Introduction to Financial Accounting: Key Concepts & Principles

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with Open Texts Intr oduction to Financial Accounting by Henry Dauderis & David Annand Edited by Athabasca University VERSION 2019–REVISIONA ADAPTABLE | ACCESSIBLE | AFFORDABLE *Creative Commons License (CC BY-NC-SA)

a d v a n c i n g l e a r n i n g Introduction to Financial Accounting by Henry Dauderis & David Annand Edited by Athabasca University Version2019 — RevisionA BE A CHAMPION OF OER! Contribute suggestions for improvements, new content, or errata: A new topic A new example An interesting new question Any other suggestions to improve the material Contact Lyryx at info@lyryx.com with your ideas. Lyryx Learning Team Bruce Bauslaugh Peter Chow Nathan Friess Stephanie Keyowski Claude Laflamme Martha Laflamme Jennifer MacKenzie Tamsyn Murnaghan Bogdan Sava Ryan Yee LICENSE Creative Commons License (CC BY-NC-SA): This text, including the art and illustrations, are available under the Creative Commons license (CC BY-NC-SA), allowing anyone to reuse, revise, remix and redistribute the text. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-sa/3.0/ Accoun ng involves a process of collec ng, recording, and repor ng a business’s economic acvi es to users. It is o en called the language of business because it uses a unique vocabulary to communicate informa on to decision makers. To understand accoun ng, we first look at the basic forms of business organiza ons. The concepts and principles that provide the founda on

for financial accoun ng are then discussed. With an emphasis on the corporate form of business organiza on, we will examine how we communicate to users of financial informa on using financial statements. Finally, we will review how financial transac ons are analyzed and then reported on financial statements. Chapter 1 Learning Objec ves LO1 – Define accoun ng. LO2 – Iden fy and describe the forms of business organiza on. LO3 – Iden fy and explain the Generally Accepted Accoun ng Principles (GAAP). LO4 – Iden fy, explain, and prepare the financial statements. LO5 – Analyze transac ons by using the accoun ng equa on. Concept Self-Check Use the following as a self-check while working through Chapter 1 . 1. What is accounting? 2. What is the difference between internal and external users of accoun ng informa on? 3. What is the difference between managerial and financial accoun ng? 4. What is the difference between a business organiza on and a non-business organiza on? 5. What are the three types of business organiza ons? 6. What is a PAE? A PE? 7. What does the term limited liability mean? 1 Chapter1 Introduc on to Financial Accoun ng

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2 Introduc on to Financial Accoun ng 8. Explain how ethics are involved in the prac ce of accoun ng. 9. Describe what GAAP refers to. 10. Iden fy and explain the six qualita ve characteris cs of GAAP. 11. Iden fy and explain at least five of the nine principles that support the GAAP qualita vecharacteris cs. 12. How is financial informa on communicated to external users? 13. What are the four financial statements? 14. Which financial statement measures financial performance? Financial posi on? 15. What informa on is provided in the statement of cash flows? 16. Explain how retained earnings and dividends are related. 17. What are the three primary components of the balance sheet? 18. Equity consists of what two components? 19. How are assets financed? 20. Iden fy and explain the three types of ac vi es a business engages in. 21. What are notes to the financial statements ? 22. What is the accoun ng equa on? 23. What are the dis nc ons among calendar, interim, and fiscal year ends? NOTE: The purpose of these ques ons is to prepare you for the concepts introduced in the chapter. Your goal should be to answer each of these ques ons as you read through the chapter. If, when you complete the chapter, you are unable to answer one or more the Concept Self-Check ques ons, go back through the content to find the answer(s). Solu ons are not provided to these ques ons. 1.1. Accoun ng Defined 1.1 Accounting Defined Accounting is the process of identifying, measuring, recording, and communicating an organization’s economic ac vi es to users. Users need information for decision making. Internal users of accounting information work for the organization and are responsible for planning, organizing, and operating the entity. The area of accounting known as managerial accounting serves the decision-making needs of internal users. External users do not work for LO1 – Define accounting.

3 the organization and include investors, creditors, labour unions, and customers. Financialaccoun ng is the area of accounting that focuses on external repor ng and mee ng the needs of external users. This book addresses financial accoun ng. Managerial accoun ng is covered in other books. 1.2 Business Organiza ons An organiza on is a group of individuals who come together to pursue a common set of goals and objec ves. There are two types of business organiza ons: business and non-business . A business organiza on sells products and/or services for profit. A non-business organiza on , such as a charity or hospital, exists to meet various societal needs and does not have profit as a goal. All businesses, regardless of type, record, report, and, most importantly, use accoun ng informa on for making decisions. This book focuses on business organiza ons. There are three common forms of business organiza ons — a proprietorship , a partnership , and a corpora on . Proprietorship A proprietorship is a business owned by one person. It is not a separate legal en ty, which means that the business and the owner are considered to be the same en ty. This means, for example, thatfromanincometaxperspec ve, theprofitsofaproprietorshiparetaxedaspartoftheowner’s personal income tax return. Unlimited liability is another characteris c of a sole proprietorship meaning that if the business could not pay its debts, the owner would be responsible even if the business’s debts were greater than the owner’s personal resources. Partnership A partnership is a business owned by two or more individuals. Like the proprietorship, it is not a separate legal en ty and its owners are typically subject to unlimited liability. Corpora on A corpora on isabusinessownedbyoneormoreowners. Theownersareknownas shareholders . A shareholder owns shares of the corpora on. Shares 1 are units of ownership in a corpora on. For example, if a corpora on has 1,000 shares, there may be three shareholders where one has 700 shares, another has 200 shares, and the third has 100 shares. The number of shares held by a shareholder represents how much of the corpora on they own. A corpora on can have different 1 Shares are also called stock . LO2 – Identify and describe the forms of business organization.

4 Introduc on to Financial Accoun ng types of shares; this topic is discussed in a later chapter. When there is only one type of share, it is usually called common shares . A corpora on’s shares can be privately held or available for public sale. A corpora on that holds its shares privately and does not sell them publicly is known as a private enterprise (PE) . A corpora on that sells its shares publicly, typically on a stock exchange, is called a publicly accountable enterprise (PAE) . Unlike the proprietorship and partnership, a corpora on is a separate legal en ty. This means, for example, that from an income tax perspec ve, a corpora on files its own tax return. The owners or shareholders of a corpora on are not responsible for the corpora on’s debts so have limited liability meaning that the most they can lose is what they invested in the corpora on. In larger corpora ons, there can be many shareholders. In these cases, shareholders do not manageacorpora onbutpar cipateindirectlythroughtheelec onofa BoardofDirectors . TheBoard of Directors does not par cipate in the day-to-day management of the corpora on but delegates this responsibility to the officers of the corpora on. An example of this delega on of responsibility is illustrated in Figure 1.1 . Figure 1.1: Generalized Form of a Corporate Organiza on Shareholders usually meet annually to elect a Board of Directors. The Board of Directors meets 1.3. Generally Accepted Accoun ng Principles (GAAP) regularly to review the corpora on’s opera ons and to set policies for future opera ons. Unlike shareholders, directors can be held personally liable if a company fails. The focus of these chapters will be on the corporate form of business organiza on. The proprietorship and partnership organiza ons will be discussed in more detail in Chapter 13 . An explora on is available on the Lyryx site. Log into your Lyryx course to run Forms of Organiza on . SHAREHOLDERS (Owners) BOARDOFDIRECTORS (RepresentOwners) PRESIDENT VICE PRES. MARKETING VICE PRES. FINANCE VICE PRES. PRODUCTION Elect Appoint

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5 1.3 Generally Accepted Accoun ng Principles (GAAP) LO3 – Iden fy and explain the Generally Accepted Accounting Principles (GAAP). The goal of accoun ng is to ensure informa on provided to decision makers is useful. To be useful, informa on must be relevant and faithfully represent a business’s economic ac vi es. This requires ethics , beliefs that help us differen ate right from wrong, in the applica on of underlying accoun ng concepts or principles. These underlying accoun ng concepts or principles are known as Generally Accepted Accoun ng Principles (GAAP) . GAAP in Canada, as well as in many other countries, is based on Interna onal Financial Repor ng Standards (IFRS) for publicly accountable enterprises (PAE). IFRS are issued by the Interna onal Accoun ng Standards Board (IASB) . The IASB’s mandate is to promote the adop on of a single set of global accoun ng standards through a process of open and transparent discussions among corpora ons, financial ins tu ons, and accoun ng firms around the world. Private enterprises (PE) in Canada are permi ed to follow either IFRS or Accoun ng Standards for Private Enterprises (ASPE) , a set of less onerous GAAP-based standards developed by the Canadian Accoun ng Standards Board (AcSB). The AcSB is the body that governs accoun ng standards in Canada. The focus in this book will be on IFRS for PAEs 2 . Accoun ng prac ces are guided by GAAP which are comprised of qualita ve characteris cs and principles. As already stated, relevance and faithful representa on are the primary qualita ve characteris cs. Comparability, verifiability, meliness, and understandability are addi onal qualita ve characteris cs. Informa on that possesses the quality of: • relevance has the ability to make a difference in the decision-making process. • faithful representa on is complete, neutral, and free from error. • comparability tells users of the informa on that businesses u lize similar accoun ng pracces. • verifiability means that others are able to confirm that the informa on faithfully represents the economic ac vi es of the business. 2 It should be noted, however, that at the introductory level, there are no significant differences in how IFRS and ASPE are applied.

6 Introduc on to Financial Accoun ng • meliness is available to decision makers in me to be useful. • understandability is clear and concise. Table 1.1 lists the nine principles that support these qualita ve characteris cs.

7 1.3. Generally Accepted Accoun ng Principles (GAAP)

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8 Introduc on to Financial Accoun ng Accoun ng Principle Explana on/Example Business en ty Requires that each economic en ty maintain separate records. Example: A business owner keeps separate accoun ng records for business transac ons and for personal transac ons. Consistency Requires that a business use the same accoun ng policies and procedures from period to period. Example: A business uses a par cular inventory cos ng method. It cannot change to a different inventory cos ng method in the next accoun ng period. Cost Requires that each economic transac on be based on the actual original cost (also known as historical cost principle). Example: The business purchases a delivery truck adver sed for $75,000 and pays $70,000. The truck must be recorded at the cost of $70,000, the amount actually paid. Full disclosure Requires that accoun ng informa on communicate sufficient informaon to allow users to make knowledgeable decisions. Example: A business is applying to the bank for a $1,000,000 loan. The business is being sued for $20,000,000 and it is certain that it will lose. The business must tell the bank about the lawsuit even though the lawsuit has not yet been finalized. Going concern Assumes that a business will con nue for the foreseeable future. Example: All indica ons are that Business X will con nue so it is reported to be a ‘going concern’. Business Z is being sued for $20,000,000 and it is certain that it will lose. The $20,000,000 loss will force the business to close. Business Z must not only disclose the lawsuit but it must also indicate that there is a ‘going concern’ issue. Matching Requires that financial transac ons be reported in the period in which they occurred/were realized. Example: Supplies were purchased March 15 for $700. They will be recorded as an asset on March 15 and then expensed as they are used.

9 Materiality Requires a business to apply proper accoun ng only for items that would affect decisions made by users. Example: The business purchases a stapler for $5 today. Technically, the stapler will last several years so should be recorded as an asset. However, the business will record the $5 as an expense instead because deprecia ng a $5 item will not impact the decisions of financial informa on. Accoun ng Principle Explana on/Example Monetary unit Requires that financial informa on be communicated in stable units of money. Example: Land was purchased in 1940 for $5,000 Canadian. It is maintained in the accoun ng records at $5,000 Canadian and is not adjusted. Recogni on Requires that revenues be recorded when earned and expenses be recorded when incurred, which is not necessarily when cash is received (in the case of revenues) or paid (in the case of expenses). Example: A sale occurred on March 5. The customer received the product on March 5 but will pay for it on April 5. The business records the sale on March 5 when the sale occurred even though the cash is not received un l April 5. Table 1.1: Accoun ng Principles Note: Some of the principles discussed above may be challenging to understand because related concepts have not yet been introduced. Therefore, most of these principles will be discussed again in more detail in a later chapter. 1.4 Financial Statements Recall that financial accoun ng focuses on communica ng informa on to external users. That informa on is communicated using financial statements . There are four financial statements: the income statement, statement of changes in equity, balance sheet, and statement of cash flows. Each of these is introduced in the following sec ons using an example based on a fic ous corporate organiza on called Big Dog Carworks Corp. LO4 – Iden fy, explain, and prepare the financial statements.

10 Introduc on to Financial Accoun ng The Income Statement An income statement communicates informa on about a business’s financial performance by summarizing revenues less expenses over a period of me. Revenues are created when a business provides products or services to a customer in exchange for assets. Assets are resources resulting from past events and from which future economic benefits are expected to result. Examples of assets include cash, equipment, and supplies. Assets will be discussed in more detail later in this chapter. Expenses are the assets that have been used up or the obliga ons incurred in the course of earning revenues. When revenues are greater than expenses, the difference is called net income or profit . When expenses are greater than revenue, a net loss results. 1.4. Financial Statements Consider the following income statement of Big Dog Carworks Corp. (BDCC). This business was started on January 1, 2015 by Bob “Big Dog” Baldwin in order to repair automobiles. All the shares of the corpora on are owned by Bob. At January 31, the income statement shows total revenues of $10,000 and various expenses totaling $7,800. Net income, the difference between $10,000 of revenues and $7,800 of expenses, equals $2,200. Big Dog Carworks Corp. Income Statement For the Month Ended January 31, 2015 Revenues Repair revenues Expenses $10,000 Rent expense $1,600 Salaries expense 3,500 Supplies expense 2,000 Fuel expense 700 Total expenses 7,800 Theis transferred tonet income Net income $2,200 the statement of changes in equity. An explora on is available on the Lyryx site. Log into your Lyryx course to run Income Statement . The heading shows the name of the en ty, the type of financial statement, and the period-in- me date.

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11 The Statement of Changes in Equity The statement of changes in equity provides informa on about how the balances in Share capital and Retained earnings changed during the period. Share capital is a heading in the shareholders’ equity sec on of the balance sheet and represents how much shareholders have invested. When shareholders buy shares, they are inves ng in the business. The number of shares they purchase will determine how much of the corpora on they own. The type of ownership unit purchased by Big Dog’s shareholders is known as common shares. Other types of shares will be discussed in a later chapter. When a corpora on sells its shares to shareholders, the corpora on is said to be issuing shares to shareholders. In the statement of changes in equity shown below, Share capital and Retained earnings balances at January 1 are zero because the corpora on started the business on that date. During January, Share capital of $10,000 was issued to shareholders so the January 31 balance is $10,000. Retained earnings is the sum of all net incomes earned by a corpora on over its life, less any distribu ons of these net incomes to shareholders. Distribu ons of net income to shareholders are called dividends . Shareholders generally have the right to share in dividends according to the

12 Introduc on to Financial Accoun ng percentage of their ownership interest. To demonstrate the concept of retained earnings, recall that Big Dog has been in business for one month in which $2,200 of net income was reported. Addi onally, $200 of dividends were distributed, so these are subtracted from retained earnings. Big Dog’s retained earnings were therefore $2,000 at January 31, 2015 as shown in the statement of changes in equity below. Big Dog Carworks Corp. Statement of Changes in Equity For the Month Ended January 31, 2015 Share Retained Capital Earnings Equity Opening balance $ -0- $ -0- $ -0- Shares issued 10,000 10,000 To demonstrate how retained earnings would appear in the next accoun ng period, let’s assume that Big Dog reported a net income of $5,000 for February, 2015 and dividends of $1,000 were given to the shareholder. Based on this informa on, retained earnings at the end of February wouldbe$6,000, calculatedasthe$2,000January31balanceplusthe$5,000Februarynetincome less the $1,000 February dividend. The balance in retained earnings con nues to change over me because of addi onal net incomes/losses and dividends. An explora on is available on the Lyryx site. Log into your Lyryx course to run Statement of Changes in Equity . The Balance Sheet The balance sheet , or statement of financial posi on , shows a business’s assets, liabili es, and equity at a point in me. The balance sheet of Big Dog Carworks Corp. at January 31, 2015 is shown below. 1.4. Financial Statements Big Dog Carworks Corp. The heading shows the name of the en ty, the type of financial statement, and the period-in- me date. The heading shows the name of the en ty, the type of financial statement, and the point-in- me date.

13 Balance Sheet At January 31, 2015 Assets Liabili es Cash $ 3,700 Bank Loan $ 6,000 Accounts receivable 2,000 Accounts payable 700 Prepaid insurance 2,400 Unearned revenue 400 Equipment 3,000 Total liabili es $ 7,100 Truck 8,000 Equity What Is an Asset? Assets are economic resources that provide future benefits to the business. Examples include cash, accounts receivable, prepaid expenses, equipment, and trucks. Cash is coins and currency, usually held in a bank account, and is a financial resource with future benefit because of its purchasing power. Accounts receivable represent amounts to be collected in cash in the future for goods sold or services provided to customers on credit. Prepaid expenses are assets that are paid in cash in advance and have benefits that apply over future periods. For example, a one-year insurance policy purchased for cash on January 1, 2015 will provide a benefit un l December 31, 2015 so is a prepaid asset. The equipment and truck were purchased on January 1, 2015 and will provide benefits for 2015 and beyond so are assets. What Is a Liability? A liability isanobliga ontopayanassetinthefuture. Forexample, BigDog’sbankloanrepresents an obliga on to repay cash in the future to the bank. Accounts payable are obliga ons to pay a creditor for goods purchased or services rendered. A creditor owns the right to receive payment from an individual or business. Unearned revenue represents an advance payment of Sharecapital $10,000 Retainedearnings 2,000 Totalequity 12,000 Totalassets $19,100 Totalliabiliesandequity $19,100 Totalassets($19,100here) alwaysequalTotalliabilies ($7,100)plusEquity ($12,000).

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14 Introduc on to Financial Accoun ng cash from a customer for Big Dog’s services or products to be provided in the future. For example, Big Dog collected cash from a customer in advance for a repair to be done in the future. An explora on is available on the Lyryx site. Log into your Lyryx course to run Balance Sheet . What Is Equity? Equity represents the net assets owned by the owners (the shareholders). Net assets are assets minus liabili es. For example, in Big Dog’s January 31 balance sheet, net assets are $12,000, calculated as total assets of $19,100 minus total liabili es of $7,100. This means that although there are $19,100 of assets, only $12,000 are owned by the shareholders and the balance, $7,100, are financed by debt. No ce that net assets and total equity are the same value; both are $12,000. Equity consists of share capital and retained earnings. Share capital represents how much the shareholders have invested in the business. Retained earnings is the sum of all net incomes earned by a corpora on over its life, less any dividends distributed to shareholders. In summary, the balance sheet is represented by the equa on: Assets = Liabili es + Equity. Assets are the investments held by a business. The liabili es and equity explain how the assets have been financed, or funded. Assets can be financed through liabili es, also known as debt , or equity. Equity represents amounts that are owned by the owners, the shareholders, and consists of share capital and retained earnings. Investments made by shareholders, namely share capital, are used to finance assets and/or pay down liabili es. Addi onally, retained earnings, comprised of net income less any dividends, also represent a source of financing. An explora on is available on the Lyryx site. Log into your Lyryx course to run Account Types . The Statement of Cash Flows (SCF) Cash is an asset reported on the balance sheet. Ensuring there is sufficient cash to pay expenses and liabili es as they come due is a cri cal business ac vity. The statement of cash flows (SCF) explains how the balance in cash changed over a period of me by detailing the sources (inflows) and uses (ou lows) of cash by type of ac vity: opera ng, inves ng, and financing, as these are the three types of ac vi es a business engages in. Opera ng ac vi es are the day-to-day processes involved in selling products and/or services to generate net income. Examples of opera ng ac vies include the purchase and use of supplies, paying employees, fuelling equipment, and ren ng space for the business. Inves ng ac vi es are the buying of assets needed to generate revenues. For example, when an airline purchases airplanes, it is inves ng in assets required to help it generate revenue. Financing ac vi es are the raising of money needed to invest in assets. Financing can involve issuing share capital (ge ng money from the owners known as

15 shareholders) or borrowing. Figure 1.2 summarizes the interrela onships among the three types of business ac vi es. used to buy assets Figure 1.2: Rela onships Among the Three Types of Business Ac vi es The statement of cash flows for Big Dog is shown below. Big Dog Carworks Corp. Statement of Cash Flows For the Month Ended January 31, 2015 Opera ng ac vi es: Net income Adjustments: $ 2,200 Increase in unearned revenues 400 Increase in accounts payable 700 Increase in prepaid insurance (2,400) Increase in accounts receivable (2,000) Net cash used by opera ng ac vi es Inves ng ac vi es: $(1,100) Purchase of equipment $(3,000) Purchase of truck (3,000) 1.4. FinancialStatements Operang Acvies createsnet ( income) Invesng Acvies buysassetsto ( generaterevenues) Financing Acvies r ( aisesmoneyto investinassets) Cash flowsresult- ingfromoperang acviescanbe reinvestedin Cash flowsresulng fromoperang acviescanbe usedtopaydown Cash flowsresulng fromfinancing acviescanbe The heading shows the name of the enty, the type of financial statement, and the period-in- me date.

16 Introduc on to Financial Accoun ng Net cash used by inves ng ac vi es Financing ac vi es: (6,000) Issued shares $10,000 Borrowed from bank 3,000 Payment on bank loan (2,000) Paid dividends (200) The statement of cash flows is useful because cash is one of the most important assets of a corpora on. Informa on about expected future cash flows are therefore important for decision makers. For instance, Big Dog’s bank manager needs to determine whether the remaining $6,000 loan can be repaid, and also whether or not to grant a new loan to the corpora on if requested. The statement of cash flows helps inform those who make these decisions. Notes to the Financial Statements An essen al part of financial statements are the notes that accompany them. These notes are generallylocatedat the end of a set of financial statements. The notes provide greater detail about various amounts shown in the financial statements, or provide non-quan ta ve informa on that is useful to users. For example, a note may indicate the es mated useful lives of long- lived assets, or loan repayment terms. Examples of note disclosures will be provided later. 1.5. Transac on Analysis and Double-entry Accoun ng An explora on is available on the Lyryx site. Log into your Lyryx course to run Communica ng Through Financial Statements . 1.5 Transac on Analysis and Double-entry Accoun ng The accoun ng equa on is founda onal to accoun ng. It shows that the total assets of a business must always equal the total claims against those assets by creditors and owners. The equa on is expressed as: Netcashprovidedbyfinancingacvies 10,800 Netincreaseincash 3,700 Cashbalance,January1 -0- Cash balance,January31 $3,700 This agreeswiththeCash amountshownontheBalance SheetatJanuary31,2015. LO5 – Analyze transac ons by using the accoun ng equa on.

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17 ASSETS = LIABILITIES + EQUITY (economic resources (creditors’ claims (owners’ claims owned by an en ty) on assets) on assets) When financial transac ons are recorded, combined effects on assets, liabili es, and equity are always exactly offse ng. This is the reason that the balance sheet always balances. Each economic exchange is referred to as a financial transac on — for example, when an organiza on exchanges cash for land and buildings. Incurring a liability in return for an asset is also a financial transac on. Instead of paying cash for land and buildings, an organiza on may borrow money from a financial ins tu on. The company must repay this with cash payments in the future. The accoun ng equa on provides a system for processing and summarizing these sorts of transac ons. Accountants view financial transac ons as economic events that change components within the accoun ng equa on. These changes are usually triggered by informa on contained in source documents (such as sales invoices and bills from creditors) that can be verified for accuracy. The accoun ng equa on can be expanded to include all the items listed on the Balance Sheet of Big Dog at January 31, 2015, as follows: ASSETS = = LIABILITIES + + EQUITY Cash + Accounts + Prepaid + Equipment + Truck Bank + Accounts + Unearned Share + Retained Receivable Insurance Loan Payable Revenue Capital Earnings If one item within the accoun ng equa on is changed, then another item must also be changed to balance it. In this way, the equality of the equa on is maintained. For example, if there is an increase in an asset account, then there must be a decrease in another asset or a corresponding increase in a liability or equity account. This equality is the essence of double- entry accoun ng . The equa on itself always remains in balance a er each transac on. The opera on of doubleentry accoun ng is illustrated in the following sec on, which shows 10 transac ons of Big Dog Carworks Corp. for January 2015.

18 Introduc on to Financial Accoun ng 1.5. Transac on Analysis and Double-entry Accoun ng

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20 Introduc on to Financial Accoun ng

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These various transac ons can be recorded in the expanded accoun ng equa on as shown below: ASSETS = LIABILITIES + EQUITY Trans. Cash + Acc. + Prepaid + Equip. + Truck = Bank + Acc. + Unearned + Share + Retained Rec. Insur. Loan Pay. Revenue Capital Earnings ASSETS = $19,100 LIABILITIES + EQUITY = $19,100 1 . 5 . T r a n s a c o n A n a l y s i s a n d D o u b l e - e n t r y A c c o u n n g 1 9

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22 Introduc on to Financial Accoun ng Transac ons summary: 1. Issued share capital for $10,000 cash. 2. Received a bank loan for $3,000. 3. Purchased equipment for $3,000 cash. 4. Purchased a truck for $8,000; paid $3,000 cash and incurred a bank loan for the balance. 5. Paid $2,400 for a comprehensive one-year insurance policy effec ve January 1. 6. Paid $2,000 cash to reduce the bank loan. 7. Received $400 as an advance payment for repair services to be provided over the next twomonths as follows: $300 for February, $100 for March. 8. Performed repairs for $8,000 cash and $2,000 on credit. 9. Paid a total of $7,100 for opera ng expenses incurred during the month; also incurred anexpense on account for $700. 10. Dividends of $200 were paid in cash to the only shareholder, Bob Baldwin. The transac ons summarized in Figure 1.3 were used to prepare the financial statements described earlier, and reproduced in Figure 1.4 below.

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23 Income Statement Figure 1.4: Financial Statements of Big Dog Carworks Corp. Accoun ng Time Periods Financial statements are prepared at regular intervals — usually monthly or quarterly — and at the end of each 12-month period. This 12-month period is called the fiscal year . The ming of

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24 Introduc on to Financial Accoun ng the financial statements is determined by the needs of management and other users of the financial statements. For instance, financial statements may also be required by outside par es, such as bankers and shareholders. However, accoun ng informa on must possess the qualita ve characteris c of meliness — it must be available to decision makers in me to be useful — which is typically a minimum of once every 12 months. Accoun ng reports, called the annual financial statements , are prepared at the end of each 12month period, which is known as the year-end of the en ty. Some companies’ year-ends do not follow the calendar year (year ending December 31). This may be done so that the fiscal year coincides with their natural year . A natural year ends when business opera ons are at a low point. For example, a ski resort may have a fiscal year ending in late spring or early summer when business opera ons have ceased for the season. Corpora ons listed on stock exchanges are generally required to prepare interim financial statements , usually every three months, primarily for the use of shareholders or creditors. Because these types of corpora ons are large and usually have many owners, users require more up-todate financial informa on. The rela onship of the interim and year-end financial statements is illustrated in Figure 1.5 . Jan. 1, 2015 Jan. 31, 2015 Dec. 31, 2015 Figure 1.5: Rela onship of Interim and Year-end Financial Statements commencement ( ofoperaons) ) (interim ) fiscalyearend ( INTERIM BALANCE SHEET prepared ( onthis date) INTERIM INCOME STATEMENT INTERIMSTATE- MENTOFCHANGES INEQUITY INTERIMSTATEMENT OFCASHFLOWS (forthemonth ofJanuary) YEAR END BALANCE SHEET prepared ( onthis date) YEARENDINCOMESTATEMENT YEARENDSTATEMENTOFCHANGESINEQUITY YEARENDSTATEMENTOFCASHFLOWS Thesemay beprepared. Thesemust beprepared.

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25 Summary of Chapter 1 Learning Objec ves An explora on is available on the Lyryx site. Log into your Lyryx course to run Accoun ng Equa on . Summary of Chapter 1 Learning Objec ves LO1 – Define accoun ng. Accoun ng is the process of iden fying, measuring, recording, and communica ng an organizaon’s economic ac vi es to users for decision making. Internal users work for the organiza on while external users do not. Managerial accoun ng serves the decision-making needs of internal users. Financial accoun ng focuses on external repor ng to meet the needs of external users. LO2 – Iden fy and describe the forms of business organiza on. The three forms of business organiza ons are a proprietorship, partnership, and corpora on. The following chart summarizes the key characteris cs of each form of business organiza on. Characteris c Proprietorship Partnership Corpora on Separate legal en ty No No Yes Business income is taxed as part of the business No 3 No 4 Yes Unlimited liability Yes Yes No One owner permi ed Yes No Yes 5 Board of Directors No No Yes LO3–Iden fyandexplaintheGenerallyAcceptedAccoun ngPrinciples(GAAP). GAAP followed in Canada by PAEs (Publicly Accountable Enterprises) are based on IFRS (Internaonal Financial Repor ng Standards). PEs (Private Enterprises) follow GAAP based on ASPE (Accoun ng Standards for Private Enterprises), a less onerous set of GAAP maintained by the AcSB (Accoun ng Standards Board). GAAP have qualita ve characteris cs (relevance, faithful representa on, comparability, verifiability, meliness, and understandability) and principles (business en ty, consistency, cost, full disclosure, going concern, matching, materiality, monetary unit, and recogni on). 3 Business income is added to the owner’s personal income and the owner pays tax on the sum of the two. 4 Business income is added to the owner’s personal income and the owner pays tax on the sum of the two. 5 A corpora on can have one or more owners.

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26 Introduc on to Financial Accoun ng LO4 – Iden fy, explain, and prepare the financial statements. The four financial statements are: income statement, statement of changes in equity, balance sheet, and statement of cash flows. The income statement reports financial performance by detailing revenues less expenses to arrive at net income/loss for the period. The statement of changes in equity shows the changes during the period to each of the components of equity: share capital and retained earnings. The balance sheet iden fies financial posi on at a point in me by lis ng assets, liabili es, and equity. Finally, the statement of cash flows details the sources and uses of cash during the period based on the three business ac vi es: opera ng, inves ng, and financing. LO5 – Analyze transac ons by using the accoun ng equa on. The accoun ng equa on, A = L + E, describes the asset investments (the le side of the equaon) and the liabili es and equity that financed the assets (the right side of the equa on). The accoun ng equa on provides a system for processing and summarizing financial transac ons resul ng from a business’s ac vi es. A financial transac on is an economic exchange between two par es that impacts the accoun ng equa on. The equa on must always balance. Discussion Ques ons 1. What are generally accepted accoun ng principles (GAAP)? 2. When is revenue recognised? 3. How does the matching concept more accurately determine the Net Income of a business? 4. What are the quali es that accoun ng informa on is expected to have? What are the limita ons on the disclosure of useful accoun ng informa on? 5. What are assets? 6. To what do the terms liability and equity refer? 7. Explain the term financial transac on . Include an example of a financial transac on as part of your explana on. 8. Iden fy the three forms of business organiza on. 9. What is the business en ty concept of accoun ng? Why is it important? 10. What is the general purpose of financial statements? Name the four financial statements?

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Exercises 27 11. Each financial statement has a tle that consists of the name of the financial statement, the name of the business, and a date line. How is the date line on each of the four financial statements the same or different? 12. What is the purpose of an income statement? a balance sheet? How do they interrelate? 13. Define the terms revenue and expense . 14. What is net income? What informa on does it convey? 15. What is the purpose of a statement of changes in equity? a statement of cash flows? 16. Why are financial statements prepared at regular intervals? Who are the users of thesestatements? 17. What is the accoun ng equa on? 18. Explain double-entry accoun ng. 19. What is a year-end? How does the ming of year-end financial statements differ from that of interim financial statements? 20. How does a fiscal year differ from a calendar year? Exercises EXERCISE 1–1 (LO1,2,3) Matching Ethics Managerial accoun ng Financial accoun ng Partnership Interna onal Financial Repor ng Standards Separate legal en ty Limited liability Unlimited liability Required : Match each term in the above alphabe zed list to the corresponding descrip on below. a. The owners pay tax on the business’s net income. b. Accoun ng standards followed by PAEs in Canada. c. Rules that guide us in interpre ng right from wrong. d. Accoun ng aimed at communica ng informa on to external users. e. Accoun ng aimed at communica ng informa on to internal users. f. The business is dis nct from its owners. g. The owner(s) are not responsible for the debts of the business. h. If the business is unable to pay its debts, the owner(s) are responsible.

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28 Introduc on to Financial Accoun ng EXERCISE 1–2 (LO3) Accoun ng Principles Business en ty Full disclosure Materiality Consistency Going concern Monetary unit Cost Matching Recogni on Required : Iden fy whether each of the following situa ons represents a viola on or a correct applica on of GAAP, and which principle is relevant in each instance. a. A small storage shed was purchased from a home supply store at a discount sale price of $5,000 cash. The clerk recorded the asset at $6,000, which was the regular price. b. One of the business partners of a small architect firm con nually charges the processing of his family vaca on photos to the business firm. c. An owner of a small engineering business, opera ng as a proprietorship from his home office, also paints and sells watercolour pain ngs in his spare me. He combines all the transac ons in one set of books. d. ABS Consul ng received cash of $6,000 from a new customer for consul ng services that ABS is to provide over the next six months. The transac on was recorded as a credit to revenue. e. Tyler Tires, purchased a shop tool for cash of $20 to replace the one that had broken earlier that day. The tool would be useful for several years, but the transac on was recorded as a debit to shop supplies expense instead of to shop equipment (asset). f. Embassy Ligh ng, a small company opera ng in Canada, sold some merchandise to a customer in California and deposited cash of $5,000 US. The bookkeeper recorded it as a credit to revenue of $7,250 CAD, which was the Canadian equivalent currency at that me. g. An owner of a small car repair shop purchased shop supplies for cash of $2,200, which will be used over the next six months. The transac on was recorded as a debit to shop supplies (asset) and will be expensed as they are used. h. At the end of each year, a business owner looks at his es mated net income for the year and decides which deprecia on method he will use in an effort to reduce his business income taxes to the lowest amount possible. i. XYZ is in deep financial trouble and recently was able to obtain some badly needed cash from an investor who was interested in becoming an equity partner. However, a few days ago, the investor unexpectedly changed the terms of his cash investment in XYZ company from the proposed equity partnership to a long-term loan. XYZ does not disclose this to their bank, who they recently applied to for an increase in their overdra line-of-credit.

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Exercises 29 EXERCISE 1–3 (LO4) Calcula ng Missing Amounts Assets = Liabili es + Equity a. 50,000 = 20,000 + ? b. 10,000 = ? + 1,000 c. ? = 15,000 + 80,000 Required : Calculate the missing amounts in a , b , and c above. Addi onally, answer each of the ques ons in d and e below. d. Assets are financed by debt and equity. The greatest percentage of debt financing is reflected in a , b , or c ? e. The greatest percentage of equity financing is reflected in a , b , or c ? EXERCISE 1–4 (LO4) Calcula ng Missing Amounts Required : Calculate the missing amounts for companies A to E . A B C D E Cash $3,000 $1,000 $ ? $6,000 $2,500 Equipment 8,000 6,000 4,000 7,000 ? Accounts Payable 4,000 ? 1,500 3,000 4,500 Share Capital 2,000 3,000 3,000 4,000 500 Retained Earnings ? 1,000 500 ? 1,000 EXERCISE 1–5 (LO4) Calcula ng Missing Amounts Assets = Liabili es + Equity Balance, Jan. 1, 2015 $50,000 $40,000 ? Balance, Dec. 31, 2015 40,000 20,000 ? Required : Using the informa on above, calculate net income under each of the following assumpons. a. During 2015, no share capital was issued and no dividends were declared. b. During 2015, no share capital was issued and dividends of $5,000 were declared. c. During 2015, share capital of $12,000 was issued and no dividends were declared.

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30 Introduc on to Financial Accoun ng d. During 2015, share capital of $8,000 was issued and $12,000 of dividends were declared. EXERCISE 1–6 (LO4) Iden fying Assets, Liabili es, Equity Items Required : Indicate whether each of the following is an asset (A), liability (L), or an equity (E) item. a. Accounts Payable k. Dividends b. Accounts Receivable l. Interest Receivable c. Bank Loan Payable m. Retained Earnings d. Building n. Interest Revenue e. Cash o. Interest Payable f. Share Capital p. Interest Expense g. Loan Payable q. Prepaid Insurance h. Office Supplies r. Insurance Expense i. Prepaid Insurance s. Insurance Revenue j. U li es Expense t. Machinery EXERCISE 1–7 (LO4) Calcula ng Financial Statement Components The following informa on is taken from the records of Jasper Inc. at January 31, 2015, a er its first month of opera ons. Assume no dividends were declared in January. Cash Accounts Receivable Unused Supplies Land Building Equipment $30,000 Bank Loan 15,000 Accounts Payable 27,000 Share Capital ? Net Income 40,000 Required : a. Calculate total assets. b. Calculate total liabili es. c. Calculate share capital. d. Calculate retained earnings. e. Calculate total equity.

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18,000 6,000 64,000 81,000 Exercises 31 EXERCISE 1–8 (LO4) Net Income, Shares Issued Accounts Receivable Accounts Payable Cash Equipment Insurance Expense Miscellaneous Expense $ 2,500 Office Supplies Expense 1,000 Service Revenue 20,000 Share Capital ? Wages Expense 9,000 EDW Inc. EDW Inc. Income Statement Statement of Changes in Equity Month Ended March 31, 2015 Month Ended March 31, 2015 Revenues Share Retained Total Service Revenue $ Capital Earnings Equity Expenses Opening Balance $ $ $ Wages Expense $ Shares Issued Miscellaneous Expense Net Income Insurance Expense Office Supplies Expense Net Income $ Ending Balance Required : Using the alphabe zed informa on above for EDW Inc. a er its first month of operaons, complete the income statement, statement of changes in equity, and balance sheet using the templates provided below. EDW Inc. Balance Sheet March 31, 2015 Assets Liabili es Cash $ Accounts Payable $ Accounts Receivable Equipment Equity Share Capital $ Retained Earnings Total Equity Total Assets Total Liabili es and Equity EXERCISE 1–9 (LO4) Net Income, Dividends Machinery $14,000 $ $ $ $ $ Accounts Receivable $17,000 Accounts Payable 3,000 Adver sing Expense 5,000 Cash 9,000 Dividends 2,000 Insurance Expense 7,000

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32 Introduc on to Financial Accoun ng Note Payable Retained Earnings Salaries Expense Service Revenue Share Capital 10,000 Algonquin Inc. Algonquin Inc. Income Statement Statement of Changes in Equity Year Ended July 31, 2015 Year Ended July 31, 2015 Revenues Share Retained Total Service Revenue $ Capital Earnings Equity Expenses Opening Balance $ 10,000 $ 6,000 $ 16,000 Adver sing Expense $ Net Income Insurance Expense Dividends Salaries Expense Ending Balance Net Income Algonquin Inc. Balance Sheet July 31, 2015 Assets Liabili es Cash $ Accounts Payable $ Accounts Receivable Note Payable Machinery Total Liabili es Equity $ Share Capital Retained Earnings $ Required : Algonquin Inc. began opera ons on August 1, 2013. A er its second year, Algonquin Inc.’s accoun ng system showed the informa on above. During the second year, no addi onal shares were issued. Complete the income statement, statement of changes in equity, and balance sheet using the templates provided below. Total Equity Total Assets Total Liabili es and Equity $ $ $

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Exercises 33 Required : Refer to EXERCISE 1–9 . Use the same informa on EXCEPT assume that during the second year, addi onal shares were issued for cash of $3,000. Complete the income statement, statement of changes in equity, and balance sheet using the templates provided below. Algonquin Inc. Algonquin Inc. Income Statement Statement of Changes in Equity Year Ended July 31, 2015 Year Ended July 31, 2015 Total Equity Total Assets Total Liabili es and Equity EXERCISE 1–11 (LO4) Net Loss $ EXERCISE1–10 (LO4) NetIncome,Dividends,SharesIssued $ Revenues Share Retained Total Service Revenue $ Capital Earnings Equity Expenses Opening Balance $ $ $ Adver sing Expense $ Shares Issued Insurance Expense Net Income Salaries Expense Dividends Net Income Ending Balance Algonquin Inc. Balance Sheet July 31, 2015 Assets Liabili es Cash $ Accounts Payable $ Accounts Receivable Note Payable Machinery Total Liabili es Equity $ Share Capital Retained Earnings $ $

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6,400 22,000 3,400 34 Introduc on to Financial Accoun ng Rent Payable $2,500 Retained Earnings 4,000 Share Capital Truck Wages Expense Required : Wallaby Inc. began opera ons on February 1, 2014. A er its second month, Wallaby Inc.’s accoun ng system showed the informa on above. During the second month, no dividends were declared and no addi onal shares were issued. Complete the income statement, statement of changes in equity, and balance sheet using the templates provided below. Wallaby Inc. Wallaby Inc. Income Statement Statement of Changes in Equity Month Ended March 31, 2015 Month Ended March 31, 2015 Revenues Share Retained Total Fees Earned $ Capital Earnings Equity Expenses Opening Balance $ 6,400 $ 4,000 $ 10,400 Equipment Rental Expense $ Net Loss Wages Expense Ending Balance Fuel Expense Net Loss Wallaby Inc. Balance Sheet March 31, 2015 Assets Liabili es Cash $ Rent Payable $ Accounts Receivable Note Payable Truck Total Liabili es $ Equity Share Capital $ Retained Earnings Total Equity Total Assets Total Liabili es and Equity EXERCISE 1–12 (LO4) Correc ng Financial Statements $ $ $ $ $ $ Accounts Receivable $1,600 Cash 6,000 Equipment Rental Expense 9,400 Fees Earned 12,000 Fuel Expense 500 Note Payable 18,000

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Exercises 35 A junior bookkeeper of Adams Ltd. prepared the following incorrect financial statements at the end of its first month of opera ons. Adams Ltd. Income Statement For the Month Ended January 31, 2015 Service Revenue $3,335 Expenses Accounts Payable $300 Land 1,000 Miscellaneous Expenses 335 Net Income Required : Prepare a corrected income statement, statement of changes in equity, and balance sheet. EXERCISE 1–13 (LO4) Income Statement Below are the December 31, 2015, year-end accounts balances for Mitch’s Architects Ltd. This is the business’s second year of opera ons. Cash $23,000 Share capital $ 30,400 Accounts receivable 24,000 Retained earnings 5,000 Office supplies inventory 2,000 Consul ng fees earned 150,000 Prepaid insurance 7,000 Office rent expense 60,000 Truck 40,000 Salaries and benefits expense 40,000 Office equipment 15,000 U li es expense 12,000 Accounts payable 30,000 Insurance expense 5,000 Unearned consul ng fees 15,000 Supplies and postage expense 2,400 Addi onal informa on: a. Included in the share capital account balance was an addi onal $10,000 of shares issued during the current year just ended. b. Included in the retained earnings account balance was dividends paid to the shareholders of $1,000 during the current year just ended. 1,635 $1,700 Balance Sheet Assets Liabili es and Equity Cash $1,000 Rent Expense $300 Repairs Expense 500 Share Capital 3,000 Salaries Expense 1,000 Retained Earnings 1,700 Building 2,500 $5,000 $5,000

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36 Introduc on to Financial Accoun ng Required : Use these accounts to prepare an income statement similar to the example illustrated in Sec on 1.4 . EXERCISE 1–14 (LO4) Statement of Changes in Equity Required : Using the data in EXERCISE 1–13 , prepare a statement of changes in equity similar to the example illustrated in Sec on 1.4 . EXERCISE 1–15 (LO4) Balance Sheet Required : Using the data in EXERCISE 1–13 , prepare a balance sheet similar to the example illustrated in Sec on 1.4 . EXERCISE 1–16 (LO4) Financial Statements with Errors Below are the May 31, 2015, year-end financial statements for Gillespie Corp., prepared by a summer student. There were no share capital transac ons in the year just ended. Gillespie Corp. Income Statement For the Year Ended May 31, 2015 Revenues Service revenue $382,000 Unearned service revenue 25,000 Rent revenue Expenses 90,000 Warehouse rent expense 100,000 Prepaid adver sing 17,000 Salaries and benefits expense 110,000 Dividends 10,000 U li es expense 42,000 Insurance expense 15,000 Shop supplies expense Net income 6,000 $197,000

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Exercises 37 Gillespie Corp. Statement of Changes in Equity At May 31, 2015 Share Retained Total Capital Earnings Equity Opening balance $5,000 $140,000 $145,000 Net income 197,000 197,000 Ending balance $5,000 $337,000 Gillespie Corp. Balance Sheet For the Year Ended May 31, 2015 Assets Liabili es $342,000 Cash $ 50,000 Accounts payable $130,000 Accounts receivable 85,000 Office equipment 45,000 Total liabili es Building 240,000 Equity $130,000 Shop supplies 52,000 Share capital $ 5,000 Retained earnings 337,000 Total equity Total assets $472,000 Total liabili es and equity Required : Using the data above, prepare a corrected set of financial statements similar to the examples illustrated in Sec on 1.4 . EXERCISE 1–17 (LO4) Determining Missing Financial Informa on Required : Complete the following calcula ons for each individual company: a. If ColourMePink Ltd. has a retained earnings opening balance of $50,000 at the beginning of the year, and an ending balance of $40,000 at the end of the year, what would be the net income/loss, if dividends paid were $20,000? 342,000 $472,000

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38 Introduc on to Financial Accoun ng b. If ForksAndSpoons Ltd. has net income of $150,000, dividends paid of $40,000 and a retained earnings ending balance of $130,000, what would be the retained earnings opening balance? c. If CupsAndSaucers Ltd. has a retained earnings opening balance of $75,000 at the beginning of the year, and an ending balance of $40,000 at the end of the year, what would be the dividends paid, if the net loss was $35,000? EXERCISE 1–18 (LO4,5) Equity – What Causes it to Change Assets = Liabili es + Equity Balances at April 1, 2015 $100,000 $60,000 $40,000 Shares issued in April April net income(loss) Dividends paid in April Balances at April 30, 2015 $180,000 = $130,000 + ? Required : Using the informa on provided above, calculate the net income or net loss realized during April under each of the following independent assump ons. a. No shares were issued in April and no dividends were paid. b. $50,000 of shares were issued in April and no dividends were paid. c. No shares were issued in April and $4,000 of dividends were paid in April. ? ? ?

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Exercises 39 EXERCISE 1–19 (LO4,5) Equity – What Causes it to Change Assets = Liabili es + Equity Balances at June 1, 2015 $160,000 $100,000 $60,000 ? Shares issued in June ? June net income(loss) ? Dividends paid in June Balances at June 30, 2015 $200,000 = $90,000 + ? Required : Using the informa on provided above, calculate the dividends paid in June under each of the following independent assump ons. a. In June no shares were issued and a $70,000 net income was earned. b. $40,000 of shares were issued in June and a $90,000 net income was earned. c. In June $130,000 of shares were issued and an $80,000 net loss was realized. EXERCISE 1–20 (LO5) Impact of Transac ons on the Accoun ng Equa on The following list shows the various ways in which the accoun ng equa on might be affected by financial transac ons. Equity = Assets + Liabili es 1. (+) (+) 2. (+) (+) 3. (+)(-) 4. (-) (-) 5. (-) (-) 6. (+) (-) 7. (-) (+) 8. (+)(-) 9. (+)(-)

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40 Introduc on to Financial Accoun ng Required : Matchoneoftheabovetoeachofthefollowingfinancialtransac ons. Ifthedescrip on below does not represent a financial transac on, indicate ‘NT’ for ‘No Transac on’. The first one is done as an example. a. 3 Purchased a truck for cash. b. Issued share capital for cash. c. Incurred a bank loan as payment for equipment. d. Made a deposit for electricity service to be provided to the company in the future. e. Paid rent expense. f. Signed a new union contract that provides for increased wages in the future. g. Wrote a le er of complaint to the prime minister about a mail strike and hired a messenger service to deliver le ers h. Received a collect telegram from the prime minister; paid the messenger. i. Billed customers for services performed. j. Made a cash payment to sa sfy an outstanding obliga on. k. Received a payment of cash in sa sfac on of an amount owed by a customer. l. Collected cash from a customer for services rendered. m. Paid cash for truck opera on expenses. n. Made a monthly payment on the bank loan; this payment included a payment on part of the loan and also an amount of interest expense. ( Hint : This transac on affects more than two parts of the accoun ng equa on.) o. Issued shares in the company to pay off a loan. Problems PROBLEM 1–1 (LO4,5) Preparing Financial Statements Following are the asset, liability, and equity items of Dumont Inc. at January 31, 2015, a er its first month of opera ons. ASSETS = LIABILITIES + EQUITY Cash Accounts Receivable Prepaid Expenses Unused Supplies Truck Bank Loan Accounts Payable Share Capital $2,000 Service Revenue 7,500 Adver sing Expense 500 Commissions Expense 720 Insurance Expense 50

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Exercises 41 Interest Expense 80 Rent Expense 400 Supplies Expense 100 Telephone Expense 150 Wages Expense 2,500 Required :

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42 Introduc on to Financial Accoun ng 1. Prepare an income statement and statement of changes in equity for Dumont’s first month ended January 31, 2015. 2. Prepare a balance sheet at January 31, 2015. PROBLEM 1–2 (LO4) Preparing Financial Statements Laberge Sheathing Inc. began opera ons on January 1, 2015. The office manager, inexperienced in accoun ng, prepared the following statement for the business’s most recent month ended August 31, 2015. Laberge Sheathing Inc. Financial Statement Month Ended August 31, 2015 Cash $400 Accounts Payable $7,800 Accounts Receivable 3,800 Share Capital 3,200 Unused Supplies 100 Service Revenue 2,000 Equipment 8,700 Retained Earnings 4,000 Adver sing Expense 300 Interest Expense 500 Maintenance Expense 475 Supplies Used 125 Wages Expense 2,600 $17,000 $17,000 Required : 1. Prepare an income statement and statement of changes in equity for the month ended August 31, 2015, and a balance sheet at August 31, 2015. No shares were issued in August. 2. Using the informa on from the balance sheet completed in Part 1, calculate the percentageof assets financed by equity. PROBLEM1–3 (LO5) TransaconAnalysis

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Problems 43 The following transac ons of Larson Services Inc. occurred during August 2015, its first month of opera ons. Aug. 1 Issued share capital for $3,000 cash 1 Borrowed $10,000 cash from the bank 1 Paid $8,000 cash for a used truck 3 Signed a contract with a customer to do a $15,000 job beginning in November 4 Paid $600 for a one-year truck insurance policy effec ve August 1 5 Collected fees of $2,000 for work to be performed in September 7 Billed a client $5,000 for services performed today 9 Paid $250 for supplies purchased and used today 12 Purchased $500 of supplies on credit 15 Collected $1,000 of the amount billed August 7 16 Paid $200 for adver sing in The News that ran the first two weeks of August 20 Paid $250 of the amount owing regarding the credit purchase of August 12 25 Paid the following expenses: rent for August, $350; salaries, $2,150; telephone, $50; truck opera on, $250 28 Called clients for payment of the balances owing from August 7 31 Billed a client $6,000 for services performed today 31 $500 of the amount collected on August 5 has been earned as of today Required : 1. Create a table like the one below by copying the headings shown. ASSETS = LIABILITIES + EQUITY Acct. Ppd. Unused Bank Acct. Unearned Share Retained Cash + Rec. + Exp. + Supplies + Truck = Loan + Pay. + Revenue + Capital + Earnings 2. Useaddi onsandsubtrac onsinthetablecreatedinPart1toshowtheeffectsoftheAugusttransac ons. For non-transac ons that do not impact the accoun ng equa on items (such as August 3), indicate ‘NE’ for ‘No Effect’. 3. Total each column and prove the accoun ng equa on balances. Required : Refer to your answer for Problem 1–3 . Prepare an income statement and a statement of changes in equity for the month ended August 31, 2015. Label the revenue earned as Fees Earned. Prepare a balance sheet at August 31, 2015. PROBLEM1–4 (LO4) PreparingFinancialStatements

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44 Introduc on to Financial Accoun ng PROBLEM 1–5 (LO5) Transac on Analysis and Table The following transac ons occurred for Olivier Bondar Ltd., an restaurant management consul ng service, during May, 2016: May 1 Received a cheque in the amount of $5,000 from TUV Restaurant Ltd., for a restaurant food cleanliness assessment to be conducted in June. May 1 Paid $5,000 for office rent for the month of May. May 2 Purchased office supplies for $3,000 on account. May 3 Completed a consulta on project for McDanny’s Restaurant and billed them $27,000 for the work. May 4 Purchased a laptop computer for $3,000 in exchange for a note payable due in 45 days. May 5 Olivier Bondar was a li le short on cash, so the manager made an applica on for a bank loan in the amount of $20,000. It is expected that the bank will make their decision regarding the loan next week. May 6 Received an invoice from the u li es company for electricity in the amount of $300. May 10 Bank approved the loan and deposited $20,000 into Olivier Bondar’s bank account. First loan payment is due on June 10. May 11 Paid for several invoices outstanding from April for goods and services received for a total of $8,000. The breakdown of the invoice costs are: telephone expense $500; adver sing expense $3,000; office furniture $2,000; office supplies $2,500. May 13 Paid employee salaries owing from May 1 to May 13 in the amount of $3,000. May 14 Completed consul ng work for a U.S. client and invoiced $18,000 US (US funds). The Canadian equivalent is $25,000 CAD. May 15 Received $25,000 cash for work done and invoiced in April. May 18 Hired a new employee who will begin work on May 25. Salary will be $2,500 every two weeks. May 21 Placed an order request for new shelving for the office. Catalogue price is $2,500. May 27 Paid employee salaries owing from May 14 to May 27 in the amount of $3,500. May 29 The bookkeeper was going to be away for two weeks, so the June rent of $5,000 was paid. May 31 Reimbursed $50 in cash to an employee for use of his personal vehicle for company business on May 20. May 31 Shelving unit ordered on May 21 was delivered and installed. Total cost was $3,000, including labour. Required : Create a table with the following column headings and opening balances. Below the opening balance, number each row from 1 to 18:

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Cash Accounts Office Prepaid Equipment Office Accounts Note/Loan Unearned Share Retained receivable supplies expenses furniture payable payable revenue capital earnings Open Bal +10,000 +25,000 +2,000 0 +25,000 +15,000 +35,000 0 0 +8,000 +34,000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

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16 17 18 Bal Using the table as shown in Figure 1.3 of the text, complete the table for the 18 items listed in May and total each column. If any of the items are not to be recorded, leave the row blank. 4 2 I n t r o d u c o n t o F i n a n c i a l A c c o u n n g

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Problems 47 PROBLEM 1–6 (LO5) Transac on Analysis and Table Required : Using the data from the table in PROBLEM 1–5 , prepare the balance sheet as at May 31, 2016.

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