Financial Accounting: A User Perspective, Sixth Canadian Edition

Hoskin, Fizzell, Cherry

6-39 a. i. $34,000 + $6,000 = $40,000

ii. $450,000 $34,000 = $416,000
b. i. $34,000 $6,000 = $28,000
ii. $450,000 $34,000 = $416,000
c. i. $35,000
ii. $450,000 $29,000 = $421,000
d. i $35,000
ii. $450,000 $41,000 = $409,000
e. $17,500 (i.e., the value of the accounts that were written off
during the year)
f. $450,000
g. The matching concept requires that when a company
recognizes revenue from sales, it must also recognize all the
expenses relating to those sales. The allowance method does
this, by recognizing the bad debts expense in the period in which
the sale occurs. As a result, it provides a better measurement of
periodic income than the direct write-off method.
Also, under the allowance method the accounts receivable are
presented on the balance sheet at a realistic amount (their net
realizable value), representing the amount that is actually
expected to be collectible. The direct write-off method, on the
other hand, simply reports the receivables at their gross amount
and therefore overstates their value.

Solutions Manual

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Chapter 6

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Financial Accounting: A User Perspective, Sixth Canadian Edition

Hoskin, Fizzell, Cherry

6-45 a.
Classic Ltd.
Statement of Financial Position
As of October 31
2011
2010
Current Assets
Cash
$67,200
$50,400
Accounts receivable
64,400
51,800
Inventory
315,000
322,000
Prepaid expenses
2,800
4,200
Total current assets
449,400
428,400
Non-current Assets
Capital assets
350,000
343,000
Less: accumulated depreciation
(123,200) (117,600)
Net capital assets
226,800
225,400
Total Assets
$676,200 $653,800
Current Liabilities
Accounts payable
$77,000
Wages payable
36,400
Taxes payable
19,600
Unearned revenue
67,200
Total current liabilities
200,200
Non-current Liabilities
Bank loan
322,000
Total Liabilities
522,200
Shareholders Equity
Common shares
70,000
Retained earnings
84,000
Total shareholders equity
154,000
Total Liabilities and Shareholders Equity $676,200

$68,600
33,600
16,800
56,000
175,000
336,000
511,000
70,000
72,800
142,800
$653,800

b. 2010 working capital = $428,400 $175,000 = $253,400

2011 working capital = $449,400 $200,200 = $249,200
The companys working capital position deteriorated slightly
during 2011.

Solutions Manual

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Chapter 6

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Financial Accounting: A User Perspective, Sixth Canadian Edition

Hoskin, Fizzell, Cherry

c. 2010 current ratio = $428,400 / $175,000 = 2.45

2011 current ratio = $449,400 / $200,200 = 2.24
The companys current ratio deteriorated during 2011.
d. 2010 quick ratio = $102,200 / $175,000 = 0.58
2011 quick ratio = $131,600 / $200,200 = 0.66
The companys quick ratio improved during 2011.
e.
The amount of working capital decreased by less than 2%
([$253,400 $249,200] / $253,400 = 1.7%), which is not
significant.
The current ratio decreased by less than 9% ([2.45 2.24] / 2.45
= 8.6%). Since the current ratio was, and still is, above the rule
of thumb safety level of 2, this decrease is not very significant.
The quick ratio increased by almost 14% ([0.66 - 0.58] / 0.58 =
13.8%). Since the quick ratio was, and still is, below the rule of
thumb safety level of 1, this increase is quite significant.
We would therefore conclude that the most significant change
was the improvement in the quick ratio and, overall, the
companys liquidity position has improved somewhat.
f. Classics management should prepare a careful analysis of
projected cash flows to determine if it needs to take action to
avoid future difficulties. In addition, it should compare its current
working capital position and overall liquidity to other companies in
the same industry, as well as to prior years.

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Chapter 6

Copyright 2011 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.