Chapter 1
Accounting and the Business Environment
Questions
1. Accounting is a system for measuring, processing, and communicating
financial information. Bookkeeping is a procedural element of
accounting.
2. a. The general public uses accounting information to manage bank
accounts, loan payments, etc.
b. Managers and owners of businesses use accounting to monitor
expenses and revenue recorded.
c. Investors and creditors use accounting information to evaluate
investments and loan applications.
d. Government agencies (including taxation authorities) use
accounting data to create reports and collect payments.
e. Not-for-profit organizations such as churches and hospitals use
accounting information in much the same way as managers of
businesses do—to manage their organizations.
3. Reasons for the development of accounting thought include the
commercial climate of fifteenth-century Italy, the Industrial Revolution,
the rise of the corporation as a business organization, income tax, the
increase in the complexity of economic activities, and the increase in
government influence on daily life. (Only two are required.)
4. Three professional designations of accountants are Chartered
Accountant (CA), Certified General Accountant (CGA), and Certified
Management Accountant (CMA).
5. The Accounting Standards Board formulates generally accepted
accounting principles. It is not a government agency.
6. The owner of a proprietorship is called the proprietor, the owners of a
partnership are called partners, and the owners of a corporation are
called shareholders.
7. Ethical standards in accounting are designed to encourage accountants
to produce honest information for decision making. The provincial
institutes of CAs’ and the CGAAC’s ethical standards are directed
toward independent auditors, but also govern CAs and CGAs,
respectively, in industry and government. The SMAC’s standards relate
more to management accountants.
8. The economic entity assumption draws clear boundaries around each
entity. It is important because it allows decision makers to evaluate each
entity as a separate economic unit.
Copyright © 2014 Pearson Canada Inc. 1
, 9. Four examples of types of accounting entities are a household, a
business such as a drugstore or a manufacturer, a professional
organization such as a law firm or a medical practice, and a not-for-
profit organization such as a church or a hospital. (Answers will vary.)
10. The essence of the reliability characteristic is that accounting
information should be based on the most objective and verifiable data
possible.
11. The cost principle dictates that assets and services purchased be
recorded at the actual cost.
12. Liabilities = Assets – Owner’s Equity.
13. An account receivable is an asset because it is an economic resource
that provides a future benefit—the right to collect cash from another
party. An account payable is a liability because it is another party’s
claim against the business’s cash—an economic obligation.
14. Transactions are events that affect the financial position of the entity
and that may be reliably recorded. They are the raw material of
accounting. Without transactions, there would be nothing to account for.
15. The result of operations is a net loss of $4,400, because expenses
exceed revenues.
16. A more descriptive title for the balance sheet is the “statement of
financial position.”
17. The balance between assets on the left side and liabilities and owner’s
equity on the right side of the balance sheet gives this financial
statement its name. The balance appears in the accounting equation,
Assets = Liabilities + Owner’s Equity, which is essentially a summary
of the balance sheet in equation form.
18. Another title of the income statement is the “statement of operations” or
the "statement of earnings."
19. The balance sheet is like a snapshot of the entity at a specific time. The
income statement is like a moving picture/video of the entity’s
operations during a period of time.
20. The statement of owner’s equity presents a summary of the changes that
occurred in owner’s equity during the period due to additional
investments by the owner, or drawings or withdrawals by the owner,
and due to net income or net loss.
21. Capital is another term for the owner’s equity of a proprietorship.
22. Net income (or net loss) flows from the income statement to the
statement of owner’s equity. Ending owner’s equity then flows to the
balance sheet. The change in cash during the period on the balance
sheet is explained by the cash flow statement, and the ending balance of
cash on the cash flow statement matches the cash amount on the balance
sheet.
23. Since Canada adopted IFRS in 2011, publicly accountable enterprises,
which includes companies whose shares trade on stock exchanges,
must report their financial results under IFRS. They are not allowed to
report under accounting standards for private enterprises (ASPE).
2 Copyright © 2014 Pearson Canada Inc
,However, it makes sense that Canadian publicly traded companies
should report under IFRS since technology and improved
communications are allowing more businesses to either purchase or sell
in markets outside Canada, and to have shareholders that reside
anywhere in the world. Investors in Canadian companies reside all over
the world. It is important that these investors be able to compare the
financial results from companies in similar industries that are located in
different countries. Having one set of accounting principles for all
countries allows investors to do this.
Copyright © 2014 Pearson Canada Inc. 3
, Starters
(5 min.) S 1-1
Revenues are the amounts earned by Ryan in return for his providing goods and services
to customers. Expenses are the decreases in equity that arise from the utilization of
assets or the increase in liabilities to cover the costs needed to deliver goods and
services to customers.
(5 min.) S 1-2
1. The bank is an external user.
2. The balance sheet would be the best financial statement for the bank to use, as it lists
all of the assets, liabilities, and equities for the company.
(5–10 min.) S 1-3
Louise will want to consider the factors discussed in Exhibit 1-5. This shows that a
corporation is the only type of business organization that has an unlimited life. Also, a
corporation is responsible for business debts, not its shareholders. In other words,
Louise's liability will be limited.
(5–10 min.) S 1-4
1 a) Economic-Entity Assumption
b) Cost Principle of Measurement
c) Stable Monetary Unit Assumption
d) Reliability Characteristic
2. Assets = Liabilities + Owner’s Equity
12,000+24,000 = 10,000 + Owner’s Equity
36,000 = 10,000 + Owner’s Equity
Thus, Owner’s Equity = 26,000
4 Copyright © 2014 Pearson Canada Inc
Accounting and the Business Environment
Questions
1. Accounting is a system for measuring, processing, and communicating
financial information. Bookkeeping is a procedural element of
accounting.
2. a. The general public uses accounting information to manage bank
accounts, loan payments, etc.
b. Managers and owners of businesses use accounting to monitor
expenses and revenue recorded.
c. Investors and creditors use accounting information to evaluate
investments and loan applications.
d. Government agencies (including taxation authorities) use
accounting data to create reports and collect payments.
e. Not-for-profit organizations such as churches and hospitals use
accounting information in much the same way as managers of
businesses do—to manage their organizations.
3. Reasons for the development of accounting thought include the
commercial climate of fifteenth-century Italy, the Industrial Revolution,
the rise of the corporation as a business organization, income tax, the
increase in the complexity of economic activities, and the increase in
government influence on daily life. (Only two are required.)
4. Three professional designations of accountants are Chartered
Accountant (CA), Certified General Accountant (CGA), and Certified
Management Accountant (CMA).
5. The Accounting Standards Board formulates generally accepted
accounting principles. It is not a government agency.
6. The owner of a proprietorship is called the proprietor, the owners of a
partnership are called partners, and the owners of a corporation are
called shareholders.
7. Ethical standards in accounting are designed to encourage accountants
to produce honest information for decision making. The provincial
institutes of CAs’ and the CGAAC’s ethical standards are directed
toward independent auditors, but also govern CAs and CGAs,
respectively, in industry and government. The SMAC’s standards relate
more to management accountants.
8. The economic entity assumption draws clear boundaries around each
entity. It is important because it allows decision makers to evaluate each
entity as a separate economic unit.
Copyright © 2014 Pearson Canada Inc. 1
, 9. Four examples of types of accounting entities are a household, a
business such as a drugstore or a manufacturer, a professional
organization such as a law firm or a medical practice, and a not-for-
profit organization such as a church or a hospital. (Answers will vary.)
10. The essence of the reliability characteristic is that accounting
information should be based on the most objective and verifiable data
possible.
11. The cost principle dictates that assets and services purchased be
recorded at the actual cost.
12. Liabilities = Assets – Owner’s Equity.
13. An account receivable is an asset because it is an economic resource
that provides a future benefit—the right to collect cash from another
party. An account payable is a liability because it is another party’s
claim against the business’s cash—an economic obligation.
14. Transactions are events that affect the financial position of the entity
and that may be reliably recorded. They are the raw material of
accounting. Without transactions, there would be nothing to account for.
15. The result of operations is a net loss of $4,400, because expenses
exceed revenues.
16. A more descriptive title for the balance sheet is the “statement of
financial position.”
17. The balance between assets on the left side and liabilities and owner’s
equity on the right side of the balance sheet gives this financial
statement its name. The balance appears in the accounting equation,
Assets = Liabilities + Owner’s Equity, which is essentially a summary
of the balance sheet in equation form.
18. Another title of the income statement is the “statement of operations” or
the "statement of earnings."
19. The balance sheet is like a snapshot of the entity at a specific time. The
income statement is like a moving picture/video of the entity’s
operations during a period of time.
20. The statement of owner’s equity presents a summary of the changes that
occurred in owner’s equity during the period due to additional
investments by the owner, or drawings or withdrawals by the owner,
and due to net income or net loss.
21. Capital is another term for the owner’s equity of a proprietorship.
22. Net income (or net loss) flows from the income statement to the
statement of owner’s equity. Ending owner’s equity then flows to the
balance sheet. The change in cash during the period on the balance
sheet is explained by the cash flow statement, and the ending balance of
cash on the cash flow statement matches the cash amount on the balance
sheet.
23. Since Canada adopted IFRS in 2011, publicly accountable enterprises,
which includes companies whose shares trade on stock exchanges,
must report their financial results under IFRS. They are not allowed to
report under accounting standards for private enterprises (ASPE).
2 Copyright © 2014 Pearson Canada Inc
,However, it makes sense that Canadian publicly traded companies
should report under IFRS since technology and improved
communications are allowing more businesses to either purchase or sell
in markets outside Canada, and to have shareholders that reside
anywhere in the world. Investors in Canadian companies reside all over
the world. It is important that these investors be able to compare the
financial results from companies in similar industries that are located in
different countries. Having one set of accounting principles for all
countries allows investors to do this.
Copyright © 2014 Pearson Canada Inc. 3
, Starters
(5 min.) S 1-1
Revenues are the amounts earned by Ryan in return for his providing goods and services
to customers. Expenses are the decreases in equity that arise from the utilization of
assets or the increase in liabilities to cover the costs needed to deliver goods and
services to customers.
(5 min.) S 1-2
1. The bank is an external user.
2. The balance sheet would be the best financial statement for the bank to use, as it lists
all of the assets, liabilities, and equities for the company.
(5–10 min.) S 1-3
Louise will want to consider the factors discussed in Exhibit 1-5. This shows that a
corporation is the only type of business organization that has an unlimited life. Also, a
corporation is responsible for business debts, not its shareholders. In other words,
Louise's liability will be limited.
(5–10 min.) S 1-4
1 a) Economic-Entity Assumption
b) Cost Principle of Measurement
c) Stable Monetary Unit Assumption
d) Reliability Characteristic
2. Assets = Liabilities + Owner’s Equity
12,000+24,000 = 10,000 + Owner’s Equity
36,000 = 10,000 + Owner’s Equity
Thus, Owner’s Equity = 26,000
4 Copyright © 2014 Pearson Canada Inc
