LO1 – Explain the importance of financial statement disclosure.
The objective of financial statements is to communicate information to meet the needs of external users. In addition to recording and
reporting verifiable financial information, accountants make decisions regarding how to measure transactions. Applying GAAP can present challenges when judgment must be applied as in the case of cost‐
benefit decisions and materiality considerations.
LO2 – Explain and prepare a classified balance sheet.
A classified balance sheet groups assets and liabilities as follows:
Assets Liabilities
Current assets Current liabilities Non‐current assets:
Plant assets
Long‐term investments Intangible assets
Non‐current or long‐term liabilities
Current assets are those that are used within one year or one operating cycle, whichever is longer, and include cash, accounts receivables, and unused supplies. Non‐current assets have benefits
liabilities must be paid within one year or one operating cycle,
whichever is longer. Non‐current liabilities are due beyond one year or one operating cycle, whichever is longer.
LO3 – Explain the purpose and content of notes to financial statements.
In accordance with the GAAP principle of full disclosure, relevant details not contained in the body of financial statements are included in the accompanying notes to financial statements. Notes generally include a summary of significant accounting policies, details regarding plant assets assets, and specifics about liabilities such as the interest rates and repayment terms.
LO4 – Explain the purpose and content of the auditor’s report.
An audit as it relates to the auditor’s report is an external examination of a company’s financial statement information and its system of internal controls. Internal controls are the processes instituted by management of a company to direct, monitor, and measure the accomplishment of its objectives including the prevention and detection of fraud and error. The auditor’s report provides some assurance that the financial statements are trustworthy. In simple terms, an unqualified auditor’s report indicates that the financial statements are reliable.
LO5 – Explain the purpose and content of the report that describes management’s responsibility for financial statements.
This report describes management’s responsibility for the preparation and presentation of financial statements, the accuracy of estimates used therein, the adequacy of internal controls, and legal and ethical oversight of all aspects of the corporation. It also explains the
responsibilities of the board of directors and the audit committee.
1. What shapes and limits an accountant’s measurement of wealth?
2. Are financial statements primarily intended for internal or external users?
3. What are the common classifications within a classified balance sheet?
4. What are current assets?
5. What are non‐current assets?
6. What are current liabilities?
7. What are non‐current liabilities?
8. What is the purpose and content of the notes to the financial statements?
9. What is the purpose and content of the auditor’s report?
10. What is the purpose and content of the report that describes management’s responsibility for financial statements?
To answer the following, refer to the Big Dog Carworks Corp. financial statements for the year ended December 31, 2020 and other
information included in this chapter.
11. Identify the economic resources of Big Dog Carworks Corp. shown in its financial statements.
12. What comprise the financial statements of BDCC?
13. Why does BDCC prepare financial statements?
14. From the balance sheet at December 31, 2020 extract the appropriate amounts to complete the following accounting equation:
ASSETS = LIABILITIES + STOCKHOLDERS’ EQUITY
15. If ASSETS – LIABILITIES = NET ASSETS, how much is net assets at December 31, 2020? Is net assets synonymous with stockholders’
equity?
16. What types of assets are reported by Big Dog Carworks Corp.?
What types of liabilities?
17. Accounting for financial transactions makes it possible to measure the progress of the entity. How do generally accepted accounting principles positively affect this measurement process?
19. Does Big Dog Carworks Corp. use the cash basis of accounting or the accrual basis? How can you tell?
20. What kind of assumptions is made by Big Dog Carworks Corp.
about asset capitalization? Over what periods of time are assets being amortized?
21. Should the salary of BDCC’s president be recorded as an asset since his salary brings benefits to the company in future accounting periods?
22. What adjustments might management make to the financial information when preparing the annual financial statements?
Consider the following categories:
a. Current asset accounts b. Non‐current asset accounts c. Current liability accounts d. Non‐current liability accounts.
Indicate several examples in each category. Use the BDCC balance sheet and notes 3 and 5 for ideas.
23. What sequence of steps is likely followed in preparing BDCC’s annual financial statements?
24. What are the advantages of using a classified balance sheet? Why are current accounts shown before non‐current ones on BDCC’s balance sheet?
25. How does Big Dog Carworks Corp. make it easier to compare information from one time period to another?
26. Who is the auditor of BDCC? What does the auditor’s report tell you about BDCC’s financial statements? Does it raise any
concerns?
27. What does the auditor’s report indicate about the application of generally accepted accounting principles in BDCC’s financial statements?
28. What is BDCC management’s responsibility with respect to the company’s financial statements? Do the financial statements belong to management? the auditor? the board of directors?
stockholders?
CP 4–1
The following list of accounts is taken from the records of the Viking Company Ltd. at December 31, 2019:
Account Balance
Accounts payable Accounts receivable
Bank loan, due within 90 days Building
Cash Equipment Land
Mortgage payable (due 2021)
Notes receivable, due within 90 days Prepaid insurance
Retained earnings Salaries payable Common stock Unused supplies
$200 100 500 1,000 20 500 2,000 1,500 40 30 ? 60 1,200 10
Required: Prepare a classified balance sheet. Assume all accounts have normal balances.
the records with him. You have been hired to reconstruct the accounting records, and with this in mind you assemble a list of all company assets. By checking with banks, counting the materials on hand, and investigating the ownership of buildings and equipment, you developed the following information as of October 31.
Account Balance Accounts Receivable
Buildings Cash Equipment Land Inventories Investments*
$ 5 10 2 5 200 3 4
*These are shares in another corporation that will be held indefinitely.
Statements and unpaid invoices found in the office indicate that $30 is owed to trade creditors. There is a $10 mortgage outstanding, $4 of which is due by October 31, 2020. Interviews with the board of
directors and a check of the common stock records indicate that there are 100 shares outstanding. Stockholders paid $100 in total to the corporation for these. No record is available regarding past retained earnings.
Required: Prepare a classified balance sheet at October 31, 2019.
P 4‐1
The following balance sheet was prepared for Abbey Limited:
Abbey Limited Balance Sheet As at November 30, 2019
Assets Liabilities
Current Current
Bank loan $ 1,000 Accounts payable $ 5,600
Notes receivable 6,000 Notes payable 2,000
Building 12,000 Cash 1,000
Merch. inventory 3,000 $ 8,600
$22,000
Non‐current Non‐current
Short‐term investments 2,500 Mortgage payable 6,000
Retained earnings 2,000 Equipment 2,000
Unused supplies 100 Salaries payable 250
Truck 1,350 8,250
5,950 Total liabilities 16,850
Stockholders’ Equity
Common stock 11,100
Total assets $27,950 Total liabilities and assets $27,950
Other information you have gathered:
a. Amounts due on borrowings by November 30, 2020 are as follows:
Bank loan $400
Mortgage payable 2,000
Notes payable 500
b. Notes receivable that will be collected by November 30, 2020 amount to $5,000.
c. The building was sold on December 15, 2019 for $20,000.
3. Based on the balance sheet categories, what additional information should be disclosed in the notes to the financial statements?
P 4‐2
The following accounts and account balances are taken from the records of Joyes Enterprises Ltd. at December 31, 2020.
Account 2020 2019
Accounts payable $ 7,000 $ 4,000
Accounts receivable 5,000 3,000
Notes receivable 3,000 2,000
Bank loan 5,000 5,000
Building 24,000 20,000
Cash 2,000 1,000
Dividends 1,000 ‐0‐
Equipment 16,000 12,000
Income taxes payable 3,000 2,500
Land 5,000 5,000
Merchandise inventory 19,000 24,500
Mortgage payable 5,000 7,000
Prepaid insurance 1,000 1,000
Common stock 48,000 48,000
Retained earnings, start of year ? 1,000
Net income ? ?
Other information:
a. One‐half of the notes receivable at December 31, 2020 will be received in cash during 2021. All of the notes receivable at December 31, 2019 were received in cash during 2020.
b. $1,000 of the bank loan and $2,000 of the mortgage payable must be repaid by December 31, 2021.
c. 2020 net income.
2. Prepare a classified balance sheet. Assume all accounts have normal balances. Disclose all amounts separately on the balance sheet.
3. Does Joyes Enterprises Ltd. have sufficient resources to meet its current obligations in 2021?
4. Refer to BDCC’s note 4 shown in this chapter. Assume now that Joyes’ plant assets are combined into one amount on the balance sheet. Prepare a suitable note to the financial statements. Assume there are no additions to plant assets in 2019, and that there is no depreciation calculated for either year.
P 4‐3
Required: Identify whether each of the following sentences would likely be found in (a) the auditor’s report; (b) the statement of management’s responsibility for the financial statements;
or (c) the notes to the financial statements. The answer to the first sentence is provided.
b 1. The significant accounting policies, which management believes are appropriate for the company, are described in Note X to the financial statements.
2. Revenue arises from the rendering of service. It is measured by reference to the fair value of consideration received or receivable.
3. These financial statements are the responsibility of the Company’s management.
4. Management has established systems of internal control that are designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use [. . .]
5. The board of directors is responsible for ensuring that management fulfils its responsibilities for financial reporting and internal control.
6. The mortgage is payable to Last Chance Bank. It bears interest at 5% per year and is amortized over 20 years. It is secured by
and reporting to the board, and makes recommendations with respect to their acceptance.
9. The estimated useful lives of the company’s depreciable assets are as follows:
10. […] standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
11. Land held for use in production or administration is stated at cost. Other plant assets are initially recognized at acquisition cost plus any costs directly attributable to bringing the assets to the locations and conditions necessary to be employed in operations. They are subsequently measured using the cost model: cost less subsequent depreciation.
12. Management recognizes its responsibility for conducting the company’s affairs in compliance with established financial standards and applicable laws, and maintains proper standards of conduct for its activities.
13. The common stock of Acme Supplies Ltd. consists of fully‐paid common shares with a stated value of $1 each.
14. The principal activity of Acme Supplies Ltd. is the retail sale of merchandise.