Understanding Financial Accounting 3rd Canadian Edition by Christopher D. Burnley test bank

 
96. How do internal users differ from external users of financial statements? Identify one internal and two external users of annual reports.
 
Solution (5 min.)
Internal users are using the information to make decisions regarding product/service pricing, operational expenses, buy versus lease decisions, and cost control measures.
 
External users use the information in a variety of ways
 
Shareholders – to make buy/sell decisions
Board of Directors – to assess how well management is running the business
Creditors – to see if the company can fulfill its debt obligations in both the short- and long-term
Regulators – are looking for corporate compliance
Tax authorities – tax assessment and compliance
 
Internal—management
External—board of directors, shareholders, creditors, regulators, taxing authorities, other corporations, security analysts, credit-rating agencies, unions
 
Bloomcode: Knowledge
Difficulty: Medium
Learning Objective: Identify the main users of financial accounting information and explain how they use this information.
CPA: Financial Reporting
AACSB: Analytic
 
 
97. Briefly explain the relationship between the management, the board of directors, and the shareholders in a public company.
 
Solution (5 min.)
The shareholders are the owners of the company. In a large public company, they are generally not involved in the day-to-day operations of the company. The shareholders elect the members of the board of directors to represent them. The board then hires (and fires) senior management to manage the operations of the company.
 
Bloomcode: Knowledge
Difficulty: Medium
Learning Objective: Describe the major forms of business organization and explain the key distinctions between each form.
CPA: Financial Reporting
AACSB: Analytic
 
 
98. Identify and describe the two main types of corporate structure. What impact, if any, does the structure have on management and financial reporting requirements?
 
Solution (8 min.)
Publicly traded companies trade on public stock exchanges such as the TSX. Shares are widely held and owned by a large number of individuals and / or entities. Some portion of the ownership will usually change hands every day. Typically a board of directors is elected to represent the interest of the shareholders. The board of directors has the authority to hire a management team who will manage day-to-day operations. The management team periodically reports to the shareholders. Financial statements are typically prepared quarterly. Annual financial statements are prepared and included in the company’s annual report.
 
Privately held corporations shares are not available through public exchanges. The shares are narrowly held and owned by a small number of shareholders. It is not as easy to transfer ownership and shareholders are often involved in the day-to-day operations of the business.
 
Bloomcode: Comprehension
Difficulty: Medium
Learning Objective: Describe the major forms of business organization and explain the key distinctions between each form.
CPA: Financial Reporting
AACSB: Analytic
 
 
99. Identify the three types of business activities a firm engages in. Provide an example of an inflow and outflow for each type of activity. Which type of activity is most critical to the company’s success and why?
 
Solution (10 min)
 
The three types of activities include:
Operating activities – example of an inflow: collection of A/R, example of an outflow: purchase of inventory
Investing activities – example of an inflow: sale of PPE, example of an outflow: purchase of PPE
Financing activities – example of an inflow: share issue or borrowing, example of an outflow: payment of dividends, loan repayment
 
Operating activates is considered the most critical to the company’s long run success or failure. If the company is not successful at generating cash flows from its operations it will ultimately run out of cash as financing sources dry up because it will not be able to attract new lenders or investors. It would begin selling PPE that is uses, further compromising operations.
 
Bloomcode: Knowledge
Difficulty: Medium
Learning Objective: Explain the three categories of business activities and identify examples of transactions related to each category.
CPA: Financial Reporting
AACSB: Analytic
 
 
100. Identify and describe the three primary financial statements prepared by accountants. How do these statements differ?
 
Solution (10 min.)
Statement of Income