Some accountants have said that the development and acceptance of generally accepted accounting principles (that is, standard setting) is undergoing a “politicization.” Some use the term “politicization” in a narrow sense to mean the influence by government agencies, particularly the securities commissions, on the development of generally accepted accounting principles. Others use it more broadly to mean the compromise that results when the bodies that are responsible for developing generally accepted accounting principles are pressured by interest groups (securities commissions, stock exchanges, businesses through their various organizations, financial analysts, bankers, lawyers, etc.). Instructions (a) What are the arguments in favour of the politicization of accounting standard setting? (b) What are the arguments against the politicization of accounting standard setting?
> On December 31, adjusting information for Big & Rich Corporation is as follows: 1. Estimated depreciation on equipment is S3, 400. 2. Property taxes amounting to $2,525 have been incurred but are unrecorded and unpaid. 3. Employee wages that are earned b
> Lazy Dog Inc. is a small private company that prepares monthly financial statements from a work sheet. Selected parts of the February work sheet showed the following data: During February, no events occurred that affected these accounts. At the end of F
> On July 1, 2014, Blondie Ltd. pays $18,000 to No Claims Insurance Ltd. for a three-year insurance contract. Both companies have fiscal years ending December 31. Prepare two sets of journal entries for Blondie, with each set of journal entries recording t
> The adjusted trial balance of North Bay Corporation is provided in the following work sheet for the year ended December 31, 2014. Instructions The note payable is due in four months. Complete the work sheet and prepare a statement of financial position
> Yeliw Enterprises purchases inventory amounting to $12,000, and records the expenditure as a debit to Office Equipment. What would be the effect of this error on the balance sheet and income statement in the period of the purchase, assuming the inventory
> One Wiser Corp. had the following transactions during the first month of business. Journalize the transactions. August 2 Invested $12,000 cash and $2,500 of equipment in the business in exchange for common shares. 7 Purchased supplies on account for
> Recently, your Uncle Warren, who knows that you always have your eye out for a profitable investment, has discussed the possibility of your purchasing some corporate bonds that he just learned of. He suggests that you may wish to get in on the ground flo
> Indicate the qualitative characteristic of financial information being described in each item below: (a) Financial statements should include all information necessary to portray the underlying transactions. (b) Financial information should make a differe
> A Special Committee on Financial Reporting proposed the following constraints related to financial reporting. 1. Business reporting should exclude information outside of management's expertise or for which management is not the best source, such as infor
> The following transactions fall somewhere in the continuum of the choices in accounting decision-making that are shown in Illustration 2-5. 1. The company president approaches one of the company's creditors to ask for a modification of the repayment te
> For each item that follows, indicate which element of the financial statements it belongs to: (a) Retained earnings (b) Sales Revenue (c) Acquired goodwill (d) Inventory (e) Depreciation (f) Loss on sale of equipment (g) Interest payable (h) Dividends
> You are hired to review the accounting records of Sheridan Corporation (a public corporation) before it closes its revenue and expense accounts as at December 31, 2014, the end of its current fiscal year. The following information comes to your attention
> Examples of some operational guidelines used by accountants follow. 1. The treasurer of Sweet Grapes Corp. would like to prepare financial statements only during downturns in the company's wine production, which occur periodically when the grape crop fai
> The following are operational guidelines and practices that have developed over time for financial reporting. 1. Price-level changes (inflation and deflation) are not recognized in the accounting records. 2. Financial information is presented so that rea
> The foundational principles of accounting are as follows: Recognition/ Derecognition 1. Economic entity 2. Control 3. Revenue recognition and realization 4. Matching Measurement 5. Periodicity 6. Monetary unit 7. Going concern 8. Historical cost 9. Fair
> Lucky Enterprises is using a discounted cash flow model. Identify which model Lucky might use to estimate discounted fair value under each scenario, and calculate the fair value: Scenario 1: Cash flows are fairly certain $1 00/year for 5 years Risk-adjus
> Medici Patriarchs purchased the following investments during 2014: (a) 1,000 shares of Private Limited, a start-up company. The value of this investment was based on an internally developed model. (b) 5,000 shares of CIBC, a public company listed on the
> Repeat BE2-6 but apply the definition of a liability proposed by the IASB and FASB. BE2-6 Discuss whether the following items would meet the definition of a liability using the criteria currently in place under IFRS. If so, explain with reference to th
> Discuss whether the following items would meet the definition of a liability using the criteria currently in place under IFRS. If so, explain with reference to the appropriate criteria. (a) Environmental remediation when a chemical spill has occurred. Th
> Refer to BE2-4. Discuss whether the items identified would be considered assets if the definition proposed by IFRS were applied. BE2·4 Discuss whether the following items would meet the definition of an asset using the IFRS definitions currently in pla
> The conceptual framework identifies the fundamental and enhancing qualitative characteristics that make accounting information useful. Instructions Answer the following questions related to these qualitative characteristics. (a) 'Which quality of financi
> Discuss whether the following items would meet the definition of an asset using the IFRS definitions currently in place. If so, explain with reference to the appropriate criteria. (a) Maxwell Ltd. owns a corporate fleet of cars for senior management's us
> What principle(s) from the conceptual framework does Hen day Limited use in each of the following situations? (a) Henday includes the activities of its subsidiaries in its financial statements. (b) Henday was involved in litigation with Kinshasa Ltd. ove
> 'What is the objective of financial reporting? For each of the situations discussed below, explain the qualitative characteristics of financial information that help provide decision-useful information to users. (a) Marcus Corp. has a management bonus pl
> Using fair values came under attack in light of the credit crunch of the last decade and the related financial crisis. Some have even accused fair value accounting of exacerbating the crisis. Access the following articles: "Discussing the Credit Crunch,"
> In its 2011 financial statements (Note 4), Air Canada has disclosed its critical estimates and judgments used in preparation of the financial statements. Instructions Access the 2011 annual report for Air Canada for the year ended December 31,2011, from
> Obtain the 2011 financial statements of Teck Resources Limited from SEDAR (www.sedar.com). Instructions (a) Using the notes to the consolidated financial statements, determine the company's revenue recognition policy. Comment on whether the company uses
> An accountant must be familiar with the concepts involved in determining the earnings of a business entity. The amount of earnings that is reported for a business entity depends on the proper recognition, in general, of revenues and expenses for a specif
> In the IASB standard-setting conceptual framework, the word "reliability" has been replaced with "faithful representation." This has caused much discussion among preparers of financial information. This change has led to other implications related to sub
> Roger Chang has some questions about the theoretical framework in which standards are set. He knows that standard setters are continually striving to develop a conceptual framework for the formulation of accounting theory. Yet Roger's supervisors have sa
> The elements that are most directly related to measuring an enterprise performance and financial status follow: Instructions (a) Indicate which element is being described below. For any item that is an asset or liability, consider if the item qualifies u
> Hoda Inc. owns 25% of the common shares of Willard Corp. The other 75% are owned by the Willard family. Hoda acquired the shares eight years ago through a financing transaction. Each year, Hoda has received a dividend from Willard. Willard has been in bu
> The proposed definition of a liability is a "present economic obligation for which the entity is the obligor." These terms can be further expanded as follows (as taken from l>\SB Board meeting minutes): "Present'' means at the report date that an economi
> The fair value hierarchy establishes three levels of input, with level one being the best type, because it uses the most objective inputs, and level three using the most subjective inputs. Instructions For each of the following scenarios, identify the le
> (Bre-X), a small mining company, announced in the early 1990s that it had discovered a fairly significant gold deposit in Indonesia. The company's shares skyrocketed from pennies a share to over $280 per share. Subsequently, it was discovered that the co
> For each item that follows, identify the foundational principle of accounting that best describes it. (a) For its annual repom, Sumsong Corp. divides its economic activities into 12-month periods. (b) Sullivan, Inc. does not adjust amounts in its financi
> The statement that follows about Timber Company appeared in a financial magazine: The land and timber holdings are now carried on the company's books at a mere S100 million (U.S.). The value of the timber alone is variously estimated at $1 billion to $3
> Its basic business is high-temperature treatment Services for contaminated soil. In its 2011 financial statements, the company had a loss of $9.3 million (and an accumulated deficit of $43.7 million). In the notes to the financial statements, the company
> Accounting information provides useful data about business transactions and events. The people who provide and use financial reports must often select and evaluate accounting alternatives. The conceptual framework that was discussed in this chapter exami
> Transactions from Lucky Bamboo, Inc.'s current year follow. 1. Lucky Bamboo, Inc. thinks it should dispose of its excess land. VVhile the book value is $50,000, current market prices are depressed and only $25,000 is expected upon disposal. The following
> Fusters, Inc. issues audited financial statements to its creditors and is required to maintain certain covenants based on its debt to equity ratio and return on assets. In addition, management of Fusters receives a bonus partially based on revenues for t
> Foundational principles of financial reporting may be grouped into four categories: recognition / derecognition, measurement, presentation, and disclosure. Instructions Briefly describe what is meant by these terms.
> Meerkat Industries would like to determine the fair value of its manufacturing facility in London, Ontario. The facility consists of land, building, and manufacturing equipment. Instructions (a) Identify some of the considerations that are involved in a
> Instructions (a) Explain the meaning and implications of the going concern assumption in financial accounting. (b) If the going concern assumption did not apply in accounting, how would this affect the amounts shown in the financial statements for the fo
> The following information is for Brittany, Inc. 1. To be more concise, the company decided that only net income should be reported on the income statement. Details on revenues, cost of goods sold, and expenses were also omitted from the notes. 2. Equipme
> The following are transactions recorded by Bounce Corporation during the current year. 1. Ordinary operating maintenance on equipment was recorded as follows: 2. The company received an advance on a custom order for merchandise that will be shipped durin
> Some individuals have argued that all Canadian companies should follow the same set of accounting principles. Explain why there are multiple sets of standards in Canada.
> In general, financial information should include all relevant information that faithfully represents the economic substance of business transactions. Instructions Discuss whether it is possible for financial information to have all of the qualitative ch
> Assets are the cornerstone of financial reporting; often it is unclear whether an expenditure is an asset or an expense. For each of the transactions described below, consider if the expenditure should be recorded as an asset or as an expense. Be sure to
> Some critics argue that having different organizations establish accounting principles is wasteful and inefficient. Instead of mandating accounting standards, each company could voluntarily disclose the type of information it considered important. In add
> The national credit rating agency downgraded the credit rating of Grand Limited by two levels from BB to B+. The credit rating agency was concerned about the company’s ability to refinance portions of its debt. Both BB and B+ are considered “junk” bonds
> Boston Clothing Limited was a private company that experienced cash flow difficulties and hired new management to turn the company around. The company then went public and the shares sold at $15 per share. Within months, however, the share price plummete
> When the AcSB issues new standards, the implementation date is usually 12 months after the issue date, but early implementation is encouraged. In this case, Paula Popov, controller, is discussing with her financial vice-president the need for early imple
> What is the difference between principles-based and rules-based accounting standards? In which category does IFRS belong? ASPE? Explain.
> Some individuals have argued that the ACSB and the International Accounting Standards Board (IASB) need to be aware of the economic consequences of their pronouncements. What is meant by “economic consequences”? What are some of the dangers if politics p
> What are some possible reasons why another organization, such as the OSC or the Securities and Exchange Commission (SEC), should not issue financial reporting standards?
> What is the role of the Ontario Securities Commission (OSC) in standard setting?
> Explain the role of the Canadian Accounting Standards Board (AcSB) in establishing generally accepted accounting principles.
> Which organization is currently dominant in the world for setting accounting standards?
> The chairman of the Financial Accounting Standards Board (FASB) at one time noted that “the flow of standards can only be slowed if (1) producers focus less on quarterly earnings per share and tax benefits and more on quality products, and (2) accountant
> What are some of the developments or events that occurred between 1900 and 1930 that helped bring about changes in accounting theory or practice?
> In 2012, Hans Hoogervorst, Chairman of the IASB, gave a speech at the FEE Conference on Corporate Reporting of the Future entitled “The Concept of Prudence: Dead or Alive?”. The speech can be found on the IFRS website at: www.ifrs.org. Instructions (a)
> What follows is part of the testimony from Troy Normand in the WorldCom case. He was a manager in the corporate reporting department and is one of five individuals who pleaded guilty. He testified in the hope of receiving no prison time when he was ultim
> Find the FASB website and locate the “Update Report to the FSB Plenary on Accounting Convergence” that was issued in 2012. Convergence between the standards in the United States and IFRS is an ongoing topic of discussion among standard setters. Some of t
> In 2002, the Sarbanes-Oxley Act was passed in the United States to strengthen the capital market- place. In the following year, there were many debates in Canada about whether the securities com-missions in Canada should adopt the same regulations. In th
> The Canadian Coalition for Good Governance was formed in 2002 and represents a significant number of institutional investors in Canada. Instructions (a) How does an institutional investor differ from other investors? (b) In your opinion, what impact wou
> Michael Sharpe, then deputy chairman of the International Accounting Standards Committee, made the following comments before the Financial Executives International 63rd Annual Conference: There is an irreversible movement toward the harmonization of fina
> The IASB released an Exposure Draft (ED) in May 2012 titled Annual Improvements to IFRSs: 2010 – 2012 Cycle. This IASB publication is intended to invite comment on changes that might improve various standards. The ED is available on the IASB website. In
> How does information asymmetry hurt investors in the capital marketplace?
> The IASB has instituted four principles related to its funding to ensure that funding does not lead to politicization of standard setting. The standards specify that funding should be broad-based, compelling, open-ended, and country-specific. This differ
> Explain the difference between primary and other sources of GAAP.
> The integrated reporting initiative discussed in this chapter focuses on extending the disclosure of financial statements to include more information about a company and its objectives and performance. Instructions Discuss what type of users of the fina
> While it is a goal of standard setters to develop accounting standards that will provide comparability across organizations and over time, there are instances when professional judgement must be used in determining the correct amount of disclosure. Assum
> There are many situations in which management of a company may want to disclose more or less information about their operations. In a situation where a manufacturer is preparing for the launch of a new product line, the information available to managemen
> Financial statements can be a valuable tool for many interested parties in the performance of a company. Consider a public company in Alberta that drills oil and sells it to refineries in the United States. The company prepares its financial statements u
> Effective 2011, Canada now has a two-tiered system for determining GAAP for private versus public companies. Private companies will follow ASPE as prepared by the AcSB, and public companies will have to follow IFRS. Private companies will be allowed to u
> As mentioned in the chapter, the capital marketplace’s reaction to recent corporate failures has been to increase the amount of government regulation. Instructions (a) Identify what steps Canada and the United States have taken to increase government re
> Nortel Networks Inc., the former telecommunications giant, was accused of misstating its financial statements. The auditors for the company signed audit reports in which they stated that the financial statements of the company were fairly presented. Ins
> The increased availability and accessibility of information has had a major impact on the process of financial reporting. Most companies have websites and make available to stakeholders a significant amount of financial information, including annual repo
> Three models for setting accounting standards follow: 1. The purely political approach, where national legislative action decrees accounting standards 2. The private, professional approach, where financial accounting standards are set and enforced by pri
> Describe what is meant by information asymmetry.
> If you were given complete authority to decide this, how would you propose that accounting principles or standards be developed and enforced?
> Identify at least three major stakeholders that use financial accounting information and briefly explain how these stakeholders might use the information from financial statements.
> Your company has been approached to bid on a contract to sell 15,000 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be outdated and no sales will be possible. The equipment n
> One of the less flattering interpretations of the acronym MIRR is “meaningless internal rate of return.” Why do you think this term is applied to MIRR?
> Travis, Inc., has sales of $387,000, costs of $175,000, depreciation expense of $40,000, interest expense of $21,000, and a tax rate of 35 percent. What is the net income for the firm? Suppose the company paid out $30,000 in cash dividends. What is the a
> Why don’t all firms simply increase their payables periods to shorten their cash cycles? Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The reason given was that the company wanted to “control c
> You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1.1 million. Over the past five years, the price of land in the area has increased 12 percent per year, with an annual standard deviation of 25 percent. A
> California Real Estate, Inc., expects to earn $71 million per year in perpetuity if it does not undertake any new projects. The firm has an opportunity to invest $16 million today and $5 million in one year in real estate. The new investment will generat
> This one’s a little harder. Suppose the current share price for the firm in the previous problem is $78.43 and all the dividend information remains the same. What required return must investors be demanding on Storico stock?
> Universal Laser, Inc., just paid a dividend of $3.10 on its stock. The growth rate in dividends is expected to be a constant 6 percent per year, indefinitely. Investors require a 15 percent return on the stock for the first three years, a 13 percent retu
> You’re prepared to make monthly payments of $350, beginning at the end of this month, into an account that pays 10 percent interest compounded monthly. How many payments will you have made when your account balance reaches $35,000?
> An investment project has annual cash inflows of $5,000, $5,500, $6,000, and $7,000, and a discount rate of 14 percent. What is the discounted payback period for these cash flows if the initial cost is $8,000? What if the initial cost is $12,000? What if
> What is the value of an investment that pays $30,000 every other year forever, if the first payment occurs one year from today and the discount rate is 13 percent compounded daily? What is the value today if the first payment occurs four years from today
> Storico Co. just paid a dividend of $3.85 per share. The company will increase its dividend by 20 percent next year and will then reduce its dividend growth rate by 5 percentage points per year until it reaches the industry average of 5 percent dividend
> Given an interest rate of 6.1 percent per year, what is the value at Date t = 7 of a perpetual stream of $2,500 annual payments that begins at Date t = 15?
> You have your choice of two investment accounts. Investment A is a 15-year annuity that features end-of-month $1,500 payments and has an interest rate of 8.7 percent compounded monthly. Investment B is an 8 percent continuously compounded lump-sum invest
> Your company currently produces and sells steel shaft golf clubs. The board of directors wants you to consider the introduction of a new line of titanium bubble woods with graphite shafts. Which of the following costs are not relevant? a. Land you alread
> In the chapter, we discussed one calculation of the sustainable growth rate as: In practice, probably the most commonly used calculation of the sustainable growth rate is ROE 3 b. This equation is identical to the sustainable growth rate equation prese
> First City Bank pays 8 percent simple interest on its savings account balances, whereas Second City Bank pays 8 percent interest compounded annually. If you made a $5,000 deposit in each bank, how much more money would you earn from your Second City Bank
