with outside parties.
Goodwill is an asset representing the future economic benefits
arising from other assets in a business combination that are not
individually identified and separately recognized. Proper
accounting of goodwill is necessary to present a statement of
financial position that is useful and faithfully representative, and
does not overstate assets.
LO 3,4 BT: AP Difficulty: C Time: 45 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 5.5
a. MLT Inc.
Statement of Income
For the Five Months Ended May 31, 2020
Sales ($22,770 + $5,320 + $4,336) $32,426

Cost of goods sold1 12,451
Gross profit 19,975
Operating expenses
Salaries and wages ($5,500 + $270) 5,770
Utilities ($4,000 + $270) 4,270
Rent ($1,800 X 5/6) 1,500
Insurance ($1,920 X 5/12) 800
Advertising 424
Depreciation ([$3,600  5] X 5/12) 300
Repairs and maintenance 110 13,174
Income from operations 6,801
Interest expense* 93
Income before income tax 6,708
Income tax (20%) 1,342
Net income $5,366
Earnings per share ($5,366  1,000) $5.37

(not mandatory disclosure under ASPE)
1
Cost of goods sold
Purchases ($14,400 + $256 – $130) $14,526
Less inventory—May 31, 2020 (2,075) 12,451
*Quarterly principal payments are calculated as follows:
Total principal $2,880

Total quarters  12
Quarterly payments $ 240
On April 1, 2020, interest was paid as follows:

$2,880 X 8% X 3/12 = $58

a. (continued)
First payment on April 1 is therefore:

Principal $240
Interest 58
Total payment $298
Interest for April and May then is as follows:

Interest [($2,880 – $240) X 8% X 2/12] = $35
Interest expense through May 31 is therefore as follows:
Jan. - Mar. $ 58
April - May 35
$ 93
b.
MLT Inc.
May 31, 2020
Assets
Current assets
Cash ($33,600 – $32,052) $ 1,548
Accounts receivable 4,336
Raw materials inventory, at cost 2,075
Prepaid insurance ($1,920 X 7/12) 1,120
Prepaid rent ($1,800 X 1/6) 300
Equipment $3,600
Less accumulated depreciation 300* 3,300
* ($3,600 ÷ 5 X 5/12)

b. (continued)
Current liabilities
Current portion of bank loan ($240 X 4) $ 960
Accounts payable ($256 + $270) 526
Salaries and wages payable 270
Interest payable
[($2,880 – $240) X .08 X 2/12] 35
Bank loan payable $2,640
Less current maturities 960
Total long-term liabilities 1,680
Common shares, 1,000 shares issued
and outstanding 2,500
Total liabilities and
shareholders’ equity $12,679
c. Current Ratio = $9,379 / $3,133 = 2.99

Times Interest Earned Ratio = $6,801 / $93 = 73.13 times
MLT’s current ratio is strong, and MLT’s times interest earned

ratio is very high. These ratios are indicators of excellent liquidity
and ability to pay interest, respectively, and the bank manager
may extend the financing based on this information.
Alternatively, the bank manager may perform additional analysis
before coming to a decision, including benchmarking against
competitor companies, and comparison of results to accrual
basis results of a comparable prior period.
LO 4,11 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance
PROBLEM 5.6
1. The new estimate would be used in computing depreciation

expense for 2020. No adjustment of the balance in accumulated
depreciation at the beginning of the year would be made. Instead,
the remaining depreciable cost would be divided by the estimated
remaining life. This is not a change in accounting principle, but
rather a change in estimate, which requires prospective treatment.
Disclosure in the notes to the financial statements is appropriate, if
material.
2. The additional assessment should be shown on the current

period's income statement. If material it should be shown
separately; if immaterial it could be included with the current year's
income tax expense. Only if the additional assessment were from
the correction of an error should it appear on the statement of
retained earnings or statement of changes in equity (since
correction of errors are accounted for retrospectively) and any
comparative numbers that would appear in the financial
statements. If the assessment was due to an error, details should
be discussed in the notes to financial statements.
3. The effect of the error at December 31, 2019, should be shown as

an adjustment of the beginning balance of retained earnings on the
statement of retained earnings or statement of changes in equity
(net of applicable income taxes). The current year's expense
should be adjusted (if necessary) for the possible carry forward of
the error into the 2020 expense computation. Any comparative
figures appearing on the financial statements, including any
income tax effects would also have to be retroactively adjusted,
and details of the error should be discussed in the notes to financial
statements.
4. The declaration of the cash dividend will be reflected as a reduction

in retained earnings in the statement of retained earnings or
statement of changes in equity and will also result in a current
liability on the statement of financial position at December 31, 2020
as the payment date is February 1, 2021.

5. The fact that the change in accounting policy took place should be
disclosed together with the reason for the change and the effect of
the change. The change destroys the comparability of financial
statements at December 31, 2019 and December 31, 2020. The
change should be applied retroactively, and the financial
statements of all prior accounting periods presented should be
restated. The beginning balance of the current period retained
earnings statement would be consequently affected. If the effect of
the change is not reasonably determinable for individual prior
periods, an adjustment should be made to the beginning balance
of retained earnings for the current accounting period.
6. The flood loss is an event that provides evidence about conditions

that did not exist at the statement of financial position date but are
subsequent to that date, and does not require adjustment of the
financial statements. Disclosure in the notes to the financial
statements as a “subsequent event” is appropriate, if material,
especially if the loss is uninsured.
7. The retirement of the former president and the appointment of a

new one does not cause any changes in financial statement
elements and as such would not require any disclosure in the
financial statements. However, there would be clear disclosure of
this information elsewhere in the annual report.
8. As it stands, the financial statement elements are incorrect. Cash

is overstated and operating expenses are understated by the
amount of the loss due to the theft. A correction for these two
accounts must be recorded to adjust the financial statements.

PROBLEM 5.7
a.
Aero Inc.
December 31, 2020
Assets Liabilities and Shareholders’ Equity
Cash $ 70,200 Accounts payable $40,000
Accounts receivable 42,000 Bonds payable 71,000 (3)
Equipment (net) 69,000 (1) Common shares 130,000 (4)
Land 108,000 (2) Retained earnings 48,200 (5)
$289,200 $289,200
(1) $81,000 – $12,000

(2) $40,000 + $38,000 + $30,000
(3) $41,000 + $30,000
(4) $100,000 + $30,000
(5) $23,200 + $35,000 – $10,000

b.
Aero Inc.

Net income $35,000
Loss on disposal of investments FV-NI 5,000
Increase in accounts payable
($40,000 – $30,000) 10,000
Increase in accounts receivable
($42,000 – $21,200) (20,800) 6,200

Proceeds from sale of FV-NI investments 27,000
($32,000 - $5,000)


Note: Aero purchased land at a cost of $30,000 in exchange for

additional bonds payable.

c. Current ratio and acid test ratios are the same (no inventory):
2020: $112,200  $40,000 = 2.81
2019: $73,200  $30,000 = 2.44
d. An analysis of Aero’s free cash flow indicates it is negative as

shown below:
Net cash provided by operating activities ....... $ 41,200

Less: Purchase of land ................................. (38,000)
Dividends paid..................................... (10,000)
Free cash flow ............................................... $( 6,800)
Current cash debt coverage – Net cash provided from operating

activities divided by average current liabilities:
$41,200
Its current cash debt coverage is 1.18 to 1
$35,000*
Overall, it appears that its liquidity position is average and overall

financial flexibility should be improved.
* ($30,000 + $40,000)  2

e. The cash flow pattern is +,-,+. Aero has managed to more than
triple its cash balance in the year mainly from cash generated
from operating activities, which is a good trend. Aero was able to
pay large dividends and obtained external financing for its
investments in land and also obtained cash by selling off some
of its investments. Aero had an alarming increase in its accounts
receivable. Unless this increase is justified from increased sales
or from a conscious change in credit policies, management
should investigate the reasons for this level of increase.
f. This type of information is useful for assessing the amount,

timing, and uncertainty of future cash flows. For example, by
showing the specific cash inflows and outflows from operating
activities, investing activities, and financing activities, the user
has a better understanding of the liquidity and financial flexibility
of the enterprise. These reports also provide useful information
about the flow of enterprise resources, which helps users make
more accurate predictions about future cash flows. In addition,
some individuals are concerned about the quality of the earnings
because the measurement of net income depends on a number
of accruals and estimates which may be somewhat subjective.
As a result, the higher the ratio of cash provided by operating
activities to net income, the more comfort some users have in the
reliability of the earnings.
LO 4,8,11 BT: AN Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance

PROBLEM 5.8
a. JIA Inc.

Net income $44,000
Adjustments to reconcile net income to net cash
provided by operating activities
Gain on disposal of machinery (7,000)
Gain on disposal of trademarks (10,000)
Increase in accounts receivable
($111,000 – $90,000) (21,000)
Increase in inventory
($107,000 – $82,000) (25,000)
Decrease in accounts payable
($93,000 – $83,000) (10,000) (54,000)
Net cash used by operating activities (10,000)

Proceeds from sale of trademarks 20,000
Proceeds from sale of machinery
($18,000 + $7,000) 25,000
Net cash provided by investing activities 45,000

Retirement of long-term debt (15,000)

Note: JIA purchased machinery at a cost of $40,000 in exchange for

long-term debt.

b.
JIA Inc.
December 31, 2020
Assets Liabilities and Shareholders’ Equity
Cash $68,500 Accounts payable $83,000
Accounts receivable 111,000 Long-term debt 110,000 (3)
Inventory 107,000
Machinery (net) 128,000 (1) Common shares 112,000 (4)
Trademarks 10,000 (2) Retained earnings 119,500 (5)
$424,500 $424,500
(1)$125,000 + $40,000 – $19,000 – $18,000

(2) $20,000 – $10,000
(3) $85,000 + $40,000 – $15,000
(4) $100,000 + $12,000
(5) $89,500 + $44,000 – $14,000
c. The statement of cash flows is useful for assessing the amount,

timing, and uncertainty of future cash flows. For example, by
showing the specific cash inflows and outflows from operating
activities, investing activities, and financing activities, the user
has a better understanding of the liquidity and financial flexibility
of the enterprise. The statement of cash flows also provides
useful information about the flow of enterprise resources, which
helps users make more accurate predictions about future cash
flows. In addition, some individuals are concerned about the
quality of the earnings because the measurement of net income
depends on a number of accruals and estimates, which may be
somewhat subjective. As a result, the higher the ratio of cash
provided by operating activities to net income, the more comfort
some users have in the reliability of the earnings. In this problem,
the cash flow from operations is negative and this should be of
concern to management. A bad trend is an increase in inventory
while at the same time experiencing a decrease in accounts
payable.

*d.
1. An analysis of JIA’s free cash flow indicates it is negative as shown
below:
Net cash used by operating activities ($10,000)

Less: Purchase of machinery for cash 0
Free cash flow $ (24,000)
2. Current cash debt coverage – Net cash provided from operating

activities divided by average current liabilities:
($10,000)
Its current cash debt coverage is (.11) to 1
$88,000*
*($93,000 + $83,000) ÷ 2 = $88,000
3. Cash debt coverage – Net cash provided from operating activities
divided by average total liabilities:
($10,000 )
Its cash debt coverage is (.05) to 1
$185,500*
*$88,000 (above) + [ ($85,000+ $110,000) ÷ 2] = $185,500
Overall, although JIA has positive working capital, its overall financial
flexibility must be corrected.
e. The cash flow pattern is -,+,-. As mentioned in part (c), JIA has
mismanaged its working capital by increasing inventory and
decreasing accounts payable at the same. JIA should investigate
the high levels of inventory and negotiated term with its suppliers.
JIA has also had an alarming increase in its accounts receivable.
Unless this increase is justified from increased sales or from a
conscious change in credit policies, management should
investigate the causes for this level of increase. Cash was
increased during the year by selling off long-term assets. Long-
term debt was retired, funded by issuance of common shares.
LO 4,8,9,11 BT: AN Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting
and Finance

PROBLEM 5.9
a.
Sargent Corporation
December 31, 2020
Assets
Current assets
Cash $ 190,000
Inventory, at lower of FIFO cost and
net realizable value 180,000
Total current assets $ 610,000
FV – OCI investments 155,000
Bond sinking fund 250,000
Note receivable from related company due 2026 40,000
Land held for future use 270,000 715,000

Land 500,000
Buildings $1,040,000
buildings 360,000 680,000
Equipment 450,000
equipment 180,000 270,000 1,450,000
Intangible assets
Patents (net of accumulated amortization) 115,000
Franchise (net of accumulated amortization) 265,000 380,000

a. (continued)
Current liabilities
Bank overdraft 40,000
Notes payable $ 120,000
7% bonds payable, due 2028 960,000 1,080,000
Capital shares
Preferred shares; 200,000 shares
authorized, 70,000 issued $ 450,000
Common shares; unlimited
authorized, 100,000 issued 1,000,000 1,450,000
Accumulated other comprehensive income 30,000
b. The main purposes of the statement of financial position are to

provide information about the assets, liabilities and shareholders’
equity, to allow the reader to assess how well the business is
using its assets to earn a return, and to evaluate the business’
capital structure. The details are intended to provide all of the
necessary information to assess business risk and future cash
flows, and are lost in the condensed presentation, especially if
items are offset. It would be difficult with the condensed format
to analyze the company’s liquidity, solvency and financial
flexibility. The final goal is to analyze profitability and return on
investment, when relating the income statement to the level of
investment outlined in the statement of financial position.
LO 2,3,4 BT: AP Difficulty: C Time: 45 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 5.10
Criticisms of the statement of financial position of the Manion

Corporation:
1. An allowance for doubtful accounts receivable is not indicated,

and there is no indication that the amount presented is “net”.
2. The basis for the valuation and the method of pricing of inventory
are not indicated, and it is not indicated that inventory is reported
at the lower of cost and net realizable value, as required by IFRS.
3. An investment in a subsidiary company is not an investment

ordinarily held to be sold within one year or the operating cycle.
As such, this account should not be classified as a current asset,
but rather should be included under the heading “Long-term
investments”. If this is an investment in the common shares of
the subsidiary (as opposed to an advance) it would be eliminated
in consolidation, as all subsidiaries are consolidated under IFRS.
4. Investments in shares listed under investments should be

described as to the measurement model used to account for
these investments, for instance, “FV-NI” or “FV-OCI” depending
on the nature of the investments and accounting policy choice.
5. Buildings and land should be segregated. The term “reserve for”

should be replaced by “accumulated” and the accumulated
depreciation should be shown as a subtraction from the Buildings
account only.
6. Investment in bonds to be held to maturity would be more

appropriately shown under the heading of "Investments" and
should be shown at “amortized cost”.
7. Reserve for Income Taxes should be entitled Income Tax

Payable.

8. Customers' Accounts with Credit Balances is an immaterial

amount. As such, this account need not be shown separately.
The $1 credit could readily be netted against Accounts
receivable, or grouped with Accounts payable without any
material misstatement.
9. Bonds Payable are inadequately disclosed. The interest rate,

interest payment dates, and maturity date should be indicated.
10. Additional disclosure relative to the Common Shares account is

needed. This disclosure should include the number of shares
authorized and issued.
11. Earned Surplus should be entitled Retained Earnings.
12. Cash Dividends Declared should be disclosed on the statement

of changes in equity under the section for retained earnings as a
reduction of retained earnings. Dividends Payable, in the amount
of $8,000, should be shown on the statement of financial position
among the current liabilities, assuming payment has not
occurred.
13. Grand totals should have captions for “Total assets” and “Total
Liabilities and Shareholders’ Equity”.
14. Shareholders’ equity may need to show “Accumulated Other

Comprehensive Income” since the company has investments
and would have unrealized gains and losses to disclose if they
are using the Fair Value through OCI model.

PROBLEM 5.11
a.
Spencer Corporation

Net income $19,000
Depreciation expense (1) $43,000
Loss on disposal of equipment (2) 7,000
Gain on disposal of land (3) (9,000)
Loss on impairment (5) 49,000
Decrease in accounts payable (39,000) (29,000)
Net cash used by operating activities (10,000)
Purchase of FV-OCI investments (15,000)
Purchase of land (4) (48,000)
Proceeds from sale of land _95,000
Net cash provided by investing activities 53,000
Issuance of notes payable _25,000
Net cash used by financing activities _(7,000)
Note: During the year, Spencer retired $140,000 in notes payable by

issuing common shares.

a. (continued)
(1) Solve for X, where $86,000 – $12,000 + X = $117,000

(2) $21,000 – ($40,000 – $12,000)
(3) $95,000 – $86,000
(4) Solve for X, where $103,000 + X – $86,000 = $65,000
(5) $173,000 – $124,000
b. Net cash provided by investing activities funded net cash

used by operating activities and financing activities.
Negative cash from operating activities may signal that
there are weaknesses in Spencer’s core operations,
including profitability of operations and management of
current assets such as accounts receivable and inventory
(both accounts receivable and inventory increased over the
year). As well, Spencer may not be taking advantage of
normal credit terms offered by its suppliers, resulting in a
significant decrease in accounts payable over the year.
Proceeds from sale of long-term assets such as equipment
and land are being used to fund operating and financing
activities, which may be cause for concern if the assets sold
were used to generate significant revenue. Shareholders did
benefit from the cash dividend received two years in a row.
However, it should be noted that the dividend declared in
2020 ($15,000) was high compared to net income generated
in the year ($19,000). Spencer may not be able to sustain
payment of cash dividends in the long-term if its profitability
does not improve going forward.

PROBLEM 5.12
a.
L&G Inc.
Statement of Cash Flows (Direct Method)
Cash paid to suppliers for goods (2) $169,000
Cash paid for other operating
expenses (3) 97,000
Cash paid for interest 11,400
Cash paid for taxes (4) 23,000 300,400

Proceeds on sale of equipment (5) 8,000
Purchase of equipment (6) (44,000)

Principal payments on long-term loan (9,000)
Dividend paid (12,000)
Net increase in cash and cash equivalents 3,750

Cash, January 1, 2020 53,850
Cash, December 31, 2020 $ 57,600

a. (continued)
Computations:
Sales revenue $368,150
(2) Cash paid to suppliers for goods

Less: Decrease in inventory (20,000)
Purchases 175,000
Cash paid to suppliers for goods $169,000
(3) Cash paid for

to and
other
onoperating
behalf of expenses
employees
Operating expenses $120,000
Less: Depreciation expense (24,000)
Add: Increase in prepaid rent 1,000
Cash paid for other operating expenses $97,000
(4) Income taxes paid

Decrease in income tax payable 2,000
Income taxes paid $23,000

a. (continued)
(5) Calculation of proceeds from sale of equipment:

Cost of equipment sold $ 20,000
Accumulated depreciation of equipment sold (70%) (14,000)
Carrying amount of equipment sold 6,000
Gain on disposal of equipment 2,000
Proceeds on sale of equipment $ 8,000
(6) Calculation of cost of new equipment purchased:

Equipment Jan. 1, 2020 $ 130,000
Equipment Dec. 31, 2020 154,000
Net increase in equipment 24,000
Cost of equipment sold 20,000
Cost of equipment purchased during year $ 44,000

b.
L&G Inc.
Statement of Cash Flows (Indirect Method)
Net income $22,750
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on disposal of equipment (2,000)
Decrease in inventory 20,000
Increase in prepaid rent (1,000)
Decrease in income tax payable (2,000)
Total adjustments 38,000
Proceeds on sale of equipment 8,000
Principal payments on long-term loan (9,000)
Dividend paid (12,000)
Net increase in cash and cash equivalents 5,750
Cash, January 1, 2020 53,850
Cash, December 31, 2020 $57,600
Supplemental disclosures of cash flow information:

Cash paid during the year for:
Interest $11,400
Income taxes $23,000

PROBLEM 5.13
a.
Martineau Inc.
Statement of Cash Flows (Direct Method)
For the Year Ended May 31, 2020
Cash paid
To suppliers for goods for resale $395,700
To suppliers for other operating
expenses 121,800
To and on behalf of employees 208,800
For interest 24,600
For income taxes 55,400 806,300

Purchase of plant assets (64,000)

Proceeds from issuance of
common shares $14,750
Principal payment of mortgage (25,000)

Cash, June 1, 2019 20,000
Cash, May 31, 2020 $33,250
Note 1: Schedule of non-cash investing and financing activities:
Issuance of common shares for plant assets $31,000

a. (continued)
Supporting calculations:
Collections from customers
Sales $945,000
Less: Increase in accounts receivable 19,200
Cash collected from customers $925,800
Cash paid to suppliers for goods for resale

Less: Decrease in inventory 10,300
Cash paid for goods for resale $395,700
Cash paid for other operating expenses

Other expenses $120,000
Add: Increase in prepaid insurance 1,800
Cash paid for other operating expenses $ 121,800
Cash paid to and on behalf of employees

Salaries and wages expense $207,800
Add: Decrease in salaries and wages
payable 1,000
Cash paid to and on behalf of employees $208,800
Cash paid for interest

Less: Increase in interest payable 2,100
Cash paid for interest $24,600

b.
Martineau Inc.
Statement of Cash Flows (partial)
For the Year Ended May 31, 2020
Net earnings $95,100
Adjustments to reconcile net income to net
cash provided by operating activities:
Decrease in inventory 10,300
Increase in prepaid insurance (1,800)
Increase in interest payable 2,100
Decrease in salaries and wages
payable (1,000) 24,400

CASES
See the Case Primer on the Student Website as well as the summary case
primer in the front of the text. Note that the first few chapters of the text lay the
foundation for financial reporting decision-making. Therefore the cases in the first
few chapters (1-5) are shorter with less depth. As such, they may not cover all
aspects of a full-blown case analysis.
CA 5.1 CIBC
Note that the financial reporting of the bank is governed not only by GAAP (IFRS)
but also by the Canadian Bank Act and the Office of the Superintendent of
Financial Institutions (OSFI). The discussion below is meant to reflect a conceptual
analysis only.
Overview
CIBC is in a precarious position with respect to its past dealings with Enron. Not
only is it still owed money by Enron but it has additional potential lawsuits. Users
will include potential and existing plaintiffs, who will use the financial statements to
determine whether the bank can afford to settle the lawsuit if they lose. The
statements may also be used in the court cases to see if the bank profited unduly
through its alleged unscrupulous dealings with Enron. This situation presents
additional risks for the audit.
Being a public Canadian bank, IFRS is a constraint.
Analysis and Recommendations

CA 5.1 CIBC (CONTINUED)
Issue: How to present the $80 million fine in the 2003 financial statements
Unusual item - loss Expense

- The magnitude of this loss is - The loss may not be seen as
such that it should be separately unusual since it may be argued
disclosed. It is the largest such that it was a result of a
settlement of its kind in Canada. management decision.
- The loss is atypical and Management chose to be
infrequent, since CIBC and other involved in the more aggressive
Canadian banks are fairly structured financing business.
conservative and normally are Therefore, this was an ordinary
not subject to these types of cost of doing business.
regulatory investigations. - The fact that the regulatory
- Management might want to authorities won their case may
highlight this loss as being lead to the conclusion that the
beyond their control. bank was complicit somehow in
- Perhaps the loss could be the Enron deception (i.e., should
presented as part of the CIBC and other banks that
discontinued operations. The participated in advising Enron
structured financing operations, have known how Enron was
if considered a separate accounting for these
component with separate transactions and why? This is
business operations and f/s, difficult to answer.)
might qualify and the lawsuit - Other.
loss may be seen to be part and
parcel of the discontinued
operations.
- Other.
In conclusion, the amount should be shown separately so that the users may see
the impact of the Enron settlements. Perhaps it could be shown as part of the
discontinued operations provided that the criteria are met. It does reflect a cost of
operating the structured financing group, and given that the bank will no longer be
operating in that line of business, this type of cost should not be recurring.

CA 5.1 CIBC (CONTINUED)
Issue: Valuation of the Enron receivables in 2003 financial statements

Write down/off Leave as is
- Enron is bankrupt - Bank has likely already
- Many people are suing Enron assessed the collectibility and
and therefore the likelihood of must feel that the amounts are
being able to collect the recoverable through the
receivables is remote. bankruptcy proceedings.
- Gives a better picture of the - Other.
harm done to CIBC by Enron.
- Other.
In conclusion, it is more conservative to write off the Enron receivables.
The issue of how to account for the additional potential lawsuits may also be of
concern. Lawsuits which are likely to result in losses that are measurable should
be accrued. The bank should consult its lawyers in this regard. The auditor should
ensure that the situation is at least appropriately disclosed in the notes for
predictive purposes.
Potential additional tax liability in 2017 financial statements.

Recognize liability for additional Do not recognize liability
potential taxes
- CIBC has taken the amount of - At this point, it is unclear as to
the settlement as a tax whether a liability exists or not.
deduction. CRA has challenged - If the amount is accrued, it may
this. prejudice the case with CRA.
- This is a provision i.e. the bank - Other.
may have a liability if the CRA
disallows the deduction.
- CIBC would accrue if the
payout is probable and
measurable.
- The amount is measurable
(being the deductible amount
times the tax rate).
- Other.
In conclusion, it is difficult to say how this should be treated. The bank would
have to determine whether, in their best judgement, and in conjunction with their
lawyers and tax accountants, a liability exists. The auditors would rely on the
evidence and expertise of the lawyers and tax .

CA 5.2 HASTINGS INC.
Overview
This is a private company and the company currently follows ASPE. However,
because the company may go public in the next 5 – 10 years, it may be a good
idea to consider moving to IFRS now to build the comparative information on a
consistent basis that would be required when going public. The company would
want to examine the impact of following IFRS versus ASPE.
Due to the losses in the past three years, there may be some potential for bias.
As the company’s auditors, you should be aware of the impact of switching to

IFRS.
NB – although the company would do a thorough review of all potential

differences, in this case, we have limited information given and so will focus on
the information presented in the case i.e. the property, plant and equipment.

Issue: How to treat the company’s revenue producing assets
ASPE IFRS
- Assets would be carried at cost - Allows an accounting policy
or amortized cost choice to either account at
- This is consistent with the way cost/amortized cost or fair
that they have been treated in value.
past – so no costs required to - Fair value would better
restate. represent reality.
- Other. - Using the revaluation method,
the increase in value would be
booked through other
comprehensive income.
- Going forward, would have to
ensure the value represents fair
value.
- Introduces volatility into
comprehensive income.
- Costly to continue to revalue.
- Most relevant information about
economic value – useful to
users.
- Other.

CA 5.2 HASTINGS INC. (CONTINUED)
In conclusion, following ASPE or IFRS are both viable options; however, switching
over to IFRS right now would involve additional costs. The company would want
to examine other differences between ASPE and IFRS before making a decision
as to which one to follow.

INTEGRATED CASES
IC 5.1 FRANKLIN DRUGS
Overview
Public company and therefore must follow IFRS.
Revenues and net income are down this year due to competition and this might
motivate the company to try to make the numbers look better. This is especially
an issue since the company’s share price has declined in reaction to the
uncertainty. In addition, management remuneration is tied to the share price –
adding further risk of bias.
Overall, as audit senior, you would be careful regarding the potential for bias;
therefore, conservative financial reporting would be the safest as long as the
resulting statements faithfully represent the results of operations and financial
position of the company.
Value of deferred costs related to FD1 and FD2
Leave as is Write down/impaired

- Legally, the patent is still in place and the - Competitors are selling generic versions
company is still able to sell the drugs of the drugs at lower prices which will
exclusively and thus recover the costs. undercut the market for FDL’s drugs.
- FDL has launched a lawsuit to protect the - Generic drug companies are able to sell
value and earnings potential of the drugs. for lower prices since they do not have the
- The legal costs should be capitalized if expensive research and development
the company expects the lawsuit to be costs. This may result in FDL not being
successful. able to recover the development costs.
- Other. - Revenues are already declining.
- The lawsuits generally take several years
and by that time the patents will have
expired.
- Other.
In conclusion, the value of the asset appears to be impaired. Estimates of the

recoverable value of the patents need to be made in determining the amount of
the impairment loss. This may have the impact of indirectly transferring the legal
costs to the income statement as part of the impairment loss.

IC 5.1 FRANKLIN DRUGS (CONTINUED)
Deferred Costs regarding FD3
Leave development costs as is Write down/off

- FDL feels that it can hold its market - Increased competition may result in asset
share based on the past success of the being impaired.
drug. Just because a generic drug comes - Customers may not be aware of the
out, it does not mean that all demand for generic drugs, as they are new to the
the brand name drug will dry up. market. Thus sales may decrease to a
- May be able to maintain sales, but at a greater extent in the future.
lower price – so development costs will still - Other.
be recoverable.
- Sales have only declined 3% to date;
therefore, demand still remains strong.
- Other.
In conclusion, it is safer to write down the development costs so that assets are
not overstated.
Volume rebates – how to measure
FDL is required to estimate the amount of volume rebates and reduce the current
year sales and receivables by the amount of estimated rebates. In this case,
management bias would be to understate the rebate in order to generate larger
sales amounts on the income statement.
As in past Estimate fewer/lower rebates

- This would be consistent. - Customers are new, so it is difficult to
- As noted above, demand for the brand determine – basing it on past
name drug will not necessarily dry up, transactions may not be relevant.
just because generic drugs are - Given the changing environment and
introduced. the increase in competition, sales may
- Other. be lower; therefore, it might make
sense to assume a lower percentage.
- Other.
In conclusion – an estimate of lower percentage appears justified given the

increased competition and the uncertainty given the fact that the customers are
new.

IC 5.1 FRANKLIN DRUGS (CONTINUED)
Valuation and presentation of assets impaired by the sale of a distribution centre:
It appears that the distribution centre meets the criteria of assets “held for sale” in
that sale is probable within one year since the buyer’s offer was accepted. The
assets of the distribution centre would need to be remeasured to the lower of their
carrying value and fair value less costs to sell. Some of the considerations that are
involved in a fair value measurement of the affected assets:
FDL must determine which assets are being measured (their condition, specific
nature, location, etc.) and whether the assets will be valued by the market as a
group or on a stand-alone basis. FDL must consider the highest and best use that
is legally, physically, and financially feasible as well as the availability of data, the
valuation technique to use, and any observable inputs.
Consider two common types of valuation techniques/models
1. Market models: These techniques use prices and other information

generated from market transactions involving identical or similar
transactions such as an earnings multiples model.
2. Income models: These techniques convert future amounts (such as future
cash flows to be generated by an asset) to current amounts.
The two approaches that are generally accepted using the discounted cash flow
model are:
1. Traditional approach: The discount rate reflects all risks in the cash flows but
the cash flows are assumed to be certain. This approach is sometimes
referred to as the “discount rate adjustment technique.”
2. Expected cash flow approach: A risk-free discount rate is used to discount
cash flows that have been adjusted for uncertainty. This approach is
sometimes referred to as the “expected present value technique.”
These two approaches are discussed more fully in Chapter 12.
In addition, the company has to consider the presentation of the assets that are
now “held for sale” as current assets and stop recognition of depreciation on
those assets.

RESEARCH AND ANALYSIS
RA 5.1 – HUDSON’S BAY COMPANY
a. Hudson’s Bay Company (HBC) has its classified balance sheet in the order
of liquidity. The statement is in report format, where the liabilities and
shareholders’ equity are listed directly below the assets. Most businesses
in North America use a similar format. Another reporting format is the
account format with the assets on the left side and the liabilities and
shareholders’ equity sections on the right side.
b. Hudson’s Bay Company uses note disclosure to provide additional financial

information that is pertinent to the users of the financial statements. Other
acceptable methods of disclosing the additional financial information are:
parenthetical explanations (which follow the item), the use of cross-
referencing to related items, (for example, relating to assets classified as
held for sale in note 9 to the financial statements) or providing supporting
schedules in the notes.
c. Hudson’s Bay Company’s year end is February 3 rd, 2018 (fiscal 2017),
whereas the year end is January 28th, 2017 (fiscal 2016) for the previous
year. Fiscal 2017 is a 53-week reporting period, and fiscal 2016 had a 52-
week reporting period. A 52-week reporting period is common in the retail
industry because it creates a calendar of even length months. Most
businesses in this industry use this calendar system because it ensures the
same number of weekends per month for comparability purposes since
weekends have higher volumes of sales in the retail industry. It also lines
up holidays in the same reporting period to enhance tracking and
comparability of sales data. Because a 52-week period adds up to only 364
days, every five or six years an extra week has to be added. This is the case
for fiscal 2017. This means that results for fiscal 2017 include an extra week
over fiscal 2016. This additional week of sales activity is discussed in the
company’s management discussion and analysis and is factored into the
comparison of results.
d. Hudson’s Bay Company uses the indirect method for its Statement of Cash
Flows. (in millions)
Feb. 3, 2018 Jan. 28, 2017
(Fiscal 2017) (Fiscal 2016)
Cash from operating activities $ (328) $ 312
Cash used in investing activities (269) (793)
Cash from financing activities 536 89
Foreign exchange gain on cash 9 7
Net change in cash $(52) $ (385)

RA 5.1 - HUDSON’S BAY COMPANY (CONTINUED)
d. (continued)
Cash generated from operations in 2017 is a net cash outflow of $328

million as opposed to a net cash inflow of $312 million; a net decrease, or
use of cash, of $640 million. Cash used or provided from operating activities
is substantially different from net loss for both years, even though 2017 net
loss ($581) is 13% higher than 2016 net loss ($516). The 2016 net loss
translated into positive cash flows of $312 million, whereas the 2017 net
loss translated into negative cash flows of $328. A review of the major
adjustments used to reconcile net loss to cash flow from operations explains
why there is such a difference:
- Increases to the 2017 net loss included $368 million of income tax
benefits, whereas in 2016 the amount was an increase of $178. This
caused a difference of $190 million between the two years. Income taxes
paid in 2017 were only 18 million, versus cash received of $37 million in
2016. The large increase in income tax benefit in 2017 arose primarily
from a substantial decrease in the U.S. statutory corporate tax rate, as
explained in Note 7.
- A second major change occurred in the changes in operating working

capital. Changes in operating working capital consisted of net cash
inflows of $184 million in 2016, whereas these changes consisted of net
cash outflows of $126 million in 2017: a net decrease of $310 million.
Note 26 shows the following:
(millions of Canadian dollars) 2017 2016

Decrease in trade and other receivables $3 $61
Increase in inventories (31) (76)
(Increase) decrease in other assets (55) 15
(Decrease) increase in trade and other payables, accrued
liabilities and provisions (22) 85
(Decrease) increase in other liabilities (21) 99
$(126) $184
This shows that operating working capital resulted in cash outflows for
all items except receivables in 2017. The opposite was true in 2016 with
all operating working capital items resulting in cash inflows except for
inventory.

e.
1. Net Cash Provided by Operating Activities  Average Current Liabilities =
Current Cash Debt Coverage Ratio
As current liabilities have remained relatively constant from 2015 to 2017, the
decrease in cash provided by (used in) operating activities from 2016 to 2017
caused the substantial decrease in the current cash debt coverage ratio from
0.090 to 1 to negative 0.093 to 1.
$ 3,500 + $ 3,519
2017 $ (328) ÷ = - 0.093:1
2
$ 3,519 + $ 3,401 1
2016 $ 312 ÷ = 0.090:1
2
2. Net Cash Provided by Operating Activities  Average Total Liabilities = Cash

Debt Coverage Ratio
$ 9,827 + $ 9,794
2017 $ (328) ÷ = - 0.033:1
2
$ 9,794 + $ 9,546 1
2016 $ 312 ÷ = 0.032:1
2
As with the current cash debt coverage ratio, total liabilities have remained
relatively constant from 2015 to 2017. The large decrease in cash provided
by (used in) operating activities from 2016 to 2017 (from a positive cash
inflow to a negative cash outflow) caused the substantial decrease in the
current cash debt coverage ratio from 0.032 to 1 to negative 0.033 to 1.
3. Net Cash Provided by Operating Activities less capital expenditures and

dividends = Free Cash Flow (Millions) in 2017 and 2016:
2017 2016
Net cash provided by operating activities $(328) $312

Less: Capital investments less proceeds
from landlord incentives ( 599) ( 657)
Less: Dividends ( 16) ( 36)
Free cash flow $ ( 943) $( 381)

The company’s financial liquidity weakened based on the decline in cash

from operating activities which has resulted in large decreases in both
current cash debt coverage and debt coverage ratios. Both of these ratios
reflect a large decrease in the company’s cash reserves, and a decline in
the company’s cash generating ability. The decline in free cash flow shows
a similar decrease in the company’s financial flexibility. The decline has
been mitigated by the company’s decrease in investments in capital
expenditures and a decrease in dividends paid during 2017.
In addition, we note that the company’s financial flexibility also looks weaker
with negative cumulative free cash flow for the last two years. However,
Hudson’s Bay is in a line of business (retail) that requires considerable
outlay for capital acquisitions, continued investment, and investment in
digital selling platforms. These assets are usually acquired through long-
term debt and equity financing, not always through internal operating cash
flows. Only through continued investment will the company continue to grow
and increase its operating cash flows in the future. The company explains
in its management discussion and analysis that its decline in cash is
symptomatic of changes to the retail industry as the industry adapts to
different selling platforms and less sales in its “brick and mortar” stores and
as it develops its online presence.
1. The 2015 current and total liabilities were obtained from the 2016 financial
statements. Alternatively, the 2016 ratio could have been estimated by
using only 2016 figures.

RA 5.2—BOMBARDIER INC.
a. The company has used a classified presentation which is consistent with

IFRS, which states that entities must use classified presentation unless
liquidity presentation offers reliable and more relevant information.
b. The following are the ratios for Bombardier for the fiscal years ending
December 31, 2017 and December 31, 2016. (Note: All figures in millions
of U.S. dollars, except for per share amounts).
Note: Because Bombardier had a net loss for the years ended December
31, 2017 and 2016, some ratios which, although they can be calculated
should not be used because the result is meaningless. These ratios are the
rate of return on common share equity and dividend payout ratio.
Dec. 31, 2017 Dec. 31, 2016

Receivables 16,218 14.1 16,339 13.1
turnover (See 1,151 1,251
also Note 16)
Inventory 14,276 2.4 14,622 2.3

turnover 5,867 6,411
Asset turnover 16,218 0.68 16,339 0.71

23,916 22,865
Profit margin (553) -3.4% (981) -6.0%

on sales 16,218 16,339
Rate of return (553) -2.3% (981) -4.3%

on assets 23,916 22,865

RA 5.2 BOMBARDIER INC. (CONTINUED)

b. (Continued)
Dec. 31, 2017 Dec. 31, 2016
Rate of return on common share equity1
(580) 14.65% (1,013) 24.59%
(3,958) (4,119)
Earnings per share

Basic $(0.25) $(0.48)
Diluted $(0.25) $(0.48)
Payout $107 Note above $94 Note above

ratio (553) (981)
Debt to total assets

28,738 114.9% 26,315 115.3%
25,006 22,826
Times interest earned

302 0.388 12 0.015
778 819
Cash debt coverage ratio

1,237 0.045 823 0.031
27,527 26,636
Current 15,113 1.14 11,296 1.14

ratio 13,276 9,933
Acid-test 4,219 0.32 4,675 0.47

ratio 13,276 9,933
Current cash debt coverage ratio

1,237 0.107 823 0.076
11,605 10,878
1 Average common equity:
Dec. 31, 2017 [(-3,732 - 347) + (-3,489 – 347)] /2
Dec. 31, 2016 [(-3,489 – 347) + (-4,054 – 347)]/2

c. Bombardier’s liquidity has declined slightly from the previous year. The
current ratio has remained stable but the quick ratio has declined slightly.
An increase in cash provided by operating abilities indicates an
improvement for operating cash flows to cover its current liabilities.
The company’s solvency position is best indicated by the coverage or risk-

related ratios. The times interest earned and cash debit coverage ratios
both indicate a slight improvement in the ability of the company to meet its
debt commitments although the company failed to generate enough
income in 2016 and 2017 to cover its interest charges. The debt ratio has
increased so that all assets are financed by debt, and the operating cash
flows are insufficient to cover its debt.
The receivables and inventory ratios, on the other hand, both showed a
slight improvement over the year, indicating better asset management,
while the asset turnover has decreased slightly due to an increase in total
assets as opposed to an increase in net sales.
The 2017 profitability ratios indicate that Bombardier had improvements in

its profit margin and return on assets over 2016 even though both ratios
still show negative returns. The company’s income statement shows
relatively stable sales, but improved Net Loss from 2016. In addition, the
company had little change in its assets, due, in part, to a slow down in
property, plant and equipment acquisition, which, combined with the lower
Net Loss, created an improvement in its return on assets. The improved
Net Loss also generated a lower loss per share. Note 13 indicates that the
number of shares outstanding remained relatively stable, so the
improvement is due to a decrease in the loss.
d. The following is a table extracted from the comparative statement of cash

flows of Bombardier (in millions of US dollars).
Dec.31, 2017 Dec.31, 2016
Cash from operating activities $531 $137
Cash used in investing activities (1,322) (1,195)
Cash from financing activities 430 1,974
Effect of exchange rate changes 34 (252)
Change in cash and cash equivalents $(327) $664

d. (continued)
The Company experienced positive, increasing, cash flows from operations

and outflows for investments in property, plant and equipment continued in
2017. Net financing inflows of cash were significantly reduced in the year
relative to 2016 due to a reduction in cash inflows from issuing new debt.
The net decline in cash and cash equivalents was due principally to the
purchase of new equipment.
Overall, the company’s 2017 cash activities resulted in a reduction of its

opening cash balance by $327.
e.
31-Dec-17 31-Dec-16
Cash and cash equivalents $2,988 11.9% $3,384 14.8%
Trade and other receivables 1,231 4.9% 1,291 5.7%
Inventories 5,890 23.6% 5,844 25.6%
Other financial assets 415 1.7% 336 1.5%
Other assets 439 1.7% 441 1.9%
Assets held for sale 4,150 16.6%
Current assets 15,113 60.4% 11,296 49.5%
PP&E 1,696 6.8% 1,949 8.5%
Aerospace program tooling 3,581 14.3% 5,174 22.7%
Goodwill 2,042 8.2% 1,855 8.1%
Deferred income taxes 603 2.4% 705 3.1%
Investment in joint ventures 491 2.0% 332 1.5%
Other financial assets 825 3.3% 915 4.0%
Other assets 655 2.6% 600 2.6%
Non-current assets 9,893 39.6% 11,530 50.5%
$25,006 100.0% $22,826 100.0%

e. (continued)
Bombardier’s mix of assets corresponds to that which is expected for a

company in manufacturing. The inventories represent the highest
investment in assets of 23.6%, which has decreased slightly from the
previous year. The amount of inventories on hand has remained relatively
stable in 2016, as have most assets. Current assets have increased
significantly over 2016 due to the addition of Assets held for sale. These
assets represent approximately 4% of total assets in inventories and 12%
in Aerospace program tooling. As assets held for sale, the Aerospace
program tooling asset is reclassified as a current asset as the disposal is
expected to be finalized shortly after year end. This accounts for the large
decrease in Aerospace program tooling in non-current assets. According to
the company’s note disclosure the assets held for sale relate to the
company’s change in percentage ownership of CSALP, the entity that
manufactures and sells the C series aircraft. This entity was previously
controlled by Bombardier. The company is selling 50% of its ownership but
will maintain significant influence in CSALP.
The increase in total assets is due in part to a positive change in currency

impact. The percentage of total assets invested in property, plant and
equipment has decreased over the 2017 year as some of the assets held
for sale in 2017 were included in the property, plant and equipment in 2016.
Although lower than in 2016, the company has a relatively high amount of
cash and cash equivalents on hand, representing 11.9% of the total assets.
A large portion of the assets is made up of Aerospace program tooling
costs, an intangible asset. This signifies the importance of the Aerospace
sector of Bombardier’s business.

RA 5.3 MAPLE LEAF FOODS INC.
a. The following are the liquidity and coverage ratios for Maple Leaf Foods Inc.
(MLF) for the fiscal years ending December 31, 2017 and 2016. (Note: All
figures are in thousands of Canadian dollars.)
2017 2016
Current ratio $765,804 2.19 $972,228 2.59

$350,251 $375,247
Quick or Acid Test $356,311 1.02 $563,855 1.50

ratio $350,251 $375,247
Current cash debt $386,695 1.10 $357,157 0.95

coverage ratio $350,251 $375,247
Debt to total $580,962 22% $544,598 21%

assets $2,632,570 $2,632,621
Times interest earned $219,449 42.46 $255,960 40.2

$5,168 $6,367
Cash debt coverage $386,695 0.67 $357,157 0.66

ratio $580,962 $544,598
Book value $2,051,608 $16.33 $2,088,023 $15.87

per share 126,489 - 832 132,085 - 540

RA 5.3 MAPLE LEAF FOODS INC. (CONTINUED)
b. Financial flexibility relates to the ability of a company to meet its current

obligations and its long-term debt requirements as they come due. This, in
turn, depends on the extent to which a company is financed by debt rather
than equity and its ability to generate operating cash flows in excess of that
needed to break even. All of the ratios calculated in part (a), with the
exception of the company’s book value per common share, can be used to
assess Maple Leaf’s financial flexibility.
MLF’s working capital position, as evidenced by the current ratio and quick
asset test, appears strong over the past two years. The current and quick
ratios have decreased from 2016, although both remain at very good levels.
The decrease is due mainly to a decrease in cash from acquisitions of
businesses, share repurchases, investment in property and equipment and
increased quarterly dividend payments. The decrease in cash was
mitigated by a decrease in current liabilities due to a large decrease in other
current liabilities which was composed mostly of obligations for share
repurchases which were satisfied by the use of cash.
MLF’s debt has increased slightly from 2016 but remains at a very
acceptable percentage of total assets (22% in 2017), a position that
provides increased financial flexibility. The company’s debt level increased
mostly due to acquisitions of other companies. This increase in debt has
been mitigated by an improved times interest earned ratio. In addition, the
company has improved its cash debt coverage ratio primarily through the
improvement of its cash from operations.
c. The following is a table extracted from the comparative statement of cash

flows of Maple Leaf Foods Inc.
2017 2016
Cash from (used in) operating activities $386,695 $357,157
Cash from (used in) financing activities (261,205) (139,309)
Cash from (used in) investing activities (325,686) (106,496)
Net increase (decrease) in cash and cash
equivalents $(200,196) $111,352
The company used more cash in its investing activities in 2017 due primarily
to the acquisition of businesses. Its financing activities also used more cash
due to larger dividend payments and cash outflows from larger share
repurchases. Cash from operating activities was larger in 2017 even though
the company generated lower net earnings. This increase was due to a
reduced investment in working capital and a reduction in restructuring
provisions, especially severance and other employee related costs as a
result of fewer plant closures.

RA 5.3 MAPLE LEAF FOODS INC. (CONTINUED)
d. The working capital position of MLF has decreased from 2016 to 2017. Its
current assets decreased while the current liabilities have decreased but by
a relatively smaller amount. The combined effect is to cause a decline in the
working capital. Since MLF has strong liquidity, as indicated by the ratio
analysis in part a, this decline in working capital is not a significant concern.
The decrease is mostly due to a decrease in its cash. As explained in part
(c), cash has decreased due to acquisition of businesses, larger dividend
payments and share repurchases.
2017 2016
Current Assets 78.8% 100.0%
Current Liabilities 93.3% 100.0%
Working Capital $415,553 $596,981
69.6% 100.0%

RA 5.4 GOLDCORP INC.
a. The major change in Goldcorp’s business from 2001 to 2017 is the number
of mines (gold and other metals) that it has in production either by itself or
as part of a joint venture. In 2001, Goldcorp had 2 mines compared to 20
by the end of 2017.
During 2016 the company developed a 20/20/20 growth plan to have a 20%
increase in gold production, a 20% increase in gold reserves and a 20%
reduction in production costs by 2021 and has set short-term targets in
order to achieve this goal. Its short-term targets for 2017 were met. In order
to achieve its goals, the company acquired new mining properties,
significant influence in other properties and formed a joint venture to exploit
additional properties. The company also divested itself of non-core assets.
b.
(in millions of US dollars) 2017 2001
Revenue $3,423 $166

Earnings (loss) from operations and associates 265 79
Operating earnings to revenue 7.7% 48%
Current assets 1,143 104

Current liabilities 1,255 16
Current ratio 0.91 6.5
Working capital ($) -112 88
Net earnings (loss) 658 53

Shareholders' equity 14,184 158
Return on shareholders' equity 4.64% 33.5%
Horizontal analysis 2017 2001

% %
Revenue 2,062 100
Earnings (loss) from operations and associates 335 100
Current assets 1099 100

Current liabilities 7,844 100
Working capital -127 100
Net earnings (loss) 1,242 100

Shareholders' equity 8,977 100

RA 5.4 GOLDCORP INC. (CONTINUED)

c. Goldcorp is a very different company than it was 16 years ago. In 2001, all
operations were in North America, with one site in Canada and the other in
the U.S. In 2017, the company operates in Canada, the U.S., Mexico, and
throughout Central and South America. In 2001, almost all of its sales were
for gold bullion, whereas in 2017 the company produced and sold silver,
copper, lead, and zinc in addition to gold. With widespread operations, the
associated administrative and development costs become significant, and
the company takes on considerably more risk, especially in an industry with
costs and product pricing so highly variable and largely non-controllable.
Consequently, the industry and the company are operating in very different
times and conditions. The increased risk from expanded operations,
however, have the effect of reducing the risk from producing only one
product. In 2001, Goldcorp produced only gold from two mining sites. This
left the company very exposed to fluctuations in gold prices and to the
production capability of its mines. By expanding its operations, the company
is expanding its mineral reserves for future production capability and is
reducing its exposure to gold price fluctuations by producing other minerals.
As indicated, the cost and realizable prices of the metals have changed.
The total cash cost to produce an ounce of gold is significantly higher at
$824 in 2017, 722% of the 2001 cost of $114. The company’s reliance on
sales of gold has decreased substantially since 2001 with 74% of its
revenues from gold in 2017 from 95% in 2001
In 2017, the average price per ounce of gold realized by Goldcorp was
$1,266, 467% of the 2001 realized price of $271. It appears that both the
realized price per ounce and the total cash costs per ounce are quite
variable, year to year.
The current ratio has decreased considerably over the 16-year span, a
result of the company’s increased complexity in its operations. The
company’s liquidity is low due in large part to its expansion efforts by
acquiring ore reserves and mining properties to increase its production
capability and position itself for future production growth. It has reduced its
costs from 2016 and shows good cash management in its cash from
operating activities on the statement of cash flows.

RA 5.4 GOLDCORP INC. (CONTINUED)
The increased scope of Goldcorp’s operations can be seen in the revenue

growth, with 2017’s revenues being 2,062% of those reported in 2001.
Goldcorp recorded an impairment loss of mining interests (from continuing
operations) in the amount of $244 million in 2017. (In spite of this large loss,
and because the impairment is a non-cash transaction, Goldcorp was able
to generate $1,211 million in operating cash flows from its $658 in earnings.)
Over the 2001 to 2017 period, total shareholders’ equity has increased to
8,977% of what it was in 2001. Because Shareholders’ Equity reports a
deficit at December 31, 2017 and the previous year, it is the contributions
of shareholders for share capital, and creditors that have maintained the
company.

RA 5.5 QUEBECOR AND THOMSON REUTERS
a. Quebecor Inc. is a global company operating in many sectors including:

publishing and distribution of newspapers, magazines and directories;
cable distribution, wireless and internet services; broadcasting; and
retailing of books, magazines and videos over the internet; as well as
activities in its sports and entertainment segment including ownership of
hockey teams and production of cultural events. Thomson Reuters
Corporation provides critical electronic information and solutions to
business and professional customers around the world. As can be seen,
Quebecor is in many different segments of the industry, making one to
one comparison very difficult. This fact holds true for the entire industry,
where each peer company is in many different sectors of the print and
electronic distribution industry. Thomson Reuters is the largest, by asset
size and revenues, and in some comparable business lines, so it would
be as good as any other company in the industry to use as a benchmark.
However, it is more useful to use an average of several companies within
an industry to provide a better benchmark for comparison since this would
be more representative of the industry than any single company.
b. Three other companies that might be used for comparison purposes are
GVIC Communications Corp., Postmedia Network Canada Corp. and
Torstar Corporation. Thomson reports in US dollars, whereas the other
four, including Quebecor Inc., report in Canadian currency.
c.
(in millions of Post-
dollars) Thomson Quebecor GVIC media Torstar
2017 2017 2016 2017 2017
Current assets $2,977 $1,689.6 $45 $179 $203
Current liabilities 4,796 2,037.6 44 196 114
Current ratio 0.62 0.83 1.02 0.91 1.78
Total liabilities 12,905 8,479.7 151 548 235

Total assets 26,480 9,685.8 248 462 481
Debt to total
assets ratio 0.49 0.88 0.61 1.19 0.49
The simple average of the current ratio for these five competitors is 1.03 and
the debt to assets ratio is 0.73. However, in looking at the five competitors,
there is a very wide range in these ratios, and given the different business
lines that each company is in, an average may not be very helpful in the
analysis. If you consider the range instead, Thompson is at the bottom of the
range in both ratios (less liquid than the other companies, but a with less debt),
whereas Quebecor is less atypical. It has a somewhat better current ratio (but
with higher debt).
RA 5.5 QUEBECOR AND THOMSON REUTERS (CONTINUED)
d. Based on this very brief analysis, Quebecor is doing slightly better than
Thomson Reuters in terms of liquidity (current ratio of 0.83 vs. 0.62),
although not as well as the five-company average of 1.03. In terms of
solvency, Thomson Reuters is better than Quebecor (debt to equity ratio
of 0.49 vs. 0.88) and better than the average of the five companies
together (0.61), indicating low debt level in comparison to its peers. In
contrast, Quebecor has the second highest debt level at 88%. The
telecommunications and broadcasting business lines may be causing this
significant difference.
e.
(in millions of dollars)
Quebecor (Cdn. $) 2017 2016
Cash from operating activities $1,171.1 $1,113.0

Cash used in investing activities (187.1) (947.2)
Cash used in financing activities (152.4) (162.1)
Net increase (decrease) in cash before
discontinued operations 831.6 3.7
Cash from discontinued operations 11.0 0
Net increase (decrease) in cash $842.6 $3.7
Thomson (US $) 2017 2016

Cash from operating activities $2,029 $2,984
Cash used in investing activities (1,047) 2,186
Cash used in financing activities (2,490) (3,712)
Net increase (decrease) in cash before
currency adjustments (1,508) 1,458
Currency translation adjustment 9 (13)
Net increase (decrease) in cash $(1,499) $1,445

RA 5.5 QUEBECOR AND THOMSON REUTERS (CONTINUED)
f. Thomson’s overall cash from continuing operating activities and cash

balances have decreased in 2017 from 2016, while Quebecor saw an
increase. Thomson shows an overall decrease in cash due primarily to an
increase in financing outflows as more debt was repaid than borrowed and
common shares were repurchased, and also due to cash outflows in its
investing activities. The company had a very large cash balance in 2016
due to the disposal of a business segment. This disposal caused a large
cash inflow shown in the cash from investing activities in 2016. Its large
reduction in cash in 2017 returns the company’s cash position to a more
normal level, comparable to that experienced in 2015. The balance in
cash in 2016 was unusually large at year end due to the disposal. Overall,
Thomson’s statement of cash flows shows more fluctuations than
Quebecor, but this may be due to specific events, such as the disposal of
a business segment, rather than the differences in the two companies
operations.
Quebecor saw an increase in cash flow from operations with a

proportionately more modest cash outflows in investing activities and
financing activities. This shows a more positive trend with continued
investments in property, plant and equipment and intangible assets to
maintain its productive capabilities and significant debt repayments and
repurchase of shares. These cash outflows combined with strong cash
inflows from operations over 2016 and 2017 show good cash
management.

RA 5.6 AUDITOR’S LETTER
Date
James Spencer, III, CEO

Spencer Corporation
125 Bay Street,
Toronto, ON
Dear Mr. Spencer:
I have good news and bad news about the financial statements for the year ended
December 31, 2020. The good news is that net income of $100,000 is close to
what we predicted in the strategic plan last year, indicating strong performance this
year. The bad news is that the cash balance is seriously low. Enclosed is the
Statement of Cash Flows which best illustrates how both of these situations
occurred at the same time.
If you look at the operating activities, you can see that all of the cash generated by
operations was used to increase inventory and to substantially reduce the
accounts payable. Compounding this problem was the fact that credit sales
exceeded collections on account. While these are necessary activities, the three
combined to reduce your cash balance by $116,000. Two activities, which are
incompatible with each other, are the increases in inventory with the decreases in
accounts payable. You might want to check into any changes in your business
practices that have caused this unlikely combination.
The corporation made significant investments in equipment and land. These were
paid from cash reserves. While it is good that no monies were borrowed against
these assets, these purchases used 75% of the company's opening cash. In
addition, the redemption of the bonds improved the equity of the corporation and
reduced interest expense. However, it also used 25% of the corporation's opening
cash. It is normal to use cash for investing and financing activities. But when cash
is used, it must also be replenished, and acquisition of plant assets is normally
financed using equity or long-term debt financing, not through the depletion of cash
on hand. The duration of the assets’ productive lives should be matched with the
duration of the debt.

RA 5.6 AUDITOR’S LETTER (CONTINUED)
Operations normally provide the cash for investing and financing activities. Since
there is a finite amount of assets to sell and funds to borrow or raise from the sale
of capital shares, operating activities are the only renewable source of cash. That
is why it is important to keep the operating cash flows positive. Cash management
requires careful and continuous planning and monitoring.
There are several possible remedies for the current cash problem. First, prepare a
detailed analysis of monthly cash requirements for the next year. Second,
investigate the changes in accounts receivable and inventory and work to return
them to more normal levels. Third, look for more favourable terms with suppliers
to allow the accounts payable to increase without loss of discounts or other costs.
Finally, if the land was purchased outright for a $200,000 total cost, consider
shopping for a low interest loan to finance the acquisition for a few years and return
the cash balance to a more normal level.
If you have additional questions or need one of our staff to address this problem,
please contact me at your convenience.
Sincerely yours,
Partner in Charge

RA 5.7 A MORAL DILEMMA
The ethical issues involved are integrity and honesty in financial reporting, full
disclosure, and the ethical accountant’s professionalism.
Presenting property, plant, and equipment net of depreciation on the face of the
statement of financial position is perfectly acceptable under both IFRS and ASPE.
However, under both sets of GAAP, the details must be provided by note
disclosures if they are not presented on the balance sheet or statement of financial
position. It is inappropriate to attempt to hide information from financial statement
users. Information must be relevant and useful, and the presentation the ethical
accountant is considering would not be appropriate if there were no further details
provided via note disclosure, as it would not assist the user in predicting future
cash flows. Users would not grasp the age of capital assets and the company’s
need to concentrate its future cash outflows on replacement of these assets. The
historical cost, accumulated depreciation and book value of each major category
of asset should be presented in a schedule in the financial statement notes, cross
referenced to a total appearing on the face of the statement of financial position.

CUMULATIVE COVERAGE AND TASK-BASED SIMULATION:

CHAPTERS 1 TO 5
Part A – Journal Entries
Required: Prepare all necessary adjusting and correcting entries required based
on the information given, up to item 13.
Instruction: Prepare the journal entries in the space provided below.
1 Allowance for Doubtful Accounts .............................................. 700
Accounts Receivable ...................................... 700
Bad Debt Expense1 .................................................................. 1,100
Allowance for Doubtful Accounts .................... 1,100

1
($44,700 - $700) X 5% less ($1,800 - $700)
($44,000 X 5% = $2,200) - $1,100
2 Supplies Expense1.................................................................... 1,600
Supplies .......................................................... 1,600

1
($2,000 - $400)
3 Insurance Expense1.................................................................. 3,000

Prepaid Insurance........................................... 3,000
1
($4,000 X 9/12)
4 FV-NI Investments .................................................................... 2,500
Unrealized Gain or Loss1 ................................ 2,500

1
($22,500 - $20,000)
5 Accumulated Depreciation – Equipment ................................... 4,200
Gain on Disposal of Equipment ................................................ 100
Equipment ...................................................... 4,300

CUMULATIVE COVERAGE (CONTINUED)
Part A (continued)
6 Depreciation Expense............................................................... 7,200
Accumulated Depreciation – Equipment ......... 7,200
7 Interest Receivable ................................................................... 208

Interest Income ............................................... 208
($25,000 X 5 % X 2/12)
8 Interest Expense....................................................................... 200
Interest Payable .............................................. 200
9 Salaries and Wages Expense ................................................... 790
Salaries and Wages Payable .......................... 790
10 Unearned Revenue................................................................... 3,200
Service Revenue1 ........................................... 3,200

1
($4,200 - $1,000)
11 Litigation Expense .................................................................... 5,000
Litigation Liability ............................................ 5,000
12 Sub-lease – no entry
13 Income Tax Instalments – no entry
Part C
14 Income Tax Expense1 ............................................................... 30,791
Income Tax Payable ....................................... 30,791

1
($109,968 (see part (b) X 28%))

Parts B and C – Adjusted Trial Balance
Unadjusted Trial Balance Adjustments Adjusted Trial Balance

Account Debit Credit Debit Credit Debit Credit
Petty cash $600 600
Cash 18,500 18,500
Accounts receivable 44,700 700 44,000
Allowance for doubtful accounts 1,800 700 1,100 2,200
Interest receivable - 208 208
Prepaid Insurance 4,000 3,000 1,000
Supplies 2,000 1,600 400
FV-NI investments 20,000 2,500 22,500
Notes receivable 25,000 25,000
Equipment 94,000 4,300 89,700
Accumulated depreciation—
equipment 36,000 4,200 7,200 39,000
Goodwill 22,000 22,000
Bank loans 18,000 18,000
Accounts payable 7,950 7,950
Salaries and wages payable - 790 790
Interest payable - 200 200
Unearned revenue 4,200 3,200 1,000
Litigation liability - 5,000 5,000
Income tax payable 30,000 30,791 791
Common shares 36,000 36,000

Parts B and C (continued) Unadjusted Trial Balance Adjustments Adjusted Trial Balance
Debit Credit Debit Credit Debit Credit
Retained earnings 59,800 59,800
Dividends 26,000 26,000
Service revenue 242,768 3,200 245,968
Interest income 1,042 208 1,250
Unrealized gain or loss - 2,500 2,500
Gain on disposal of equipment 300 100 200
Depreciation expense - 7,200 7,200
Office expense 4,100 4,100
Travel expense 6,700 6,700
Insurance expense 900 3,000 3,900
Interest expense 1,300 200 1,500
Utilities expense 750 750
Rent expense 54,000 54,000
Salaries and wages expense 49,510 790 50,300
Supplies expense - 1,600 1,600
Bad debt expense - 1,100 1,100
Telephone and internet expense 3,200 3,200
Repairs and maintenance expense 600 600
Litigation expense - 5,000 5,000
Income tax expense - 30,791 30,791
$407,860 $407,860 $60,589 $60,589 $420,649 $420,649
Total expenses and revenues
(excluding Income Tax Expense) $139,950 $249,918
Income before income taxes $109,968
Income tax expense ($109,968 x 28%) $30,791

COMULATIVE COVERAGE PART D (CONTINUED)

ERSKINE CONSULTING LTD.
Statement of Income
Revenues
Service revenue $245,968
Unrealized gain or loss 2,500
Interest income 1,250
Gain on disposal of equipment 200
Total revenues 249,918
Expenses
Rent expense 54,000
Salaries and wages expense 50,300
Depreciation expense 7,200
Travel expense 6,700
Litigation expense 5,000
Office expense 4,100
Insurance expense 3,900
Telephone and internet expense 3,200
Supplies expense 1,600
Interest expense 1,500
Bad debt expense 1,100
Utilities expense 750
Repairs and maintenance expense 600
Total expenses 139,950
Income before income tax 109,968
Income tax expense 30,791
Net income $79,177
Statement of Retained Earnings
Retained earnings, January 1 $ 59,800

Add Net income 79,177
138,977
Less dividends 26,000
Retained earnings, December 31 $112,977
COMULATIVE COVERAGE PART D (CONTINUED)

As at December 31, 2020
Assets
Current assets
Cash $19,100
Interest receivable 208
Supplies 400
FV – NI investments 22,500
Note receivable, due 2023 25,000 47,500

Equipment 89,700
Less accumulated depreciation—equipment 39,000 50,700
Goodwill 22,000
Current liabilities
Bank loans $ 18,000
Accounts payable 7,950
Interest payable 200
Salaries and wages payable 790
Litigation liability 5,000
Income tax payable 791
Common shares $36,000
Total liabilities and shareholders’ equity $182,708

COMULATIVE COVERAGE (CONTINUED)
Part E – Measurement
There are three levels in the fair value hierarchy
level 1 inputs provide the most reliable fair values because

Level 1
these inputs are based on quoted prices in an active market
for identical items
level 2 is the next most reliable and considers evaluating
Level 2
similar assets or liabilities in active markets or using
observable inputs such as interest rates or exchange rates.
level 3 is the least reliable level since much judgement is
Level 3
needed based on the best information available. This often
includes unobservable inputs and management judgements
about how the markets would value the asset.
The FV-NI investments are based on the TSX market value Level 1 inputs
which provide the most reliable fair values because these inputs are based
on quoted prices in an active market for the exact same item.
There would be no difference in the accounting treatment of these

investments under ASPE although in ASPE there is no fair value hierarchy.
The unadjusted balance of $20,000 does not necessarily represent the cost
of the investments. The carrying amount in the account is the fair value of
the investments at the last reporting period.
Part F – Ratio Analysis
Erskine’s current ratio is 1.85:1

Current assets $62,508
Current ratio = = = 1.85
Current liabilities $33,731
Erskine’s payout ratio is 32.8%

Cash dividends $26,000
Payout ratio = = = 32.8%
Net income $79,177

Solution Manual for Intermediate Accounting, Volume 1, 12th Canadian by Kieso
LEGAL NOTICE
Copyright © 2019 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.
MMXVIII x F1

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[89]
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Puzzle No. 33
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[88]
HORIZONTAL
Garden 4 plat Pulls43

To pull6 along after The 44
thing
Sack 8 To exercise
45 power
Alarm 10 To mimic
47
Be indebted
11 to You 49
A savage
12 animal A unit
50
The 14man Fuss51
A cup 15that cheers To supply
53 weapons
Wager 17 Effusively
55 sentimental
Otherwise
18 Course
58
Frame 20 to support a Hypocrisy
62
coffin Ingenuous
63
Applaud
22 To drudge
65
A form25 of ice Accomplish
66
Stutter
26 Poem 67
Morally
28 improved To drink
68 little by little
A dish30 made with In that
70 way
pastry A notorious
71 fiddler
It is so
31 Gone 73by
Males 33or females To offer
75 for sale
collectively Genus77 homo
A parent
34 Stepped
78 rapidly
What36the United The 79
essential person
States is supposed to
be
The 38woman
Chief39deity of
historical Egypt
Righteous
41
Invest42
VERTICAL
Pound1 Still 37
Cloth 2for wiping Wave 38
To stay3 for A beam39
Exist 4 Solemn40 wonder
Visionary
5 person Pale46 green
In the6direction of Unresisting
48
Ourselves
7 Forth50
Disfigurement
8 An insect
51
Proceed9 Unclose
52
Ends10of stockings Chart 54
Not any
13 Insane55
Belonging
14 to him Presently
56
A very16 little Wrath 57
To command
17 Donkey59
A measure
19 of distance Joyful60
Knock 21 Goddess
61 of Dawn
Call 23
out Lawful64
Bronze24 or copper Spoken67
A half25dozen Wooden69 or metal pins
Inland27 Type72 measure
Sources
29 of supply A measure
73 of area
Finished
32 Over74 and in contact
Hawaiian
34 food with
Skill 35 A veto76
[91]
[Contents]
Puzzle No. 34
FIVE SPOTS AND RAYS
By R. B. MacMullin, Jr.
Good interlock, but a number of unkeyed letters.

These are apt to try the ingenuity of the solver.
1 2 3 4 5 6 7 8 9 10 11 12
13 14 15 16
17 18 19 20 21 22
23 24 25 26 27
28 29 30 31
32 33 34 35
36 37 38 39 40
41 42 43 44 45 46
47 48 49
50 51 52 53
54 55 56 57 58 59
60 61 62 63
64 65 66 67
68 69 70 71 72
73 74 75 76 77 78
79 80 81 82
83 84 85
[90]
HORIZONTAL
Vessel1 used for Negro49
assaying gold Greek50exclamation
Tertiary
5 Decoration
51
Coral 9island Devoured
53
Rainbow
13 Steering
54 lever
Unity15 Hot egg-nog
57
Asterisk
16 Linear
60
God17 of sunshine Scottish
62
Discernment
19 Eternity
64
Near22 A fatty
65 acid
Yale23 Weaving
66 machine
Seize25 Homo 68
Tip 26 Herself
69
Fear27 Metal-bearing
70 rock
Melody
28 No 72
Snake30 One73
Used31for bacterial Necessity
74
culture Note78on diatonic scale
Plaster
32 Speculator
79 who sells
Force34times distance Yes 80
(Fr.)
Charcoal
37 Raised
81 platform
Stag’s
39 horn Iron 83
Australian
41 ostrich Armored
84
Evening
43 Indivisibility
85
Dyne45centimeter
Tint 47
Pedal48digit
VERTICAL
Sign of
1 omission In a 39
heap
3.1416
2 Heron40
Mistake
3 Minor42(mus.)
Legal4security Deity44
Pig 6 Steep46flax
Inform7 Molten
51
Brazilian
8 coin A saying
52
Indivisible
9 particle Hostelry
55
Brown10 Weir56
Gold11 Religious
58
Metric
12unit of volume 45 inches
59
Sacred
14 beetle Scrawny
60
Noiseless
16 Void61space
Sulfate
18 of aluminum Common
63 fuel
King20of the fairies Accumulate
64
Natural
21 ability Farinaceous
67
Absent
22 Wax69 impression
Insertion
24 of virus Eldest
71 son of Isaac
Collection
27 Born74
Epoch29 Because
75 of
Metric
31land measure Equivocation
76
Grief33 Wickedness
77
Planetary
35 orbit Exist79
A nut36 Another
82 note on the
Saltpeter
38 diatonic scale
[93]
[Contents]
Puzzle No. 35
A SLOTTED OBLONG
By Marion Hague
Splendid corner solids and easy central islands.

Good words. A nice one to solve at leisure.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
18 19 20 21 22
23 24 25 26 27
28 29 30
31 32 33 34 35 36 37 38 39
40 41 42 43 44 45 46
47 48 49 50 51 52 53
54 55 56 57 58
59
60 61 62 63 64 65 66 67 68 69 70
71 72 73 74 75
76 77 78 79 80 81
82 83 84 85 86 87 88
89 90 91 92 93 94
95 96 97 98 99 100 101
102 103 104 105 106
107 108 109 110
[92]
HORIZONTAL
Foot-gear
1 Body60of land
Every6 surrounded by water
Float10 Hastened
65
The 13
smallest amount An edge
66
The 18
floor of a fireplace Rapacious
67 bird
Also20 To wind,
71 as a brook
A kettle
21 Burdened
73
One22 who carries Small75dagger
something To set
76free of
Items23of record Horse77
Pertaining
25 to a pole To allow
79
To pass
27 from one Co-relative
80 of “neither”
place to another Period
81 of time
To break
28 short A possessive
82 pronoun
Exhausted
29 A delicious
83 drink
Jewel30 Arbor85
Rule31established by A measure
87 of length
authority Entrance
89
Clan34 Machine
90 which gives
Hostelry
36 motion
Extremity
38 At any
93 time
Domestic
40 animal Tells95
Instrument
42 used to A variety
98 of quartz
operate a lock Dwells
99
Snare43 Fastened
102
Color45 Bond
103
Bustle
46 Tag104
Marks47made by Recollect
106
folding Older
107
Sort 49
of skeleton found The108
fruit of the pine
in the sea tree
Striking
51 gently Lyric
109poems
Piece54of instruction An 110
aromatic herb
Sort 55
of preserved fruit
Pouch56
Epistle
58
To enliven
59
VERTICAL
Hard 1covering High50 school subject

Female2 fowl Delicious
52 nut
Grain3 Great53
Sins 4 Receptacle
55
Provide
5 for meagrely Precious
57 stone
Near 7 Dry 61
Thicket
8 Home 62of a wild beast
Metal9or wooden band A conjunction
63
Short10space of time Indicated
64
Merit11 Always
67
Neuter
12 pronoun To recline
68
According
13 to law Anxiety
69
A nobleman
14 Spoken
70
A Southern
15 Runs72swiftly
constellation A triangular
74 piece of
Fixed16 land at the mouth of a
Inclination
17 river
Listen
19 Potency
75
Having
22 two feet To depart
78
Sees24 Negative
80
A bar26of metal for Domestic
82 animal
raising weight To supply
83 food or
Sacred
27 musical amusement
composition Furiously
84
Land32measure A food
85
Troubles
33 Set again
86
Beside
35 Fine88lace
Otherwise
37 Strong
89 wind
Sort 91
of molding
To prepare
38 for Common name of old
publication 92German
Not any
39 emperors
Part 41
of verb “to be” Wealthy
94
Existing
43 only in name Soft 96
finned fish
A silk
44used for Boy 97
upholstering Span
100of twenty-four
Expert
46 hours
Demand
47 Kind
101of tree
Whole48 Forward
103
Artificial
49 waterway Exist
105
[95]
[Contents]
Puzzle No. 36
AN HOUR GLASS
By Mrs. Henry Wolf
The constructor must have turned her hour glass

several times while she was building this hour glass.
It presents beautiful masses of interlocks.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
16 17 18 19 20
21 22 23 24
25 26 27
28 29 30 31
32 33 34
35 36 37 38
39 40 41 42 43 44
45 46 47 48 49 50
51 52
53 54 55 56 57 58 59 60 61
62 63 64 65
66 67 68 69 70 71 72
73 74 75
76 77 78 79
80 81 82 83
84 85 86 87 88
89 90 91 92
93 94 95
[94]
HORIZONTAL
Definite
1 Clamor52
Cymbals7 used by Delivered
53
Hindu dancers Entanglers
58
Declares
10 Insects
62
Vigilant
16 Wicked63
Publication
17 Skin65 disease
Manifest
20 Defense
66
Plateau
21 Premise
68
17th22 century article of Plunge70
dress Previous
73
Concept
24 Quarrel
74
Confederations
25 of Anger 75
territory Performs
76
Nightfall
26 Unsympathetically
78
Operator
27 of cotton Irritated
79
cleaning machine Harangues
80
Restrain
28 One82 of many
Belonging
29 to Ireland Helmsman
83
Conveyed
31 Employer
84
Insect32 Aversions
85
Bloomed
33 again Liquid88measure
Scotch34 for no Prepared
89
Stride35 Share 91
Silenced
37 A relative
92
Agitate
38 Regards
93
Lyric39poems Assent94
Title 42 Feared95
Half 43
Laundry
45 implement
One48 who lives only for
pleasure
Nautical
51 diary

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FINANCIAL POSITION AND CASH FLOWS

Solutions Manual 5-1 Chapter 5

Summary of Questions by Learning Objectives and Bloom’s Taxonomy

Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT

Solutions Manual 5-2 Chapter 5

Legend: The following abbreviations will appear throughout the solutions

Solutions Manual 5-3 Chapter 5

ASSIGNMENT CLASSIFICATION TABLE

3. Statement of cash 2, 11, 12, 11, 14, 7, 8, 11

5. Analysis* 18, 20 4, 5, 12, 7, 8

*This material is covered in an Appendix to the chapter.

Solutions Manual 5-4 Chapter 5

ASSIGNMENT CHARACTERISTICS TABLE

E5.1 Statement of financial position Simple 15-20

P5.1 Preparation of a classified statement of Moderate 30-35

Solutions Manual 5-5 Chapter 5

ASSIGNMENT CHARACTERISTICS TABLE (CONTINUED)

P5.5 Statement of income and statement of Moderate 30-40

Solutions Manual 5-6 Chapter 5

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 5.1

(a) The statement of financial position provides information

(b) The statement of cash flows provides information about the

Solutions Manual 5-7 Chapter 5

BRIEF EXERCISE 5.2

The main purpose of the statement of cash flows is to help users

Users of Gator Printers’ statement of cash flows include

BRIEF EXERCISE 5.3

Three examples of financial statement items which are omitted

Solutions Manual 5-8 Chapter 5

BRIEF EXERCISE 5.4

Cash and cash equivalents and accounts receivable are monetary

BRIEF EXERCISE 5.5

Solutions Manual 5-9 Chapter 5

BRIEF EXERCISE 5.6

Property, plant, and equipment

BRIEF EXERCISE 5.7

Note: Goodwill would be shown separately from intangibles.

Solutions Manual 5-10 Chapter 5

BRIEF EXERCISE 5.8

All of the above with the exception of unearned revenue are

Note: For the notes payable, as at statement of financial position

Solutions Manual 5-11 Chapter 5

BRIEF EXERCISE 5.9

(a) Under IFRS