Understanding Financial Accounting 3rd Canadian Edition by Christopher D. Burnley solution manual

 
Finance
Finance

 
Tax
 
Taxation

SOLUTIONS TO DISCUSSION QUESTIONS
 
DQ1-1        Accounting, as an information system, provides economic information to users to allow them to determine whether the entity is operating effectively and efficiently.  In addition, accounting facilitates the making of important decisions in the management of the entity, such as whether new assets should be purchased or leased, or whether equity financing should be used as opposed to debt financing.
 
LO 1  BT: K  Difficulty: E  Time: 5 min.  AACSB: None  CPA: cpa-t001  CM: Reporting
 
 
DQ1-2        The owner’s legal liability is as follows for each form of business:
 
Proprietorship:  The owner (or proprietor) is responsible for the debts of the business.  His or her personal assets are at risk in the event of legal action.
 
Partnership: The owners (or partners) are responsible for the debts of the business.  Their personal assets are at risk in event of legal action.
 
Corporation: The owners (or shareholders) are only responsible for the debts of the corporation to the extent of their investment in the company’s shares.  Any debts in excess of this amount are not their responsibility.
 
The taxation of income is as follows for each form of business:
 
Proprietorship: The income of a proprietorship is taxed in the hands of the owner (i.e. the proprietor).
 
Partnership: The income of a partnership is taxed in the hands of the owners (i.e. the partners).
 
Corporation: The income of a corporation is taxed separately (i.e. the corporation files its own tax return).  Any income distributed to the shareholders (i.e. dividends) is then taxed in the hands of the owners (i.e. the shareholders).
 
LO 3  BT: K  Difficulty: E  Time: 15 min.  AACSB: None  CPA: cpa-t001  CM: Reporting

DQ 1-3       If an entrepreneur has a relatively simple business with low liability risk, it may be better to operate the business as a proprietorship. If the entrepreneur is not looking to borrow any money he or she will not assume the personal risk. Proprietorships are easy to form and do not have any organizational costs. If the entrepreneur has no intention of expanding the business or selling the business, a proprietorship makes sense.
 
LO 3  BT: C  Difficulty: M  Time: 10 min.  AACSB: None  CPA: cpa-t001  CM: Reporting
 
DQ 1-4       A private corporation is one whose shares are held by a small number of individuals. This makes the transfer of ownership more difficult, as the shares do not trade on a public stock exchange.  A public corporation has shares held by a larger number of individuals or entities and these shares are bought and sold on a public stock exchange (such as the Toronto Stock Exchange).
 
LO 3  BT: C  Difficulty: E Time: 10 min.  AACSB: None  CPA: cpa-t001  CM: Reporting
 
DQ 1-5       Public companies have their shares traded on a public stock exchange. The federal and provincial governments have regulations related to how public companies report their financial statements and are interested in ensuring that these regulations are followed. The stock exchanges also have regulations about the timing and format of information that companies must convey to them and to investors.
 
LO 2  BT: C  Difficulty: M Time: 5 min.  AACSB: None  CPA: cpa-t001  CM: Reporting
 
DQ 1-6       Shareholders – These users are interested in the performance of their investment in the company. They will use the financial statements to evaluate how well management is handling their investment.  Individual shareholders may also use the financial statements in assessing whether to continue to hold the shares, purchases more or sell the shares they have.
          Creditors (i.e. Financial Institutions) – These users are interested in evaluating the company to decide whether to lend money to it. They will use the statements to evaluate the risk that will be taken in making the loan.  This includes assessing the company’s ability to service the debt (i.e. pay interest and repay principal).

 
DQ1-6 (Continued)
 
          Taxing Authorities – These users establish the rules for how taxable income will be measured. They are interested in the fair measurement of the financial performance of the company so that the appropriate tax will be paid. Note, however, that income taxes are not paid based on the net earnings reported in the financial statements; rather, income taxes are based on taxable income. In preparing the tax return, the financial statements’ net income is the starting point and is then adjusted to arrive at taxable income.