Chapter 1
The Financial Statements
Short Exercises
(5 min.) S 1-1
1. Assets are resources controlled by the company as a result of past events and from which
the company expects to receive future economic benefits.
Shareholders’ equity represents the insider claims of a business, the claims to the assets
held by the owners of the business.
Assets and shareholders’ equity differ in that shareholders’ equity is a claim to assets.
Assets must be at least as large as shareholders’ equity. Equity can be smaller than assets.
2. Both liabilities and shareholders’ equity are claims to assets.
Liabilities are the outsider claims to the assets of a business. Shareholders’ equity
represents the insider claims to the assets of the business.
(5 min.) S 1-2
Total assets = Total liabilities + Shareholders’ equity
a)
$300,000 = $150,000 + $150,000
b)
290,000 = 90,000 + 200,000
c)
220,000 = 100,000 + 120,000
1
, Financial Accounting Seventh Canadian Edition Instructor’s Solutions Manual
(continued) S 1-2
A different presentation should be:
a) Total assets = Total liabilities + Shareholders’ equity
= $150,000 + $150,000 = $300,000
b) Shareholders’ equity = Total assets – Total liabilities
= $290,000 – $90,000 = $200,000
c) Total liabilities = Total assets – Shareholders’ equity
= $220,000 – $120,000 = $100,000
(5 min.) S 1-3
1. Shareholders’ Equity = Assets – Liabilities
It would not change in analyzing a household or a neighbourhood restaurant’s information.
2. Liabilities = Assets – Shareholders’ Equity
(5-10 min.) S 1-4
a. Accounts payable L g. Accounts receivable A
b. Common shares E h. Long-term debt L
c. Cash A i. Merchandise inventories A
d. Retained earnings E j. Notes payable L
e. Land A k. Accrued expenses payable L
f. Prepaid expenses A l. Equipment A
(5 min.) S 1-5
1. Income and expenses
2. Net income, or net earnings (or net loss, if negative)
2
,Financial Accounting Seventh Canadian Edition Instructor’s Solutions Manual
(10 min.) S 1-6
Split Second Wireless Inc.
Statement of Income
For the Year Ended December 31, 2020
(In millions)
Revenue $ 90
Expenses 20
Net income $ 70
(5 min.) S 1-7
Mondala Ltd.
Statement of Retained Earnings
For the Year Ended December 31, 2020
(In millions)
Balance, beginning of year ................................................................. $200
Net income ($400 − $300) ................................................................. 100
Less: Dividends .................................................................................. (40)
Balance, end of year ........................................................................... $260
3
, Financial Accounting Seventh Canadian Edition Instructor’s Solutions Manual
(10-15 min.) S 1-8
Skate Sharp Limited
Balance Sheet
December 31, 2020
ASSETS
Current assets:
Cash $ 13,000
Receivables........................................................................................... 2,000
Inventory .............................................................................................. 40,000
Total current assets ............................................................................... 55,000
Equipment .................................................................................................. 75,000
Other assets ................................................................................................ 10,000
Total assets ................................................................................................. $140,000
LIABILITIES
Current liabilities:
Accounts payable .................................................................................. $ 10,000
Short-term notes payable....................................................................... 5,000
Total current liabilities .......................................................................... 15,000
Long-term liabilities:
Long-term debt ...................................................................................... 70,000
Total liabilities 85,000
SHAREHOLDERS’ EQUITY
Share capital ................................................................................................ 15,000
Retained earnings ........................................................................................ 40,000*
Total shareholders’ equity ..................................................................... 55,000
Total liabilities and shareholders’ equity .................................................... $140,000
_____
*Computation:
Total assets ($140,000) – current liabilities ($15,000) – long-term debt ($70,000) – share capital ($15,000) =
$40,000
4
The Financial Statements
Short Exercises
(5 min.) S 1-1
1. Assets are resources controlled by the company as a result of past events and from which
the company expects to receive future economic benefits.
Shareholders’ equity represents the insider claims of a business, the claims to the assets
held by the owners of the business.
Assets and shareholders’ equity differ in that shareholders’ equity is a claim to assets.
Assets must be at least as large as shareholders’ equity. Equity can be smaller than assets.
2. Both liabilities and shareholders’ equity are claims to assets.
Liabilities are the outsider claims to the assets of a business. Shareholders’ equity
represents the insider claims to the assets of the business.
(5 min.) S 1-2
Total assets = Total liabilities + Shareholders’ equity
a)
$300,000 = $150,000 + $150,000
b)
290,000 = 90,000 + 200,000
c)
220,000 = 100,000 + 120,000
1
, Financial Accounting Seventh Canadian Edition Instructor’s Solutions Manual
(continued) S 1-2
A different presentation should be:
a) Total assets = Total liabilities + Shareholders’ equity
= $150,000 + $150,000 = $300,000
b) Shareholders’ equity = Total assets – Total liabilities
= $290,000 – $90,000 = $200,000
c) Total liabilities = Total assets – Shareholders’ equity
= $220,000 – $120,000 = $100,000
(5 min.) S 1-3
1. Shareholders’ Equity = Assets – Liabilities
It would not change in analyzing a household or a neighbourhood restaurant’s information.
2. Liabilities = Assets – Shareholders’ Equity
(5-10 min.) S 1-4
a. Accounts payable L g. Accounts receivable A
b. Common shares E h. Long-term debt L
c. Cash A i. Merchandise inventories A
d. Retained earnings E j. Notes payable L
e. Land A k. Accrued expenses payable L
f. Prepaid expenses A l. Equipment A
(5 min.) S 1-5
1. Income and expenses
2. Net income, or net earnings (or net loss, if negative)
2
,Financial Accounting Seventh Canadian Edition Instructor’s Solutions Manual
(10 min.) S 1-6
Split Second Wireless Inc.
Statement of Income
For the Year Ended December 31, 2020
(In millions)
Revenue $ 90
Expenses 20
Net income $ 70
(5 min.) S 1-7
Mondala Ltd.
Statement of Retained Earnings
For the Year Ended December 31, 2020
(In millions)
Balance, beginning of year ................................................................. $200
Net income ($400 − $300) ................................................................. 100
Less: Dividends .................................................................................. (40)
Balance, end of year ........................................................................... $260
3
, Financial Accounting Seventh Canadian Edition Instructor’s Solutions Manual
(10-15 min.) S 1-8
Skate Sharp Limited
Balance Sheet
December 31, 2020
ASSETS
Current assets:
Cash $ 13,000
Receivables........................................................................................... 2,000
Inventory .............................................................................................. 40,000
Total current assets ............................................................................... 55,000
Equipment .................................................................................................. 75,000
Other assets ................................................................................................ 10,000
Total assets ................................................................................................. $140,000
LIABILITIES
Current liabilities:
Accounts payable .................................................................................. $ 10,000
Short-term notes payable....................................................................... 5,000
Total current liabilities .......................................................................... 15,000
Long-term liabilities:
Long-term debt ...................................................................................... 70,000
Total liabilities 85,000
SHAREHOLDERS’ EQUITY
Share capital ................................................................................................ 15,000
Retained earnings ........................................................................................ 40,000*
Total shareholders’ equity ..................................................................... 55,000
Total liabilities and shareholders’ equity .................................................... $140,000
_____
*Computation:
Total assets ($140,000) – current liabilities ($15,000) – long-term debt ($70,000) – share capital ($15,000) =
$40,000
4
