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

Financial Analysts – These users provide investment advice to their customers. They are interested in evaluating the investment potential of various companies. They will want to evaluate not only individual companies, but also make comparisons between companies, likely in the same industry.
          (Note:  there are other users discussed in the chapter that would be equally acceptable answers to this question.)
 
LO 2  BT: C  Difficulty: M Time: 15 min.  AACSB: None  CPA: cpa-t001  CM: Reporting
 
 
DQ1-7        Shareholders invest in the shares of a company.  They may expect to receive dividends, which are a distribution of past profits to shareholders.  They also expect to eventually sell their shares at a higher price than they paid for them, due to capital appreciation. 
 
LO 2  BT: C  Difficulty: E Time: 5 min.  AACSB: None  CPA: cpa-t001  CM: Reporting
 
         
DQ 1-8       Capital appreciation is an increase in the market value of the shares of a company.  Investors realize this type of return by purchasing shares in a company, and then later selling the shares at a higher market price than they had originally paid.  Capital appreciation often results from a company’s growth (i.e. increased revenues and increased profits).
 
LO 2  BT: C  Difficulty: M Time: 5 min.  AACSB: None  CPA: cpa-t001  CM: Reporting
 
 

 
DQ 1-9       When creditors loan money to a company, they expect to receive their money back.  That is one cash stream, called return of principal.  The other cash stream is periodic interest that creditors receive for time they have allowed the company to use their money. 
 
LO 2  BT: C  Difficulty: E Time: 5 min.  AACSB: None  CPA: cpa-t001  CM: Reporting
 
DQ 1-10     The three major types of activities in which all companies engage are financing, investing, and operating activities.
 
Financing refers to the activity of obtaining funds for the company to operate. Two primary sources of funds are owners and creditors.  Some typical financing activities are:  short- and long-term borrowing, repayment of debt, dividend payments, and the issuance of additional shares.
Investing refers to the activity of using funds generated by financing activities to acquire assets that will generate profits in the future. Investments include the purchase of property, plant, and equipment and the purchase and sale of investments in other companies.
Operating activities are associated with developing, producing, marketing, and selling the products and/or services of the company.  Operating activities are mainly concerned with the day-to-day activities of the company.
 
LO 4  BT: C  Difficulty: M Time: 10 min.  AACSB: None  CPA: cpa-t001  CM: Reporting
 
 
DQ 1-11     The three major categories of items that appear in a typical statement of financial position (balance sheet) are assets, liabilities, and shareholders’ equity.

 
DQ1-11 (Continued)
 
Assets are resources owned by a company that will be used or sold for its the future economic benefit. In order to have an asset, the event that gave the company the control of the resource must have already happened. The company is able to perform its activities and thereby generate profits with the help of its assets. This means that they are income earning. Assets may be current or non-current. Current assets will be used or converted into cash within the next year or operating cycle. Examples include cash, inventory, and accounts receivable. Non-current assets are those assets whose benefits may be realized over a period longer than one year or operating cycle. Examples include property, plant, and equipment, patents, trademarks, etc.
 
Liabilities are the amounts that the company owes to others and which require a probable future outflow or sacrifice of resources to settle an obligation that exists as a result of a transaction that has already taken place. Liabilities may be classified as current and non-current. Current liabilities include notes payable due within one year, accounts payable, accrued expenses, and dividends payable. Non-current liabilities include long-term debt, long-term warranties payable, and pension liabilities.
 
Shareholders’ Equity represents the wealth or the ownership interest of the owners. Shareholders’ equity may also be defined as the difference between the assets and liabilities of a company: