(eBook PDF) Financial Accounting: A

Critical Approach 4th Canadian

Go to download the full and correct content document:
https://ebooksecure.com/product/ebook-pdf-financial-accounting-a-critical-approach-4
th-canadian/
More products digital (pdf, epub, mobi) instant
download maybe you interests ...

Financial Institutions Management A Risk Management

Approach 4th

http://ebooksecure.com/product/financial-institutions-management-
a-risk-management-approach-4th/

(eBook PDF) Accounting: A Smart Approach 4th Edition

http://ebooksecure.com/product/ebook-pdf-accounting-a-smart-
approach-4th-edition/

(eBook PDF) Fundamentals of Financial Accounting 4th

Canadian Edition by Fred Phillips

http://ebooksecure.com/product/ebook-pdf-fundamentals-of-
financial-accounting-4th-canadian-edition-by-fred-phillips/

(eBook PDF) Canadian Financial Accounting Cases 2nd

Canadian Edition

http://ebooksecure.com/product/ebook-pdf-canadian-financial-
accounting-cases-2nd-canadian-edition/
(eBook PDF) Understanding Financial Accounting Canadian
Edition

http://ebooksecure.com/product/ebook-pdf-understanding-financial-
accounting-canadian-edition/

(eBook PDF) Research Methods and Statistics: A Critical

Thinking Approach 4th Edition

http://ebooksecure.com/product/ebook-pdf-research-methods-and-
statistics-a-critical-thinking-approach-4th-edition/

(eBook PDF) College Accounting: A Contemporary Approach

4th Edition

http://ebooksecure.com/product/ebook-pdf-college-accounting-a-
contemporary-approach-4th-edition/

(eBook PDF) Financial Accounting An Integrated Approach

6th

http://ebooksecure.com/product/ebook-pdf-financial-accounting-an-
integrated-approach-6th/

(eBook PDF) The Study of Law: A Critical Thinking

Approach (Aspen College) 4th Edition

http://ebooksecure.com/product/ebook-pdf-the-study-of-law-a-
critical-thinking-approach-aspen-college-4th-edition/
FINANCIAL FOURTH
EDITION

ACCOUNTING
A CRITICAL APPROACH

JOHN FRIEDLAN
vi CONTENTS

Summary of Key Points 65 Why Does It Matter When a Company

Formula Summary 66 Recognizes Revenue? 194
Key Terms 66 Google Inc. 197
Why Do Managers Have So Much Choice? 199
Similar Terms 67
The Gradual Approach to Recognizing
Assignment Materials 68
Revenue 199
Questions 68
Multiple Deliverable Arrangements 204
Exercises 70
Problems 76 Expense Recognition 205
Using Financial Statements 91 Gains and Losses 206
Endnotes 100 The Objectives of Financial Reporting 208
Tax Minimization 209
Stewardship 210
CHAPTER 3 Management Evaluation 210
The Accounting Cycle 101 Performance Evaluation 210
Cash Flow Prediction 210
Introduction 102
Monitoring Contract Compliance 210
The Accounting Cycle: Introduction 102
Earnings Management 211
Accrual Accounting 104 Minimum Compliance 212
The Accounting Cycle: Transactional Analysis 107 Is Accounting Information Relevant, Reliable,
The Accounting Equation Spreadsheet and Journal and Useful? 212
Entries 107 Reporting Impact 213
The Accounting Cycle—Example 111 Can Managers Do Whatever They Want? 214
Adjusting Entries 124 Solving Accounting Choice Problems 214
The Full Accounting Cycle, Beginning to End 132 Constraints, Facts, and Objectives 215
Preparing Journal Entries 133 Analyzing Accounting Problems 216
Posting Journal Entries to the General Ledger 135 Solved Problem 218
Preparing and Posting Adjusting Journal Entries 136
Summary of Key Points 223
Preparing the Trial Balance 137
Key Terms 224
Preparing the Financial Statements 139
Preparing and Posting Closing Journal Entries 139 Assignment Materials 224
Questions 224
Solved Problem 142
Exercises 225
Summary of Key Points 153
Problems 232
Formula Summary 154
Using Financial Statements 244
Key Terms 154
Endnotes 250
Similar Terms 154
Assignment Materials 154
CHAPTER 5
Questions 154
Exercises 156 Cash Flow, Profitability, and the Cash Flow
Problems 167 Statement 251
Using Financial Statements 182 Introduction—Cash Is King! 252
Endnotes 186 The Cash Cycle 252
Example: Cash Flow Scenarios at Peabody Corp. 255
CHAPTER 4 The Cash Flow Statement: Overview 259
Income Measurement and the Objectives Understanding the Cash Flow Statement: Specific
Activities 264
of Financial Reporting 187
Financing and Investing Activities 264
Introduction 188 Cash from Operations 265
Revenue Recognition 188 Interpreting and Using the Cash Flow Statement 275
The Critical-Event Approach 189 Thomson Reuters’ Statement of Cash Flows 275
Some Critical Events 191 Other Issues 276
 CONTENTS vii

Impact of Manager Decisions on Cash Flow Using Financial Statements 371

Information and the Effect of Accrual Accounting Endnotes 377
Choices on the Cash Flow Statement 280
Solved Problem 281
CHAPTER 7
Summary of Key Points 284
Formula Summary 285 Inventory 378
Key Terms 285 Introduction 379
Similar Terms 285 What Is Inventory? 380
Assignment Materials 286 What Do IFRS Say? 381
Questions 286 Perpetual and Periodic Inventory
Exercises 287 Control Systems 382
Problems 294 Internal Control 384
Using Financial Statements 309 Inventory Valuation Methods 384
Endnotes 313 First-In, First-Out (FIFO) 386
Average Cost 386
Specific Identification 387
CHAPTER 6 Comparison of the Different Cost
Cash, Receivables, and the Time Value Formulas 387
of Money 314 Which Method Is Best? 392
Introduction 316 The Lower of Cost and NRV Rule 394
Cash 316 Inventory Disclosures in Financial Statements 397
Is a Dollar a Dollar? 318 Biological Assets and Agricultural Produce 399
The Effect of Changes in Purchasing Inventory and the Services Industry 400
Power 318 Inventory Errors 403
The Effect of Changing Prices of Foreign Inventory Accounting and Income Taxes 404
Currencies 318
Financial Statement Analysis Issues 404
Cash Management and Controls over Cash 319 A Banker’s View of Inventory 407
The Time Value of Money 320 Solved Problem 407
Future Value 321
Summary of Key Points 410
Present Value 323
Formula Summary 411
Present Value of an Annuity 325
Key Terms 411
Receivables 327
Accounting for Uncollectible Receivables 329 Similar Terms 412
Long-Term Receivables 334 Assignment Materials 412
Financial Statement Presentation 335 Questions 412
Financial Statement Analysis Issues 339 Exercises 414
Earnings Management—Hidden Reserves 339 Problems 422
Current and Quick Ratios 341 Using Financial Statements 434
Accounts Receivable Turnover Ratio 342 Endnotes 438
Other Issues 343
Solved Problem 344
CHAPTER 8
Summary of Key Points 349
Formula Summary 350 Capital Assets: Property, Plant, and Equipment,
Key Terms 350
Intangibles, and Goodwill 439
Similar Terms 350 Introduction—What Are Capital Assets? 440
Assignment Materials 350 Measuring Capital Assets and Limitations
Questions 350 to Historical Cost Accounting 441
Exercises 352 What Is Cost? 443
Problems 361 Basket Purchases 445
viii CONTENTS

Depreciation 446 Disclosure 534

Depreciation and Market Values 447 Fair Value of Debt 534
Depreciation Methods 447 Mortgages 535
Comparing Methods 451 Leases 536
Summary 454 Pensions and Other Post-Retirement Benefits 543
Componentization of Assets 455
Contingencies 548
Valuing Capital Assets at Fair Value 455
Commitments 549
Financial Statement Disclosure 457
Events after the Reporting Period/Subsequent
Natural Resources 461
Events 550
Intangible Assets 461
Financial Statement Analysis Issues 552
Goodwill 467
Debt-to-Equity Ratio 552
Sale of Capital Assets 468 Interest Coverage Ratio 553
Impairment of Capital Assets 470 The Impact of Off-Balance-Sheet Liabilities 554
Does the Way Capital Assets Are Accounted Solved Problem 556
for Affect the Cash Flow Statement? 472
Summary of Key Points 558
Financial Statement Analysis Issues 473
Appendix: Deferred Income Taxes/Future
Solved Problem 476 Income Taxes 559
Summary of Key Points 481 Formula Summary 565
Appendix: Depreciation and Taxes 482 Key Terms 566
Formula Summary 483 Similar Terms 567
Key Terms 483 Assignment Materials 567
Similar Terms 484 Questions 567
Assignment Materials 484 Exercises 569
Questions 484 Problems 578
Exercises 485 Using Financial Statements 588
Problems 493 Endnotes 599
Using Financial Statements 506
Endnotes 514
CHAPTER 10
Owners’ Equity 600
CHAPTER 9
Introduction 601
Liabilities 515 Corporations, Partnerships, and
Introduction: What Are Liabilities? 516 Proprietorships 601
Current Liabilities 517 Characteristics of Equity 607
Bank and Other Current Loans 517 Common and Preferred Shares 608
Accounts Payable 518 Share Repurchases 612
Collections on Behalf of Third Parties 518 Retained Earnings, Dividends, and
Income Taxes Payable 519 Stock Splits 613
Dividends Payable 519 Retained Earnings 613
Accrued Liabilities and Provisions 519 Dividends 613
Unearned Revenue 522 Stock Splits 616
Disclosure 522 Accumulated Other Comprehensive Income 617
Bonds and Other Forms of Long-Term Contributed Surplus 618
Debt 523
Statement of Changes in Equity 618
Characteristics of Bonds 526
Pricing of Bonds 527 Accounting Changes—Policies and
Accounting for Bonds 528 Estimates 618
Accruing Interest on Long-Term Debt 533 Leverage 619
Early Retirement of Debt 533 Employee Stock Options 622
 CONTENTS ix

Economic Consequences 625 Endnotes 705

Financial Statement Analysis Issues 626 Example of Acquiring Less Than 100 Percent of a
Price-to-Book Ratio 626 Subsidiary—Non-Controlling Interest (Online)
Earnings per Share 626
Dividend Payout Ratio and Dividend
Yield 628 CHAPTER 12
Return on Shareholders’ Equity 629 Analyzing and Interpreting Financial
Solved Problem 630 Statements 706
Summary of Key Points 633 Introduction 707
Formula Summary 634 Why Analyze and Interpret Financial
Key Terms 635 Statements? 708
Similar Terms 635 Know the Entity 709
Assignment Materials 636 Permanent and Transitory Earnings
Questions 636 and Earnings Quality 710
Exercises 638 Permanent versus Transitory Earnings 710
Problems 647 Earnings Quality 712
Using Financial Statements 658 Using Ratios to Analyze Accounting
Endnotes 666 Information 714
Vertical and Horizontal Analysis 714
Evaluating Performance 721
CHAPTER 11 Liquidity 726
Solvency and Leverage 730
Investments in Other Companies 667
Other Common Ratios 733
Introduction 668 Some Limitations and Caveats about Financial
Why Do Companies Invest in Other Statements and Financial Statement Analysis 735
Companies? 669 Earnings Management 736
Accounting for Investments in Other Corporations: A Final Thought 737
Introduction 669
Solved Problem 737
Control: Accounting for Subsidiaries 670
Summary of Key Points 743
The Consolidated Balance Sheet on the Date the
Formula Summary 744
Subsidiary Is Purchased 673
Non-controlling Interest 675 Key Terms 746
Are Consolidated Financial Statements Similar Terms 746
Useful? 677 Assignment Materials 747
Significant Influence 679 Questions 747
Passive Investments 683 Exercises 749
Problems 759
Solved Problem 686
Using Financial Statements 772
Appendix: The Consolidated Financial
Statements in Periods after a Subsidiary Endnotes 781
Is Purchased 688 Appendix: Assurance and the Auditors’
Summary of Key Points 691 Report (Online)
Key Terms 691
Similar Terms 692 APPENDIX 782
Assignment Materials 692
Questions 692
Exercises 693 GLOSSARY 794
Problems 696
Using Financial Statements 701
INDEX 803
 PREFACE

OBJECTIVES
Welcome to the fourth edition of Financial Accounting: A Critical Approach. I’ve written the book
to provide an accessible and insightful introduction to the nature of accounting information.
My goal is to have anyone who studies the book thoroughly become a sophisticated user of
financial statements and understand the accounting issues, controversies, and scandals that are
reported in the business press. I’m proud that this book is written exclusively by a Canadian
author, the only such introductory financial accounting book currently available. As an IFRS
(International Financial Reporting Standards) country, the relevance of a Canadian perspective is
all the more important. Adaptations of U.S. books are less able to effectively capture the Canadian
accounting environment.
The title of the book requires some explanation. The Critical Approach to financial account-
ing guides students to look critically at accounting information. The book emphasizes the im-
portance of accounting information as a decision-making tool but also addresses the
limitations, controversies, and problems with accounting and accounting information. Rather
than accept the numbers in financial statements at face value, students learn that managers
often choose from alternative acceptable ways of accounting for transactions and economic
events and that these choices can have economic consequences for an entity’s stakeholders and
for the entity itself. Students also learn that accounting information provided by an entity can’t
be all things to all people. The information may be useful to some decision makers, but not to
others. Students learn to critically evaluate whether the information is appropriate for the deci-
sions they are making.
A conversation with a student a few years back reminds me of the importance of a critical
approach to studying accounting. The student, who had transferred from another university, was
struggling as he prepared for the mid-term exam. He said that he found the approach I use in
introductory financial accounting quite challenging, explaining that at his previous university he
was mainly asked to calculate, not to analyze and interpret information. After he left, I wondered
how students’ careers benefit from learning accounting from mainly a technical or procedural
standpoint.
Many accounting textbooks classify themselves as having a “user” or a “preparer” orientation.
In my view, these classifications are artificial: a good introductory education in financial account-
ing requires elements of both. Although the main purpose of this book is to make students literate
readers of financial statements (a user orientation), it’s difficult to understand financial state-
ments without having some appreciation of how data are entered into an accounting system and
converted into the information included in accounting reports. As a result, it’s useful for intro-
ductory accounting students to understand basic bookkeeping (a preparer orientation). Without
this familiarity, students will find it difficult to understand how and why accounting choices
made by managers affect the financial statements.
Thus, while Financial Accounting: A Critical Approach is not primarily a book about how to
do accounting, the “how to” part is fully covered. Chapter 3 explains how transactions and
economic events are recorded and the data converted into financial statements. In the context
of this book, understanding the procedural aspects of accounting is helpful for understanding
 PREFACE xi

the relationship between transactions and economic events and the resulting financial
statements.
One of the important features of Financial Accounting: A Critical Approach is the use of short
decision-oriented “mini-cases.” The cases, and an approach for solving them, are first introduced
in Chapter 4. Cases with solutions are provided as the Solved Problems in Chapters 4 through 12.
Cases for assignment and exam purposes appear in the Appendix to the book. All of the cases
place the student in the role of a user or interpreter of financial statements (what I call user-
oriented cases). The cases serve three purposes: first, they help develop critical thinking and
problem-solving skills; second, they help develop an appreciation of the context-specific nature of
accounting; and third, they allow students to get “inside the heads” of preparers and users to
understand how perspective affects the preparation and use of financial statements. Accounting
comes to life as students are forced to think about alternative ways of accounting for transactions
and economic events, and to consider the impact the different alternatives can have on decisions
and economic outcomes.
Contemporary Canadian accounting students, accountants, and users of financial state-
ments must function is a very challenging environment. Accounting standards tend to be com-
plex and there are two quite independent sets of standards in use in Canada: International
Financial Reporting Standards (IFRS) and Accounting Standards for Private Enterprises
(ASPE). At the introductory level, ASPE and IFRS are very similar (as they say, “the devil is in
the details”), so there’s really not a big impact. I decided the main emphasis in this book would
be IFRS because public companies are the most visible, although there are many more private
companies, so there will likely be more companies that use ASPE. In places where there are
significant differences between the two sets of standards, I’ve included boxes called “Account-
ing Standards for Private Enterprises.” When using the book, you can be confident that, unless
otherwise stated, ASPE and IFRS are the same for purposes of introductory accounting. How-
ever, it’s important for readers to know that the two sets of standards can result in very signifi-
cantly different financial statements.
In the fourth edition, I was able to use IFRS financial statements of Canadian companies as
they issued their first annual sets of IFRS statements in early 2012. My thanks to the many
companies that gave their permission for extracts of their financial statements to be used in
the book.

CHANGES TO THE FOURTH EDITION

I’ve made some significant changes in the fourth edition. The major ones are:
• The learning objectives in each chapter have been expanded so that it’s easier to link specific
parts of a chapter to a specific learning objective.
• Almost all financial statement examples are from Canadian companies that prepared their
statements on an IFRS basis.
• Added balloon comments to some exhibits to explain the key points.
• Chapter 1: Expanded the introduction to IFRS and ASPE.
• Chapter 2: Moved coverage of the qualitative characteristics of useful accounting information
to Chapter 2 from Chapter 4 and updated the content to reflect the current IFRS conceptual
framework.
• Chapter 4: Clarified the appropriateness of using the percentage-of-completion method
for service arrangements. Added a short section that explained multiple deliverable
arrangements.
• Chapter 7: Introduced accounting for biological assets and agricultural produce and explained
different types of inventory errors and the impact they have on the financial statements.
• Chapter 9: Added a discussion of mortgages.
xii PREFACE

• Chapter 11: Revised coverage of passive investment to reflect the current/upcoming IFRS
standard. Briefly introduced amortized costs, fair value through profit and loss, and fair value
through other comprehensive income.
• Chapter 12: Coverage of auditors’ opinions has been moved to a chapter appendix here
from Chapter 10.
In this edition, I changed the nature of the chapter-opening vignettes. This time, each
vignette links the chapter coverage to a Canadian corporation. The vignettes welcome readers
to each chapter with an engaging, interesting, and relevant story. They were written by Can-
adian journalist Ellin Bessner (who is also my wife!). I thank her for her for the hard work
and creativity she brought to the task. I hope you find the vignettes interesting and valuable.
In addition, many other minor changes have been added to improve the text. Many of the
exercises and problems in the end-of-chapter material have been revised and many new problems
and exercises added.

PEDAGOGICAL FEATURES OF FINANCIAL ACCOUNTING:

A CRITICAL APPROACH
Besides the cases mentioned above, this text is full of other useful pedagogical tools.
• Learning Objectives and Summary of Key Points—The learning objectives at the beginning of
each chapter focus students’ attention on what they will learn. The summary at the end of each
chapter outlines how each learning objective was addressed.
• Key Terms and Glossary—Key terms are printed in bold in the text and are listed with page
references at the end of each chapter. The terms are defined in the text and appear with their
definitions and a page reference in the glossary at the end of the book.
• Questions for Consideration boxes—Each chapter contains a number of questions for con-
sideration, providing opportunities for students to stop and think about what they have
read so far in the chapter. The boxes are designed as critical thinking questions requiring
application of the material in the chapter. Solutions to the questions are provided.
• Knowledge Check boxes—Each chapter contains numbered Knowledge Check boxes that give
students a chance to stop and check their understanding of key points raised in the chapter. If
a student can’t answer the questions, they should go back and review the preceding sections.
Solutions to the Knowledge Checks are provided on Connect.
• Insight boxes—Throughout the text, commentary on key points is provided in the Insight
boxes. These provide additional details concerning the nature and interpretation of account-
ing information.
• Accounting Standards for Private Enterprises boxes—Where appropriate, these boxes high-
light differences between IFRS and ASPE.
• Use of extracts from actual entities’ financial statements—Many of the issues, concepts, and
points raised in the book are demonstrated through extracts from the financial statements of
actual entities, presented as they appeared in the entity’s annual report. Students are able to see
first-hand the presentation of the topic in a real-world setting.
• Solved Problems—Each chapter provides a detailed problem with a solution. Most of the
solved problems are cases that should help students develop their analytical skills.
• Similar Terms list—This unique feature provides a list of accounting terms used in the text
compared to other terms with essentially the same meaning that students may encounter in
the media, in financial documents, and in accounting practice.
• Using Financial Statements—Each chapter’s assignment material provides extensive extracts
from an entity’s financial statements and a series of questions that provide students with the
 PREFACE xiii

opportunity to work with actual financial statement material and to apply the chapter content
in a realistic context.
• Assignment material—Each chapter contains a large number of questions, exercises, and prob-
lems that provide students with the opportunity to apply the knowledge and skills they have
gained from the chapter. All of this material is keyed to the learning objectives in the text.

A NOTE ON COVERAGE
Financial Accounting: A Critical Approach provides considerable depth on a number of topics not
normally covered in introductory accounting texts or courses. These topics include revenue rec-
ognition, leases, pensions, future income taxes (in an appendix), employee stock options, and
consolidated financial statements. Coverage of revenue recognition is intended to introduce the
concept of accounting choice and demonstrate the impact of different ways of reporting eco-
nomic events on the financial statements. The other, more complex, topics are included because
they commonly appear in financial statements and often have large dollar amounts associated
with them. If students are to make sense of an entire set of statements, they must have some fam-
iliarity and comfort with these topics, even if they tend to be complex. Some instructors may
prefer not to cover some of the sections on leases, pensions, future income taxes, and investments
in other companies. These topics can easily be skipped without having any impact on students’
understanding of later chapters.

NAMES OF ENTITIES
Some readers may wonder about the origins of the names given to the entities used in the ex-
amples and end-of-chapter material. Financial Accounting: A Critical Approach provides names
for more than 500 entities throughout the book and most are actual names of places in Canada!

McGraw-Hill Connect™ is a Web-based assignment and assessment platform that gives students
the means to better connect with their coursework, with their instructors, and with the important
concepts that they will need to know for success now and in the future.
With Connect, instructors can deliver assignments, quizzes, and tests online. Nearly all the
questions from the text are presented in an auto-gradeable format and tied to the text’s learning
objectives. Instructors can edit existing questions and write entirely new problems, track individ-
ual student performance—by question, assignment, or in relation to the class overall—with de-
tailed grade reports, and integrate grade reports easily with Learning Management Systems
(LMS) such as WebCT and Blackboard.
By choosing Connect, instructors are providing their students with a powerful tool for improv-
ing academic performance and truly mastering course material. Connect allows students to prac-
tise important skills at their own pace and on their own schedule. And, equally important,
students’ assessment results and instructors’ feedback are all saved online—so students can con-
tinually review their progress and plot their course to success.
Connect also provides 24/7 online access to an eBook—an online edition of the text—to aid
students in successfully completing their work, wherever and whenever they choose.

KEY FEATURES OF CONNECT

Simple Assignment Management
With Connect, creating assignments is easier than ever, so you can spend more time teaching and
less time managing.
• Create and deliver assignments easily with selectable end-of-chapter questions and test bank
material to assign online.
xiv PREFACE

• Streamline lesson planning, student progress reporting, and assignment grading to make
classroom management more efficient than ever.
• Go paperless with the eBook and online submission and grading of student assignments.

Smart Grading
When it comes to studying, time is precious. Connect helps students learn more efficiently by
providing feedback and practice material when they need it, where they need it.
• Automatically score assignments, giving students immediate feedback on their work and side-
by-side comparisons with correct answers.
• Access and review each response; manually change grades or leave comments for students
to review.
• Reinforce classroom concepts with practice tests and instant quizzes.

Instructor Library
The Connect Instructor Library is your course creation hub. It provides all the critical resources
you’ll need to build your course, just how you want to teach it.
• Assign eBook readings and draw from a rich collection of textbook-specific assignments.
• Access instructor resources, including ready-made PowerPoint presentations and media to use
in your lectures.
• View assignments and resources created for past sections.
• Post your own resources for students to use.

eBook
Connect reinvents the textbook learning experience for the modern student. Every Connect sub-
ject area is seamlessly integrated with Connect eBooks, which are designed to keep students
focused on the concepts key to their success.
• Provide students with a Connect eBook, allowing for anytime, anywhere access to the textbook.
• Merge media, animation, and assessments with the text’s narrative to engage students and
improve learning and retention.
• Pinpoint and connect key concepts in a snap using the powerful eBook search engine.
• Manage notes, highlights and bookmarks in one place for simple comprehensive review.

INSTRUCTOR RESOURCES
Solutions Manual The fully revised Solutions Manual contains in-depth answers and step-by-
step solutions for all assignment material included in the text.

Instructor’s Manual The thoroughly updated Instructor’s Manual includes learning objectives,
chapter overviews, classroom icebreakers, active learning techniques, comprehensive lecture notes,
writing assignments, and an assignment topic grid related to the coverage in the assignment material.

Computerized Test Bank The test bank contains more than 1,000 questions of the highest qual-
ity, varying in style and level of difficulty.

Microsoft® PowerPoint® Presentations With one presentation for every chapter of the text, in-
structors can guide their students through the text with ease. The slides have been adapted to fit
the fourth edition, and the addition of figures and diagrams increases their visual appeal.
 PREFACE xv

SUPERIOR LEARNING SOLUTIONS AND SUPPORT

The McGraw-Hill Ryerson team is ready to help you assess and integrate any of our products,
technology, and services into your course for optimal teaching and learning performance.
Whether it’s helping your students improve their grades, or putting your entire course online, the
McGraw-Hill Ryerson team is here to help you do it. Contact your iLearning Sales Specialist to-
day to learn how to maximize all of McGraw-Hill Ryerson’s resources!
For more information on the latest technology and Learning Solutions offered by McGraw-
Hill Ryerson and its partners, please visit us online: www.mcgrawhill.ca/he/solutions.

Solutions that make a difference.

 ACKNOWLEDGMENTS

Many people contributed to the development of this book and I take this opportunity to thank them.

Many thanks to faculty reviewers who devoted significant time and effort to reading the manu-
script as it developed and who provided valuable comments, suggestions, and criticisms, all of
which served to make the book better:
Peggy Coady, Memorial University of Newfoundland
Han Donker, University of Northern British Columbia
Gurpinder Gill, Mount Royal University
Ian Hutchinson, Acadia University
Michael Khan, University of Toronto
Jaime Morales, Trent University
Sandy Qu, York University
Shu-Lun Wong, Memorial University of Newfoundland

Thanks to Bic Ngo, then a fourth-year accounting student at the University of Ontario Institute of
Technology and now with Deloitte & Touche LLP, for the work he did on the solutions, and to
Katelyn Menard, currently a student at UOIT for her work on the solutions. Also, thank you to
Susan Cohlmeyer of Memorial University of Newfoundland for her technical checks and com-
ments, and to Ellin Bessner for writing the vignettes.

Various instructors assisted in preparing the set of supplements that accompany the book:
Sandy Hilton, University of British Columbia (Connect)
Jane Bowen, University of Ontario Institute of Technology
(Microsoft® PowerPoint® Presentations)
Lynn de Grace, McGill University (Test Bank)
Alla Volodina, York University (Instructor’s Manual)

I’d like to thank the many companies whose financial statement extracts are presented in the
book. It would be very difficult to write a book like this without real-world examples of financial
reporting. Also thanks to the companies that are featured in the chapter-opening vignettes.

The staff at McGraw-Hill Ryerson provided outstanding support to help develop and market the
book and were a pleasure to work with. Many thanks to the entire team, specifically Keara
Emmett, Sponsoring Editor; Chris Cullen, Developmental Editor; and Cathy Biribauer, Super-
vising Editor. Thanks also to Gillian Scobie and Rodney Rawlings for their work on the copy
editing and proofreading, respectively, of this book.

Finally, a special acknowledgment to Professor Al Rosen who helped shape and develop the way
I think about and teach accounting. His contribution to this book is significant.

John Friedlan
Faculty of Business and Information Technology
University of Ontario Institute of Technology
 CHAPTER
1 What Is Accounting and Why
LEARNING OBJECTIVES
After studying the material
in this chapter you will be
able to do the following:
LO 1 Define accounting and
explain why it’s important.
LO 2 Describe the accounting
environment and understand
that the accounting information
an entity presents is affected by
the accounting environment.
LO 3 Discuss how the interests
of the people who prepare
accounting information can
conflict with the interests of
those who use it.
LO 4 Explain what a critical
approach to accounting is.
LO 5 Understand the purpose
of accounting standards such
as International Financial
Reporting Standards (IFRS)
and Accounting Standards for
Private Enterprises (ASPE) and
be familiar with the different
sets of accounting standards
that are used in Canada.
LO 6 Understand that the
main purpose of accounting is
to measure economic activity
and that accounting measure-
ments can often be difficult
and subjective.
The Accounting Environment:
Is It Done?
W
hen Marvel’s The Avengers
movie opened across North
America on the first weekend
in May 2012, it earned over $200 mil-
lion at the box office and set a new rec-
ord for opening weekend ticket sales.
At Cineplex Entertainment’s Silver-
City Richmond Hill Cinemas, in Ontario,
some of that money came from the
wallets of moviegoers who shelled
out for a premium-priced $16.99 3D
ticket so they could experience the
action flick in the special UltraAVX Cineplex Entertainment
auditorium. These theatres offer re-
served seating, a Christie Solaria
digital projector, a wall to wall screen, 7.1 Dolby digital surround sound,
and leatherette high-back rocker seats with moveable arm rests.
But while Cineplex encouraged its customers to “Escape With Us”
and sit in the dark to watch Captain America team up with Iron Man, Hulk,
Thor, and Black Widow, executives at the company’s head office in
Toronto were also paying careful attention to a wide range of business
information in the world outside that could have an impact on their $1.8
billion company.
For example, the healthy eating trend prompted a switch to canola oil
for the popcorn. Concern for the environment has Cineplex using recyc-
lable popcorn bags and food trays, among other green initiatives.
Economic conditions have an effect as well because, according to Pat
Marshall, a Cineplex spokesperson, “Our business tends to grow during
difficult economic times as people downsize their more expensive out-
of-home entertainment offerings and find movies a more affordable form
of escapism.”
Technological developments are also a factor for Cineplex,
because people can now watch movies at home on DVD, D, or
via Netflix or Rogers On Demand, instead of fighting the he
lineups at the cinema.
“We compete for people’s available time and leisure dol-
lars,” Marshall acknowledged.
The company is also concerned about clamping down
on movie piracy, noting that piracy affects studios’
budgets, meaning that they might produce fewer and d
poorer quality movies.
Then there is government regulation to keep in mind.
Probably some of the people engrossed in watching
the blockbuster knew that Cineplex Inc. is also re-
quired to follow Ontario Film Review Board admission
2 CHAPTER 1

rules for who can see various movies. While the board rated The Avengers PG, for
Parental Guidance, Cineplex employees couldn’t allow just anyone in to watch The
Hunger Games. The board gave that movie a 14A classification, meaning that you had
to be older than 14 to see it, or else you had to be accompanied by an adult.
Cineplex’s Web site says it is “the largest motion picture exhibitor in Canada” with
130 theatres, 1,359 screens, and 10,000 employees, who it calls Cast Members. The
company owns several top-tier brands: Cineplex Odeon, Galaxy, Famous Players,
Colossus, Coliseum, SilverCity, Cinema City, and Scotiabank Theatres.
Companies like Cineplex also check the business environment to keep up with their
competitors, including AMC and Empire Theatres. After careful study of the industry,
Cineplex management decided to open a dozen more of its UltraAVX auditoriums
across Canada before the summer of 2012.
The stock market also has an impact on the Canadian entertainment powerhouse.
The share price on Bay Street for Cineplex stock was worth $31.28 on the Friday that
The Avengers opened, which is the highest level it had been in a year.
–E.B.

LO 1 WHAT IS ACCOUNTING AND WHY DOES IT MATTER?

I have spent over 30 years in accounting education and I still get excited and passionate when I
walk into a classroom to talk about the topic of the day. You may find this strange and surprising:
How can anyone get excited about accounting? But there is a lot more to the subject than most
people realize. Accounting is dynamic. It requires creativity. It can be controversial. Accounting
matters! It’s almost impossible to make good business decisions without relevant accounting in-
formation, and accounting information can be very relevant to personal decisions people make in
their day-to-day lives.
Some of the decisions that both business managers and individuals might use accounting in-
formation for are listed in Table 1.1. The details about how many of these decisions are made is
what this book is going to explore.

TABLE 1.1 • Determine whether or not to buy a business and how much to pay.
• Calculate the amount of tax to pay.
Business and
Personal • Evaluate whether to lend to a prospective borrower, and at what interest rate.
Decisions That • Assess whether or not you can afford to borrow money.
Rely on • Decide if you can afford to go on vacation.
Accounting • Determine how to divide family assets in a divorce.
Information • Find out how much money you have in the bank.
• Determine how to invest money in a retirement savings plan or a tax free saving account.
LO 1 • Determine bonuses earned by management.
• Evaluate whether to expand your business.
• Assess whether to make a product or to purchase it from an outside supplier.
• Evaluate how well managers have managed a business.
• Assess how well a business has performed.
• Determine if you should donate money to a particular charity. (Has the charity been managed well?
Is it using its money effectively?)
• Determine how much a business is worth.
• Evaluate how much regulated businesses should be allowed to charge for their goods and services.
• Evaluate if a government has provided effective and efficient financial management.
• Decide whether to make a major purchase like a computer or car.
 The Accounting Environment: What Is Accounting and Why Is It Done? 3

Most people don’t see accounting as it really is. Consider the following:
• Accounting isn’t a science. Indeed, it’s probably more an art than a science.
• Accounting isn’t precise or exact. Many estimates have to be made and uncertainty surrounds
most accounting numbers.
• Accounting doesn’t provide the “right” answer. There can be more than one reasonable answer
for many accounting situations.
• Accounting is flexible.
• Accounting requires judgment.
As you work through the material in this book keep these statements in mind. I’m not going to explain
them here, but as you learn more about accounting you will gradually come to see that they are true.

What Is Accounting? LO 1
Let’s begin with some definitions. Accounting is a system for gathering data about an entity’s eco-
nomic activity, processing and organizing that data to produce useful information about the entity,
and communicating that information to people who want to use it to make decisions (see Figure 1.1).
The entity is an economic unit of some kind, such as a business, university, government, or even a
person. Note that data and information aren’t the same thing. Data are raw, unprocessed facts about
an entity’s economic activity that are entered into an accounting system. Information results from
organizing and presenting the data in ways that make it useful for decision making by stakeholders.

FIGURE 1.1
The Accounting
System

Gather Process and

Communicate
Data Organize
Information
Data

While this definition of accounting may seem straightforward, it’s not. When designing an ac-
counting system, accountants and managers have to make many decisions about what data should
be gathered and how it should be organized. Communicating using accounting information pre-
sents the same complexities people face with any form of communication. Just as writers choose
words to influence readers, accountants can use legitimate, alternative ways of reporting the eco-
nomic activity of an entity to influence how people perceive financial information.

INSIGHT

Bookkeeping Is Not the Same as Accounting

It’s important not to confuse accounting and bookkeeping. When most people think of accounting,
what they are really thinking of is bookkeeping. For those of you who have taken an “accounting”
course in the past, what you may have been studying was bookkeeping—the process of recording
financial transactions and maintaining financial records. Bookkeeping is part of accounting, but only
one part. Accounting involves the design and management of information systems, how to account
for and report an entity’s economic activity, and the analysis and interpretation of financial information.
4 CHAPTER 1

LO 1 Why Does Accounting Matter?

Accounting matters because it has economic consequences—it affects people’s wealth—and it
can have an impact on the decisions they make. For example, suppose you owned a small busi-
ness, and you could choose between two legitimate and legal ways to account for a particular
transaction. One accounting method will result in paying less tax than the other. Which method
would you choose? Almost everyone would choose the one that involves paying the least amount
of tax. The economic consequence of your choice is that you keep more money and the govern-
ment gets less. Choose the other accounting method and the economic consequence is that you
have less money.
Does this example surprise you? In reality, accountants and managers can often choose among
alternative ways of accounting for transactions and economic events, and often the method
chosen has significant economic consequences. Indeed, how an entity accounts for its trans-
actions and economic events can have economic consequences for all the decisions described in
Table 1.1. One of the main themes of this book is explaining the choices available to accountants
and managers so that you can be a savvy user of accounting information and avoid unexpected
negative economic consequences.

LO 1 WHY DO PEOPLE NEED AND WANT

ACCOUNTING INFORMATION?
More and better information allows for better decisions. Without information, a “decision” is
nothing more than a guess. For example, suppose you wanted to take a vacation over the winter
break. You see an advertisement in the newspaper promoting Aruba as a fabulous winter des-
tination. Assuming you have never been to Aruba and know little about it, would you simply
accept the advertisement’s claims at face value? Most wouldn’t. Most people would probably
want to find out whether Aruba offered what they wanted from a winter vacation. They might
ask friends and relatives if they know anything about Aruba, do research in the library or on the
Internet, or consult with expert sources that specialize in travel information, such as a good
travel agent or a guide published by an independent company. They would gather information
until they were comfortable making a decision. Not all information is equal; in making a deci-
sion, you would generally give more weight to the information that is most reliable and most
relevant to your needs.
What does a trip to Aruba have to do with accounting? To make good decisions, whether
about a winter vacation or a business strategy, people need good information. Every day people
make important decisions, both for themselves and on behalf of other entities: individuals decide
how to invest their retirement money, bankers decide whether to lend money to struggling busi-
nesses. Table 1.1 lists other decisions people have to make.

INSIGHT

The Cost-Benefit Trade-off

While more information leads to better decisions, there are limits. It’s usually not possible or worth-
while to collect all the information available on a subject. First, gathering and analyzing information is
costly and takes time. At some point the benefit isn’t worth the cost. The concept of comparing the
benefits of an action with its costs, and of taking the action only if the benefits are greater, is known
as the cost-benefit trade-off. Information should be collected only if the benefit from it exceeds its
cost. (For example, it’s probably not worth the cost in time and money to call a university to find out
the colour of the carpeting in its lecture halls.) Second, there are limits to the amount of information
people can effectively manage and process. Too much information or “information overload” can
impair a person’s ability to make decisions.
 The Accounting Environment: What Is Accounting and Why Is It Done? 5

QUESTION FOR CONSIDERATION

Explain why a potential vacationer to Aruba would likely find travel information published by Aruba’s gov-
ernment travel department less credible than information provided by an independent travel company.

ANSWER: The objective of the government travel department is to encourage people to visit the is-
land. Its publications will likely emphasize the favourable qualities of the island and downplay or ig-
nore negative ones. In contrast, an independent travel company’s objective (if it’s truly independent)
should be to provide a useful service to its customers that will encourage them to use the company’s
services again (the company will make more money if it can generate repeat business). As a result,
its information is less likely to be biased. This doesn’t mean the information provided by Aruba’s gov-
ernment travel department wouldn’t be useful. It means that a user should recognize the probable
bias, and its implications, when assessing the information.

Let’s consider an example of how information can improve a business decision. Suppose you
were approached by a recent acquaintance who asked you to lend a significant amount of your
own money to her business. What would you want to know before you agree? Your first key ques-
tion would probably be, “Will the company be able to pay back the money borrowed, plus interest?”
A second question would be, “If the company were unable to pay me back, what resources does it
have that I could take and sell to recover my money?”
This is where accounting comes in. In answer to the first question, accounting information might
be helpful in telling you how well the business has performed in the past and how much cash it has
been able to generate. This information might help you predict how the business will do in the fu-
ture. To help answer the second question you might want a list of the resources the business owns
and a list of other entities it owes money to so you can see what would be available to you if the loan
weren’t repaid. You can probably think of more examples. Of course, non-accounting information,
perhaps about the people managing the business, might also be helpful in making your decision.

KNOWLEDGE CHECK 1.1

What is accounting?
What is meant by the statement “accounting has economic consequences”?
What is the cost-benefit trade-off? Why is it usually not appropriate to collect all possible infor-
mation that might be useful in making a decision?
Explain the difference between data and information.

THE ACCOUNTING ENVIRONMENT LO 2

How an entity reports its economic activity in its financial statements or other type of accounting
report is influenced by the circumstances under which the activity is occurring. Accounting was cre-
ated to provide a record of economic activity and information useful in decision making, so it makes
sense that accounting should be responsive to the environment and the people using the informa-
tion. To say that all economic activity should be accounted for in the same way makes no more sense
than saying that everyone should live in the same type of house or drive the same type of car. There
are different types of houses and cars because people have different needs, dictated by factors around
them such as climate, family, wealth, and employment, as well as personal preferences.
Therefore, before we start our examination of accounting information we will explore the
accounting environment and consider the factors that can affect how an entity approaches its
6 CHAPTER 1

financial reporting. There are four key components of the accounting environment: overall en-
vironment, entities, stakeholders, and constraints. These components are displayed in Figure 1.2
and discussed below.

Environment
The character of a county’s institutions influence the way its citizens live their lives. Canada, for
example, is a constitutional democracy with a mixed economy and a legal system based on British
common law (except for Quebec, which uses the civil code). The environment “umbrella” at the
top of Figure 1.2 identifies some of the important factors that establish the structure of a society:
political, cultural, economic, competitive, regulatory, and legal parameters. The differences in
these between countries help explain why accounting rules vary from country to country.

FIGURE 1.2
Economic * Competitive * Regulat
The Accounting ca l * Cultural * ory * L
Polit i egal
Environment
ENVIRONMENT

CHARACTERISTICS OF ENTITIES CONSTRAINTS

• Size • Customers • Contractual Limits to Managers’ Reporting Choices
• Industry • Suppliers obligations • Contracts • Income Tax Act
• Risk • Distribution • Public vs. private • Accounting • Demands of powerful
• Ownership channels • Stage in lifecycle standards stakeholders
structure • Capital structure • Moral and ethical • Securities legislation
• Labour force • Need for financing considerations • Other
• Other • Law

ENTITY
Types of Entities
• Individual • Not-for-profit
• Corporation organization
• Partnership • Government
• Proprietorship • Industry
• Other

Other
Managers decide how to report
sources
of Information
information

STAKEHOLDERS
• Shareholders • Unions • Potential shareholders • Governments • Public
• Partners • Regulators • Managers • Politicians • Competitors
• Proprietors • Creditors • Donors • Analysts • Bond raters
• Employees • Tax authorities • Customers • Communities • Journalists
• Other

DECISIONS
 The Accounting Environment: What Is Accounting and Why Is It Done? 7

Entities
Entities are at the centre of the accounting environment because stakeholders are looking for in-
formation about them and it’s the entities that typically provide the accounting information stake-
holders need. There are three categories of business entities—corporations, proprietorships, and
partnerships—as well as not-for-profit organizations, governments, and individuals. Let’s take a
brief look at some of the different types of entities.

Corporations A corporation is a separate legal entity created under the corporation laws of
either Canada, one of the provinces, or some other jurisdiction in the world. Corporations have
many of the same rights and responsibilities as individuals. For example, they must file tax re-
turns, can be sued, and can enter into contracts (to borrow money, to provide goods or services to
customers, etc.).
Ownership in a corporation is represented by shares, and owners of shares are called share-
holders. Shares are issued to investors when a company is formed, and they can be issued at any
time during a corporation’s life.
One of the most important features of a corporation is that it provides limited liability to its
shareholders, which means that shareholders aren’t liable for the obligations of the corporation or the
losses it suffers. For example, if a corporation borrows money and is unable to repay the loan, the
lender can’t demand repayment from shareholders. Another attractive feature of corporations is that
share ownership is easily transferred without affecting the corporation, which simply carries on busi-
ness with new owners. For other types of entities a transfer of ownership can be more difficult.
Shares of public corporations can be purchased by anyone interested in owning part of the
company. The shares are usually traded on a stock exchange—a place (physical or virtual) where
the shares of publicly traded entities can be bought and sold. Examples of exchanges are the Toronto
Stock Exchange (TSX), the TSX Venture Exchange, and the New York Stock Exchange (NYSE). www.tsx.ca
In contrast, the shares of private corporations can’t be purchased unless the entity or its share-
holders agree. If you set up your small business as a corporation, and you are the sole shareholder,
no one could obtain shares unless you wanted to sell them. Most corporations in Canada are pri-
vate. Examples of Canadian public and private corporations are given in Table 1.2.

Proprietorships A proprietorship is an unincorporated business with one owner. Unlike a cor-

poration, a proprietorship isn’t a separate legal entity. It doesn’t pay taxes; instead, the proprietor
(the owner of the proprietorship) includes the money made by the proprietorship in his or her
personal tax return, along with income from other sources, such as employment. If a proprietor-
ship doesn’t meet its obligations any entities that are owed money can attempt to recover it by
seizing the proprietor’s personal assets, such as his or her house, car, or bank account. An attract-
ive feature of proprietorships is that, unlike corporations, they are easy and inexpensive to set up.

TABLE 1.2 Examples of Public and Private Canadian Corporations

Name of Corporation Ownership Type of Business Web Site
Canadian Tire Corporation Public Retail www.canadiantire.ca
Loblaw Companies Limited Public Food distribution www.loblaw.ca
Research In Motion Limited Public Technology www.rim.com
Royal Bank of Canada Public Bank www.rbc.com
WestJet Airlines Ltd. Public Transportation www.westjet.com
Maple Leaf Sports and Entertainment Limited Private Sports and entertainment www.mlse.com
McCain Foods Limited Private Food processing www.mccain.com
McDonald’s Restaurants of Canada Ltd. Private Food services www.mcdonalds.ca
Home Hardware Stores Limited Private Retail www.homehardware.ca
Irving Oil Limited Private Fuel oil dealer www.irvingoil.com
Another random document with
no related content on Scribd:
oozing through the envelope swelled each egg, till they clung
altogether in a mass, and, rising, floated at the top. Then very soon
each round dot lengthened out into a long streak, and in a few days an
eyeless head appeared at one end with a soft closed mouth under it,
and at the other a tail, with a soft fin round it like the tail of the lancelet;
so that by the time you find the spawn, you may, most likely, be able to
see the tiny creature wriggling every now and then in its watery bed.
This will go on for some time, and a week or two may pass before the
moving tadpole breaks through its egg skin, and coming out into the
world, fastens on to a piece of weed (1, Fig. 15) by two little suckers
behind its mouth. And now that it is out of the egg the interest begins.
Look carefully day after day and you will see some branching tufts (2,
Fig. 15) growing larger and larger on each side of its head. What are
these? We have not seen them in any fish. No! but if you take a young
hound-shark out of his leathery egg before his time, you will find that
he has outside gills much like these, only he loses them before he
comes out into the world, whereas the tadpole keeps them to breathe
with a little longer. If you put the tadpole, at this stage, under the
microscope, you can see the red blood flowing through these gills to
take up air out of the water.
Meanwhile the tadpole’s lips are gradually forming into a round
mouth, much like the lamprey’s, and by-and-by the inner part of this
mouth is covered with two little horny jaws, forming a sharp beak (3,
Fig. 15) with which he will nip off pieces of weed for food. Meanwhile,
as he grows larger and larger, and eyes, nostrils, and flat ears form in
the head, a covering begins to grow back over the sides of the neck,
and little by little the branching tufts disappear (3, Fig. 15). How, then,
can he breathe now? Watch carefully and you will see that he gulps
every moment as we saw the minnow doing (p. 23). The fact is that the
outside tufts have faded away, and under the cover the tadpole has six
slits in his throat, like the slits of the lamprey, which are covered in
somewhat similar fashion to those of the amphioxus (see p. 11), and
he breathes through them.
Here is our tadpole, then, to all intents and purposes a fish. He
swims with a fish’s tail; he gulps in water at his mouth, passing it out at
the slits in his throat after it has poured over his fish’s gills. Moreover,
he has a fish’s heart, of two chambers only, like the minnow’s (p. 23),
which pumps the blood into these gills to be freshened, while, like the
lamprey, he has a gristly cord, enlarged at the end to form a gristly
skull, a round sucking mouth, and no limbs. All this time, however,
though he has a fish’s fin round his tail, he has no arm or leg fins. Wait
a while and you will see that under his tender skin far more useful
limbs are being prepared. As he grows bigger and more active week
by week, wriggling among the weeds and feeding greedily, two little
bumps appear one on each side of his now bulky body, just where it
joins the tail. These bumps grow larger every day, until, lo! some
morning they have pierced through the skin, and two tiny hind legs (4,
Fig. 15) are working between the body and the tail. The two front legs
are longer in coming, for they are hidden under the cover which grew
over the gills, but in about another week they too appear, and we have
a small four-legged animal with a lamprey’s tail (5, Fig. 15). These legs
are something far in advance of fish fins, for they have shoulders and
thighs, arm and leg bones, wrist and ankle bones, hand and foot
bones; and instead of the large number of rays in a fish’s fin they have
four fingers on their short front legs, and five toes at the end of long
hind ones; the toes being joined together by a web, which helps him
wonderfully in striking the water as he swims.
The tadpole has now become fitted to jump and leap on the land or
swim by his legs in the water; and, moreover, while these legs have
been growing, another change has been taking place. You will notice
by careful watching that at first he still gulps in water as he used to do,
but he comes more often to the top, and, poising himself so that his
mouth is out of the water, gives out a bubble of bad air, draws in some
fresh, and goes down again. Why does he do this? Have you any
recollection of another fish-like animal which comes up to take in air?
Look back at our friends the mud-fishes (p. 34), and read how the
Ceratodus fills his air-bladder when he is short of good air in the water.
When you have re-read this, you will suspect that the tadpole, too, has
something like an air-bladder, which he fills from time to time. And so
he has. While his legs are growing a bag has been forming inside at
the back of his throat, which afterwards divides into two, and he fills
these by shutting his mouth, drawing air in at his nostrils, putting up the
back of his tongue to shut it in, and then swallowing it down into the
lungs; so that he is now a truly double-breathing animal, using his gills
when below water and his lungs when above. Moreover, if you could
watch inside his body, you would now see that little by little the blood-
vessels going to the gills grow smaller and smaller, and those going to
the lungs grow larger and larger; while the fish’s two-chambered heart
divides into three chambers, one to receive the blood from the body,
another to receive it from the lungs, and one to drive this blood back
again through the whole animal. And when at last this change is so
complete that all the blood goes to the lungs to be freshened, the gills
shrivel up and disappear, and our tadpole is a true air-breathing
animal.
Notice, though, that he is still cold and clammy, not warm like a
mouse or a bird. For his blood still moves slowly, and as he has only
three chambers to his heart instead of four, as warm-blooded animals
have, the good blood from the lungs and the worn-out blood from his
body become mixed each time they come round, so that his breathing
work is still of a low kind all his life. And now that he can leap and swim
with his legs, his tail is no longer of use to him, and it is gradually
sucked in, growing shorter and shorter till it disappears, and the young
frog is complete.
Thus our backboned animal has succeeded in getting out of the
water on to the land, and in doing so he has quite changed his habits.
A peaceful vegetarian before, he is now a greedy eater of insects,
slugs, and other animals. His horny beak has been pushed off; his lips
have stretched back farther and farther, till they now open right back as
far as his flat little ear; and he is a gaping, wide-mouthed, leaping
55
frog —

... “Hoarse minstrel of a strain

Aquatic, leaping lover of the rain;”

(7, Fig. 15), with teeth in the roof of his mouth. But perhaps his
tongue is the most curious of all, for instead of being fixed at the back,
and free in the front, as in most other animals, the root of it is fastened
to the front of his lower jaw, and the tip lies back in his mouth, so that
when he wishes to catch an insect he throws his tongue quickly
forward, captures his prey on the sticky point, and flings it back down
his throat.
So he hops about the summer long, if he can only escape from
ducks and rats and other frog-eating animals. He often takes to the
water, for he can fill his lungs with air and use it very slowly, and,
moreover, his soft skin is of great use to him in still breathing in the
water or in the moist air; and when winter comes he takes refuge with
many others at the bottom of the pond, and sinks into a state of torpor,
till the spring brings croaking and egg-laying time round again.

Fig. 16.

The Common Smooth Newt56—male and young in

the water; female on the bank.

Our little frog, then, is truly an animal with a double life, a genuine
57
amphibian, meaning by this, not merely an animal that can swim in
the water and move on land, for seals and water-rats, white bears and
hippopotamuses, can do this, but one that in the early part of its life
would die if taken out of the water, while afterwards it lives and
breathes in the air.

Fig. 17.

Proteus of the Carniola caverns,58 with its external

breathing gills.—(Adapted from Brehm.)

Have these double-lived creatures, then, such a great advantage

over real water animals, or how can we account for their having
adopted this strange life? If we only look upon them as they are now,
we can scarcely call them particularly successful, compared to other
animals. For though there are plenty of them, yet they are
comparatively small and insignificant; and when we find large ones like
the gigantic salamander of Japan, they are sluggish and feeble. Look
at the common newts, or water-salamanders of our ponds, with their
weak crawling limbs, as they wander round the edges of a pond,
feeding on water-insects and tadpoles, the male with his crested back,
the smooth mother, and the young eft-tadpole with its branching tufted
gills (Fig. 16). They are much less active than the frog, for they never
lose their tails, and they come less often out of the water, although
they are true air-breathing animals. Then, when we go to other
countries, there is the Proteus (Fig. 17), that curious half-transparent
newt, with a round body and tiny helpless legs, which lives in eternal
darkness in the still underground pools of the Carniola caverns near
Adelsberg. He has become well fitted for his dismal life, for his tiny
eyes are grown over with skin, and he never loses the feathery gills on
each side of his neck, but lives like a tadpole all his life, although he
has true lungs. Again, in America we have the Siren, with its long
snake-like body, and only front legs, with which it cannot walk. It, too,
keeps its gills as it wanders about the stagnant waters of South
Carolina, feeding on worms and insects. Then in the Mexican lakes
there are the curious Axolotls, which also wear outside gills, as a rule,
all their lives, and fathers, mothers, and children remain breathing in
the water together, although they have real lungs. But about twenty
years ago, some of those axolotls, which were kept in the Jardin des
Plantes in Paris lost their gills, came out upon the land, and astonished
people by becoming true land salamanders, like some already well
known and called Amblystomes, breathing only with their lungs. It was
difficult for some time to make the world believe that grown-up water-
breathing creatures which could lay eggs were able to turn into other
creatures without gills. But at last a lady, Fraulein Marie von Chauvin,
took some axolotls when they were full-grown, and kept them on land
in wet moss, washing and feeding them every day, and thus
succeeded in teaching them to breathe air, so that their gills shrivelled
up and disappeared. Then there could no longer be any doubt that the
axolotl is only the lower water-form of the amblystoma, which in the
Mexican lakes, owing to the increased dryness of the surrounding
country, has lost the habit of coming out on to the land, and remains in
the water with its little ones all its life; but which, when brought to a
moist climate where it can breathe comfortably on land, sometimes
returns to its old double life.
 Fig. 18.

Axolotl, a creature living and breeding for generations in

the water. Amblystoma coming out of the water,—an axolotl
which has lost the gills and acquired lungs.

We have, in fact, in Europe real land salamanders, which live in

cool damp places, looking like lumpy soft-skinned lizards, but going
down to the water to lay their eggs, that their little ones may go through
59
their tadpole life—and one of these, the black salamander, which
lives high up in the mountains of Germany, France, and Switzerland,
does not even go to the water, but carries the young tadpoles in her
body till they can breathe air and run alone; and yet they are still true
amphibia, for if they are taken out of their mother and put in water, they
go through all their changes like common efts and newts.
Lastly, there is a strange group of legless creatures called
Cæcilians, which have taken refuge underground, burrowing like
worms, though they are true amphibians and their young have gills in
their babyhood hidden under a slit in the neck. These cæcilians are the
only amphibians which have scales something like fishes, yet they
never live in the water, but in the marshy ground of tropical countries,
feeding on worms and insects.

* * * * *
Now when we think that these sluggish newts, and salamanders,
and cæcilians, with their more nimble but comparatively unprotected
relations, the frogs, are all the amphibians now living, we cannot but
wonder how Life came to produce such a feeble set of creatures to
fight the battle of existence.
But if we glance back to that far-off time when the ancient fishes
were wandering round the shores and in the streams of the coal-
forests, we shall be better able to read the riddle. For in those days it
was a great step for an animal to get out of the water at all, and those
that did so had a much better time of it than our frogs and newts have
now, when the country is full of land enemies.
And so we find that the amphibia were not then the small scattered
groups they are now, but strong lusty animals, with formidable
weapons. In the hardened mud, which in those days formed the soft
swampy ground of the coal-forests, but is now stiffened into the roofs
and floors of our coal-mines, footprints have been left which tell us of
large and formidable creeping animals, with toed feet and long flat
tails, dragging themselves over the marshes of the coal-forests, and
finding their way to many places which even the mud-fish with their
paddles could not reach; and from time to time, in these same roofs
and floors of our mines, both here and in America, we find the bones
and coverings of these amphibia, buried in Nature’s catacombs for
ages, and only brought to light by the rude hand of man.
These remains remind us that

“A monstrous eft was of old the lord and master of earth,

For him did the high sun flame, and his river billowing ran.
And he felt himself in his force to be Nature’s crowning race;”
 60
for they show us huge and powerful creatures which sported in the
water or wandered over the land with sprawling limbs, long tails, and
bones on which gills grew, while their heads were covered with hard
bony plates, and their teeth were large, with folds of hard enamel on
the surface. Some of these were fish-like, with short necks and broad
flat tails, but they had true legs and toes; others, more like crocodiles,
and sometimes ten feet long, were able to walk firmly, but still dragging
their bodies and long tails over the swampy ground on which their
footprints are still found; some were small and more like lizards, with
simple teeth, scaly armour, and light nimble bodies; and these,
probably, ran about quickly on the land, and have sometimes left their
skeletons in the hollow trunks of the old coal-forest trees.
All these plated and formidable creatures were amphibia or
double-lived animals, and this was their Golden Age, as they preyed
upon the fishes in the swamps and ponds, probably not sparing even
their nearest connections, the mud-fishes, who, less fortunate than
themselves, had followed the road of fish-life instead of coming out
upon the land. They lived so long ago that we can tell but little of their
daily lives, but it is clear that they played a very different part from our
small frogs and newts of to-day, and in their well-formed limbs were
worthy forerunners of land and air-breathing animals.
But like the old race of fishes these large amphibians were only to
have their day, for as other branches of the family tree grew up, and
reptiles grew strong and mighty, and other true land animals began to
flourish, these huge plated forms dwindled away, and we lose sight of
them; and when we find any of their relations again it is only as our
present frogs and newts, salamanders and cæcilians, which have
taken up their refuge in lakes, ponds, ditches, underground waters, or
damp mud. And, curiously enough, those forms of to-day which are
61
most like the huge Labyrinthodonts, as they are called, of the old
coal-forests, are the feeble cæcilians, with their horny scales and their
numerous ribs, although they have now fallen the lowest of all
amphibians, and, with their sightless eyes and ringed and legless
bodies, have taken to burrowing in the ground like worms.
Not so the frogs, which, like the bony fishes, began their career in
later times, and have known how to fit themselves into many nooks
and corners in life. In almost all countries of the globe they hop merrily
about the ponds and ditches, never wandering far from the water, into
which they jump and dive whenever danger threatens. It is true they
are eaten by thousands, both as tadpoles and frogs, by birds, snakes,
water-rats, and fish, and even by each other, but they multiply fast
enough to keep up the supply, and find plenty of insects both in and
out of the ponds. Nor have they kept entirely to a watery life, for their
near relations, the toads, which have toothless mouths and toes less
webbed, have ventured much farther on to the land, protected partly,
no doubt, by the disagreeable acrid juice which they can throw out
from a gland behind the eye whenever they are attacked.
It is curious to notice the quiet leisurely waddle of the sluggish
toad, as he spreads out his short fat legs and puffs out his warty skin,
and to compare him with the nervous, anxious, little frog, starting at
every danger. And still more curious is it to see him getting out of his
skin, as he does several times a year. For his skin does not peel off in
pieces as it does in the watery frogs, but splits along his back; then he
wriggles about till it lies in folds on his sides and hips, and, putting one
of his hind feet between the front ones, draws the skin off the leg like a
stocking off a foot. With the other leg he does the same, and then,
drawing out his front legs, pulls the whole skin forward, and stripping it
over his head, swallows it; thus deliberately putting his old coat inside
him, and appearing in one that is glossy, fresh, and new. The toad has
many enemies in spite of his acrid taste, and he shows his wisdom by
hiding in walls and under stones in the daytime, and coming out in the
dusk of evening to hunt the beetles and grubs so often out of reach of
the water-loving frog.
 Fig. 19.

The Flying Tree-Frog of New Guinea62 (Wallace).

But the toad is not the only land relation of the frog; there are
others of the group that venture even farther from water; for in most
parts of the world (though not in England), tree-frogs, with sucking
disks at the ends of their toes and fingers, climb the trees and hunt for
insects among the leaves and branches; while in Borneo Mr. Wallace
found one (Fig. 19) with webbed feet, which it spread out, and so flew
down from the trees. There are plenty of the ordinary tree-climbing
frogs to be seen in the south of France, their small green bodies
peeping out from under the dull gray olive-leaves; and to be heard, too,
in an endless chorus all night long when the spring arrives.
 But how can these tree-dwellers bring up their little ones in water?
Some of them come down and lay their eggs in the ponds, and even
sleep down in the mud in winter. Others lay their eggs in little puddles
of water in the hollows of the trees, and there the young ones live their
tadpole life; while in one curious tree-frog of Mexico, called the
Nototrema, the mother has a pouch in her back, and the father places
the eggs in it for the little tadpoles to live in a moist home till they leap
out as perfect frogs.
Nor is this the only case in which fathers and mothers take care of
63
their young. In one species of frogs living near Paris, the father
winds the long string of gluey eggs round his thighs, and buries himself
in the ground till the young tadpoles are ready to come out, and then
he leaps into the water. And in one of the tongueless toads, the
64
Surinam toad, the mother’s soft skin swells up, forming ridges and
hollows, and when her eggs are laid the father clasps them in his feet,
and, leaping on her back, puts an egg into each hollow. Then the
mother goes into the water, and remains there while each tadpole
completes its changes in its own hole, jumping out at last a finished
toad.
Yet, in spite of curious habits such as these, the frogs and their
companions on the whole lead a very monotonous life. They are, it is
true, more intelligent than fish, and have learned to know more of the
world, but in the long ages that have passed since their ancestors
roamed in the coal-forest marshes, other and higher animals have
taken possession of the land, and left room only for a few scattered
groups of amphibia. Still, however, they remain hovering between two
lives, and filling such spots as neither the fishes nor the land animals
can occupy; and when we hear them croaking in the quiet night, or see
them leaping on the marshy ground, they remind us that we have still
living in our day, a link between the fish whose world is a world of
waters, and the air-breathing animals which have become masters of
the land.
THE REPTILES IN THEIR PALMY DAYS.
 CHAPTER V.
THE COLD-BLOODED AIR-BREATHERS OF THE
GLOBE IN TIMES BOTH PAST AND PRESENT.

And now the transformation is complete, for when we pass on to the

next division of backboned animals, the “Reptiles,” we hear nothing
more of gills, nor air taken from the water, nor fins, nor fishes’ tails.
From this time onward all the animals we shall study live with their
heads in the air, even if their bodies may be in the water; they swim
with their legs or, as in the case of the snakes, with their wriggling
bodies, and they lay their eggs on the land where their young begin life
at once as air-breathers.
Yet they can often remain for a long time both under water and
under ground, for they are still cold-blooded animals, breathing very
slowly, and easily falling into a state of torpor when the air around them
is cold and chill. They are but the first step, as it were, to active land-
animals; yet they have played a great part in the world, and when we
know their history we shall be surprised to find how much Life has
been able to make of her cold-blooded children.
To learn how this has been, however, we must travel away from
home and our own surroundings. The tiny brown lizard which runs over
our heaths, while its legless relation, the slowworm, burrows in the
ground,—the few snakes which glide through the grass of our
meadows, and the stray turtles thrown at rare intervals on our shores,
—tell us very little about true reptile life. It is to Africa, India, South
America, and other warm countries, that we must go to find the
formidable crocodiles, huge tortoises, large monitor-lizards, and
dangerous boa-constrictors, cobras, and rattle-snakes. And even then,
strong and powerful as some of these creatures are, they do not tell us
half the history of the cold-blooded air-breathers. For the day of reptile
greatness, like that of the sharks and enamel-scaled fish, was long
long ago.
Now that we know how frogs pass from water-breathing to air-
breathing, and how axolotls, accustomed to live all their life in the
water, can lose their gills and become land-animals, we can form an
idea how in those ancient days, while still the huge-plated newts were
wandering in the marshes, some creatures which had lost their gills
would take to the land, and their young ones starting at once as air-
breathers, as the black salamanders do now (see p. 80), would in time
lose all traces of the double or amphibian life, and become true air-
breathing reptiles.
At any rate, there we find them appearing soon after the coal-forest
period passed away, at first few and far between, in company with the
large amphibians, but spreading more and more as the ages passed
on, till they in their turn became monarchs of the globe. Already, when
65
the coal-forests had but just passed away, a lizard, in some points
like the monitors that now wander on the banks of the Nile, was living
among his humbler neighbours; and from that time onwards we find
more and more reptiles, till just before the time when our white chalk
was being formed by the tiny slime-animals at the bottom of the sea,
we should have seen strange sights if we could have been upon the
globe. For the great eft was no longer
“... lord and master of earth.”
All over the world, and even in our own little England, which was
then part of a great continent, cold-blooded reptiles of all sizes, from
lizards a few inches long to monsters measuring fifty or sixty feet from
head to tail, swarmed upon the land, in the water, and in the air. There
were among them a few kinds something like our tortoises, lizards, and
crocodiles; but the greater number were forms which have quite died
out since birds and beasts have spread over the earth, and a
wonderful and powerful set they were.
Some were vegetable-feeders, which browsed upon the trees or
fed upon the water-weeds, as our elephants and giraffes, our
hippopotamuses and sea-cows do now. Others were ferocious animal-
eaters, and their large pointed teeth made havoc among their reptile
companions, as lions and tigers do among beasts. Some swam in the
water devouring the fish, while others, like birds or bats, soared in the
air.
In the open ocean were the sea-lizards, some called Fish-
66
Lizards, like huge porpoises thirty feet long, but really cold-blooded
reptiles, with paddles for legs, and long flattened tails for swimming.
Woe to the heavily-enamel-scaled fish when these monsters came
along, their pointed teeth hanging in their widely-gaping mouths as
they raised their huge heads, with large open eyes, out of the water!
Then among these were others with long swan-like necks and small
67
heads, which would strike at the fish below them in the water, while
68
other slender, long-bodied monsters, measuring more than seventy
feet from tip to tail, flapped along the sea-shore with their four large
paddles, or swam out to sea like veritable sea-serpents, devouring all
that came in their way. These were all water-reptiles, while there were
also many smaller land-lizards playing about upon the shore, and
among the trees and bushes. But the strangest of all were perhaps the
69
“Flying reptiles” of all sizes, from one as small as a sparrow to one
which measured twenty-five feet from tip to tip of its wings. These
reptiles did not fly like birds, for they had no feathers, but only a broad
membrane, stretching from the fifth finger of their front claw to their
body, and with this they must have flown much as bats do now, while
some of them were armed not only with claws, but also with hooked
beaks and sharp teeth, with which they could tear their prey.
And meanwhile upon the land were wandering huge creatures,
larger than any animal now living, which were true reptiles with teeth in
their mouths, yet they walked on their hind legs like birds, probably
only touching the ground with their short front feet from time to time, as
kangaroos do. They had strong feet with claws, the marks of which
they have left in the ground over which they wandered, supporting
themselves by their powerful tails as they went.
70
Some of them were peaceful vegetarians, browsing on the tree-
ferns and palms, and rearing their huge bodies to tear the leaves from
the tall pine-trees. But others were fierce animal-feeders. Fancy a
71
monster thirty feet high, with a head four or five feet long, and a
mouth armed with sabre-like teeth, standing upon its hind legs and
attacking other creatures smaller than itself, or preying upon those
other huge reptiles which were feeding peacefully among the trees.
Surely a battle between a lion and an elephant now would count as
nothing compared to the reptile-fights which must have taken place on
those vast American lands of the west, or on the European pasture-
grounds, where now the remains of these monsters are found.
But where are they all gone? We know that they have lived, for we
can put together the huge joints of their backbones, restore their
gigantic limbs, and measure their formidable teeth, but they
themselves have vanished like a dream. As time went on, other and
more modern forms, the ancestors of our tortoises, lizards, crocodiles,
and afterwards snakes, began to take the place of these gigantic
types; while warm-blooded animals, birds and beasts, began to
increase upon the earth. Whether it was that food became scarce for
these enormous reptiles, or whether the birds and beasts drove them
from their haunts, we are not yet able to find out. At any rate they
disappeared, as the ancient enamelled fishes and large newts had
disappeared before them, and soon after the beds of white chalk were
formed, which now border the south of England and north of France,
only the four divisions of tortoises, lizards, crocodiles, and snakes,
survived as remnants of the great army of reptiles which once covered
the earth.

* * * * *
Ah! if we could only have a whole book upon reptiles to show how
strangely different these four remaining groups have become during
the long ages that they have been using different means of defence;
and how, even in a single group, they employ so many varied
stratagems to survive in the battle of life! Look at the tortoises with
their hard impregnable shells, the crocodiles with their sharp-pointed
teeth and tough armour-plated skins, and the silently-gliding snakes
with their poisonous fangs or powerful crushing coils. See how the tiny-
scaled lizard darts out upon an insect and is gone in the twinkling of an
eye, and then watch the solemn chamæleon trusting to his dusky
colour for protection, and scarcely putting one foot before another in
the space of a minute.
 Each of these has his own special device for escaping the dangers
of life and attacking other animals, and yet we shall find, before we
finish this chapter, that they are all formed on one plan, and that it is in
adapting themselves to their different positions in life that they have
become so unlike each other.
We shall all allow that the Tortoises are the most singular of any,
and it is curious that they are also in many ways the nearest to the
frogs and newts, although they are true reptiles. Slow ponderous
creatures, with hard bony heads (Fig. 20), wide-open expressionless
eyes, horny beaks, and thick clumsy legs, the tortoises seem at first
sight to be only half alive, as they lumber along,

“Moving their feet in a deliberate measure

Over the turf,”

carrying their heavy shell, and eating, when they do eat, in a dull
listless kind of way. They do, in truth, live very feebly, for they can only
fill their lungs with air by taking it in at the nostrils and swallowing it as
frogs do, and then letting it drift out again as the lungs collapse, for
their hard shell prevents them from pumping it in and out by the
movement of their ribs like other reptiles. This slowness of breathing
and the fact that they have only three-chambered hearts like frogs (see
p. 76), so that the good and bad blood mix at every round, causes
them to be very inactive, and they digest their food very slowly, and
have been known to live months and even years without eating.
 Fig. 20.

The Greek Tortoise.

This sluggishness would, indeed, certainly be their ruin in a

bustling greedy world, if it were not for the strong box in which they
72 73
live. Take in your hand one of the small Greek or American
tortoises, so often sold as pets, and you will see how well he can draw
back out of harm’s way, while at the same time you will, I think, be
sorely puzzled to understand how he is made. His head, his four legs,
and his tail, with their thick scaly skin, are intelligible enough. But why
do all these grow on to the inside of his shell, so that when you trace
them up you cannot find the rest of his soft body? You would hardly
guess that his shell is the rest of his body, or at least of his skeleton.
But it is so. The arched dome which covers his back is made of his
backbone and ribs, and the shelly plates arranged over it are his skin
hardened into horny shields, which, in the Hawksbill turtle, form the
tortoise-shell which is peeled off for our use; while the flat shell under
his body is the hardened skin of his belly, and the bones which belong
to it.
 Fig. 21.

Carapace of the Tortoise.

j, Joints of the backbone grown together; r, ribs formed into a

solid cover; sh, shoulder bones; h, hip bones covered by
carapace, which has grown over them.

Let us make this clear, for it is a strange history. If you look at the
skeleton of a lizard (Fig. 23, p. 103), it is all straight-forward enough.
His head fits on to his long-jointed backbone, which is able to bend in
all parts freely, down to the very tip of his tail. His front legs with their
shoulder bones (s), and his hind legs with their hip bones (h), are
attached in their proper places to his backbone, and lastly, his ribs (r)
protect the inside of his body, and by expanding and contracting pump
the air in and out of his lungs, the front ribs being joined underneath in
a breastbone. It is easy to see, therefore, that the lizard may be active
and nimble, twisting his body hither and thither, and escaping his
enemies by his quickness. But the tortoise is slow and sluggish, and
has only managed to baffle the numberless animals which are looking
out for a meal by fabricating a strong box to live in. But he had to make