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Chapter 1

Accounting: The Key to Success

Questions 1. Wynne Powell identifies accounting knowledge as the key to success in business. 2. Service business examples include: WestJet Airlines, Sympatico, AOL Canada, CompuServe, Microsoft, Tim Hortons, Harveys, McDonalds, Burger King, Tilden, Hertz, and Budget. Businesses offering products include Leons, CCM, Bauer, NIKE, Reebok, Dell, HewlettPackard, Apple, Tilley, Levis, and GAP. 3. Business organizations can be organized in one of three forms: sole proprietorship, partnership, or corporation. These forms have implications for legal liability, taxation, continuity, number of owners, and legal status as follows: Legal entity Limited liability Unlimited life Business taxed One owner allowed Proprietorship Partnership no no no no no no no no yes no Corporation yes yes yes yes yes

4. The two organizations for which accounting information is available in Appendix I at the end of the book are WestJet Airlines and Leons Furniture. 5. Hospitals, colleges, electric utilities, prisons, and bus lines are examples of organizations that can be formed as profit-oriented businesses, government units, or nonprofit establishments. 6. Individuals responsible for marketing activities are likely interested in information such as sales volume, advertising costs, promotion costs, salaries of sales personnel, and sales commissions. 7. External users and their uses of accounting information include: (a) lenders for measuring the return of loans; (b) shareholders for assessing the acquisition of shares; (c) directors for overseeing management; and (d) employees for judging employment opportunities. Other users are auditors, consultants, officers, regulators, unions, suppliers, and appraisers. 8. The internal role of accounting is to serve the organizations internal operating functions by providing useful information in completing their tasks more effectively and efficiently. By providing this information, accounting helps the organization reach its overall goals. 9. The purpose of accounting is to provide decision makers with information helping them make better decisions. Examples include information for people making investments, loans and similar decisions. 10. Accounting professionals deal with a variety of information about their employers and clients that is not generally available to the public. Ethical issues arise concerning the possibility that accounting professionals might personally benefit by using confidential information. There is also the possibility that their employers and clients might be harmed if certain information is not kept confidential.

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved. Solutions Manual for Chapter 1

11. Technology and its ability to process vast amounts of data have increased the demand for individuals knowledgeable in accounting. Demand exists for people who can design accounting systems, supervise their operation, analyze complex transactions, and interpret reports. Demand also exists for people who can effectively use computers to analyze accounting reports. Technology will never substitute for qualified people with abilities to prepare, use, and analyze accounting information. 12. Acounting information can be processed efficiently and effectively using technology, hence the relationship. 13. Managerial accounting tasks performed by both private and government accountants include general accounting, cost accounting, budgeting, auditing, and management consulting. 14. Management consulting services offered by public accounting professionals include designing and installing accounting systems, establishing internal controls, advice on budgeting, guidance in information technology, and constructing employee benefit plans. 15. In addition to preparing tax returns, tax accountants help companies plan future transactions to minimize the amount of tax to be paid. 16. The independent auditor for Leons Furniture is Ernst & Young LLP.

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved. Solutions Manual for Chapter 1

QUICK STUDY Quick Study 1-1 Accounting information could be used to determine if a product should be sold or if an investment should be made. Quick Study 1-2 The choice of an accounting method when more than one alternative method is acceptable often has ethical implications. This is because accounting information can have major impacts on individuals wellbeing. For example, many companies base compensation of managers on the amount of reported profit. When the choice of an accounting method affects the amount of reported profit, the amount of compensation is also affected. Similarly, if workers in a division receive bonuses based on the divisions profit, its computation has direct financial implications to these individuals. Quick Study 1-3 Accountants need to enhance their knowledge of information technology not only because it is critical to keep pace with new developments such as e-commerce and accounting software, but also to more effectively and efficiently analyze and interpret the increasing volume and speed of information. Quick Study 1-4 Internal controls serve several purposes. They monitor an organizations activities to promote efficiency and prevent wrongful use of its resources. They also help ensure the validity and credibility of accounting reports. Internal controls are often crucial to effective operations.

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved. Solutions Manual for Chapter 1

Quick Study 1-5 Accounting professionals practice in many areas including: * Financial accounting * Managerial accounting * Taxation * Management consulting * Auditing * Government accounting * Information systems Accounting related opportunities are numerous and include: * Credit analysis or lending * Investment and other financial services * Valuation and appraisal * Financial planning *Quick Study 1-6 Note to instructor: Go to the site and engage the students in a discussion.

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved. Solutions Manual for Chapter 1

EXERCISES Exercise 1-1 (10 minutes) a. b. c. d. e. f. g. Corporation Sole proprietorship Corporation Partnership Sole proprietorship Sole proprietorship Corporation

Exercise 1-2 (5 minutes) Bank manager Owner Toy Supplier I or E E I E I or E Parent E Canada Customs and Revenue E Agency Cleaner contracted by TLC E

Exercise 1-3 (15 minutes) (Answers will vary.) External users and some questions they seek to answer with accounting information include: a. Shareholders (investors), who seek answers for questions such as: 1. Are resources owned by a business adequate to carry out plans? 2. Are the debts owed excessive in amount? 3. What is the current level of income? b. Creditors, who seek answers for questions such as: 1. Does the business have the ability to repay its debts? 2. Can the business take on additional debt? 3. Are resources sufficient to cover current amounts owed? c. Employees, who seek answers to questions like: 1. Is the business financially stable? 2. Can the business afford to pay higher salaries? 3. What are growth prospects for the organization?

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved. Solutions Manual for Chapter 1

Exercise 1-4 (20 minutes) (Answers will vary.) a. Common situations involving ethical decision-making in course work include performing independent work on examinations and individually submitted assignments/projects. It can also extend to promptly returning reference materials so others can use them, and in proper preparation for class to efficiently use the time and question period to not detract from others instructional benefits. b. Managers can face several situations demanding ethical decisionmaking in their dealings with employees. Examples include fairness in performance evaluations, salary adjustments, and promotion recommendations. They can also include avoiding any perceived or real harassment of employees by the manager or any other employees. It can also include issues of confidentiality regarding personal information known to managers. c. Accounting professionals who prepare tax returns can face situations where clients wish to claim deductions that they cannot substantiate. Also, clients sometimes exert pressure to use methods not allowed or questionable under the law. Issues of confidentiality also arise when these professionals have access to clients personal records. d. Auditing professionals with competing audit clients are likely to learn valuable information about each client that the other clients would benefit from knowing. In this situation the auditor must take care to maintain the confidential nature of information about each client. There could also be a potential conflict of interest. Exercise 1-5 (20 minutes) http://globeandmail.ca http://www.canadianbusiness.com a Canadian newspaper online - a Canadian business magazine online http://www.PROFITguide.com - a Canadian business magazine online http://finance.yahoo.com a general business site

http://www.sedar.com http://www.strategis.ic.gc.ca an online database that The Canadian Business has accounting information for Map provides access to thousands of public companies international, national, provincial, that operate in Canada territorial, and municipal
Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved. Solutions Manual for Chapter 1 6

business information http://canada.gc.ca http://www.canadiancareers.com The Canada Site is very Canadian Careers useful in keeping you abreast of provides information as to where changes in regulations and the jobs in Canada are legislation that affect business

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved. Solutions Manual for Chapter 1

Exercise 1-6 (10 minutes) 1. 2. 3. 4. 5. B C F A G

Exercise 1-7 (5 minutes) 1. 2. 3. 4. 5. H C E A F

Exercise 1-8 (10 minutes) 1. 2. 3. 4. 5. 6. 7. 8. A C B A A B B C

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved. Solutions Manual for Chapter 1

PROBLEMS Problem 1-1A (10 minutes) Characteristic Type of Business Organization Sole Proprietorship Limited liability Unlimited liability Owners are shareholders Owners are partners Taxed as a separate legal entity Problem 1-1B (5 minutes) a) WestJet Airlines Ltd. is a corporation because it has shareholders. b) Leons Furniture is a corporation because it has shareholders. Ethics Challenge The retailer is taking advantage of the consumers in this time of crisis. It is important that companies balance profits with ethics and social responsibility. According to the CGAs Code of Ethical Principles (see Appendix to Chapter 1), Members have a fundamental responsibility to safeguard and advance the interests of society. This responsibility extends beyond a members own behaviour to the behaviour of colleagues and to the standards of the Association and the profession. It may be prudent of Dennis to discuss with his boss the ethical and socially responsible alternative(s) to raising prices. Partners hip Corporatio n

Copyright 2005 by McGraw-Hill Ryerson Limited. All rights reserved. Solutions Manual for Chapter 1

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