Extended Projects

Prepared by Valorie Leonard, Laurentian University

• Introduction to Financial Accounting
• Preparing and Using Financial Accounting’s Reports
• Doing Financial Accounting
• Financial Accounting Analysis
• Financial Accounting – Overall Evaluation

Introduction to Financial Accounting

Air Canada

1. What is financial performance? Which financial statement measures the financial performance of Air Canada? How did Air Canada perform for the year ending December 31, 2001 compared to 2000?

2. What is financial position? Which financial statement measures the financial position of Air Canada? What was the total amount of resources and liabilities for Air Canada as at December 31, 2001 compared to 2000?

3. How many notes to the financial statements does the Air Canada report have? What is the purpose of these notes?

4. Identify potential users of Air Canada’s financial statements and briefly describe why each user would likely be interested in the performance of this company and what decision they would likely need to make.

5. Who has the main responsibility for the information reported in the financial statements? Who was the President and CEO of Air Canada? Who was the Executive Vice-President and CFO? What is the name of the report that these two executives signed? Briefly explain the purpose of the report.

6. Who were the auditors of Air Canada? Briefly describe their role.

7. Read the notes to the financial statements and give an example illustrating how Air Canada demonstrated its ethical responsibilities.

8. Which of the following events should Air Canada record as a transaction? Briefly explain why or why not.

i) The President and CEO announced his resignation on April 1, 2001.

ii) On November 30, 2001, Air Canada renewed its contract to lease nine aircraft effective January 31, 2002.

iii) The purchasing manager placed an order on December 27, 2001 for $100,000 of spare parts, to be delivered on January 5, 2002.

9. What is accrual accounting? How do you know, from looking at Air Canada’s balance sheet, that the company used accrual accounting?

10. If you had an opportunity to invest $5,000 in Air Canada by purchasing common shares, what risks would you want to assess before finalizing your decision?

Note: By the time you read this, Air Canada will have completed another fiscal year (or more) and this new information could improve your understanding and help you prepare a more complete analysis. If requested by your Instructor, visit the company’s Web site (or search www.sedar.com) and look for the more recent annual report(s).

Preparing and Using Financial Accounting’s Reports

The Forzani Group

1. Read the 2002 annual report and identify which retail stores are included in The Forzani Group. What resources did The Forzani Group have? How did the group finance its resources?

2. What form of business organization has The Forzani Group used? Briefly explain the legal status. Briefly describe the type of equity accounts used by this form of business organization.

3. Assess the financial condition of The Forzani Group. If the company needed more cash financing, what would you recommend?

4. The company reported capital assets of $120,525,000 for January 27, 2002 ($92,581,000 for January 28, 2001). Read note 4 and explain what this tells a reader of the financial statements.

5. Review the Consolidated Statement of Operations and explain the highlights of this company’s financial performance. What does this statement tell you about management’s performance over the past year? From looking at The Forzani Group’s statement of operations, how do you know that the company used accrual accounting?

6. Explain what the retained earnings account represents. Reconcile the changes in the retained earnings account from 2001 to 2002. Did the company declare any dividends? How large a dividend could it declare? Explain.

7. Review the Consolidated Statement of Cash Flows and document your observations. Explain the highlights of the company’s cash flow strategy.

8. What additional information do you now have after reviewing the Consolidated Statement of Cash Flows? Does this change your answer to question 3 (above) with respect to more financing? If you were a shareholder in The Forzani Group, would you be happy with management’s performance?

9. Generally accepted accounting principles (GAAP) form the conceptual foundation of accounting and the preparation of financial statements. Why is this essential? How do you know whether the financial statements prepared by The Forzani Group have been prepared in accordance with GAAP? Give some specific examples and explain how they have been applied to the financial statements presented in The Forzani Group’s annual report.

Note: By the time you read this, The Forzani Group will have completed another fiscal year (or more) and this new information could improve your understanding and help you prepare a more complete analysis. If requested by your Instructor, visit the company’s Web site (or search www.sedar.com) and look for the more recent annual report(s).

Doing Financial Accounting

Indigo Books & Music Inc.

1. Indigo presented a Summary of Significant Accounting Policies in Note 2 following the financial statements in its 2002 annual report. What was the purpose of this note? Why is it so important? Read the note and, in general terms, explain what Indigo’s note tells you.

2. Read the annual report and identify which retail stores were included under the “umbrella” Indigo Books & Music Inc. (Indigo). Think about the operations of Indigo and identify the types of revenue that would likely be included in the $735,684,000 reported on the income statement for the year ended March 30, 2002. Justify the revenue recognition method/policy selected by Indigo for each type of revenue you have identified.

3. Explain how Indigo applied the matching criterion and achieved expense recognition with respect to its retail book sales.

4. Accrual accounting includes the use of prepaid and accrued expenses. Explain how this concept was applied to the prepaid expenses on Indigo’s balance sheet.

5. In addition to preparing financial statements, accounting records are important for control. Explain this concept. Identify by name and position which managers of Indigo acknowledged responsibility for internal control. What were their specific claims?

6. Historical cost is the acquisition cost, which is recorded in accordance with generally accepted accounting principles. However, as time goes on and more information becomes available, it becomes necessary to apply other principles that adjust the historical cost to a different value. Examine the balance sheet for Indigo as well as the notes to the financial statements and identify the methods of asset valuation that were used. Briefly explain each one.

7. Why does Indigo amortize its capital assets? Which alternative method did Indigo chose? How can this policy be justified?

8. Read Notes 9 and 10 and explain why Indigo reported convertible debentures under both non-current liabilities for $28,071,000 and shareholders’ equity for $1,903,000.

Note: By the time you read this, Indigo will have completed another fiscal year (or more) and this new information could improve your understanding and help you prepare a more complete analysis. If requested by your Instructor, visit the company’s Web site (or search www.sedar.com) and look for the more recent annual report(s).

Financial Accounting Analysis

Canadian Tire

1. Most financial statement analysis is based on ratios such as return on investment (ROI), whereby the annual return earned by an individual is divided by the investment made. Should we use ratio analysis to evaluate management’s performance?

2. We know that many external parties rely on the financial statements contained in a company’s annual report. Why does a shareholder need to evaluate the financial statements? How does financial statement ratio analysis help shareholders?

3. Use the 2001 annual report to calculate Canadian Tire’s return on equity (ROE). Explain what leverage is and whether Canadian Tire has leveraged effectively? Briefly explain and show all calculations.

4. Prepare an analysis of Canadian Tire’s financial position at the end of 2001 as compared to 2000. Use the respective balance sheets and any other information from the annual report that you think is relevant. Comment on your findings. Show all calculations.

5. Prepare an analysis of Canadian Tire’s financial performances for 2001 as compared to 2000. Use the respective income statements and any other information from the annual report that you think is relevant. Comment on your findings. Show all calculations.

6. Review Canadian Tire’s cash flow statement and comment on the company’s cash flow performance. What does Canadian Tire’s financial strategy appear to be?

7. Assume you just inherited $100,000. Would you be willing to invest this money in shares of Canadian Tire? Justify your answer with reference to the analysis you have performed above.

Note: By the time you read this, Canadian Tire will have completed another fiscal year (or more) and this new information could improve your understanding and help you prepare a more complete analysis. If requested by your Instructor, visit the company’s Web site (or search www.sedar.com) and look for the more recent annual report(s).

Financial Accounting – Overall Evaluation

Sears Canada and The Hudson’s Bay Company

1. Sears Canada and The Hudson’s Bay Company (HBC) operate very similar businesses and are considered direct competitors of each other. Compare the accounting policies in Note 1 for both HBC (January 31, 2002 annual report) and Sears (December 29, 2001 annual report) and identify any differences. Select one of the differences and try to justify why each company selected its particular policy.

2. Review the statement of cash flows for each company and compare their cash flow strategies. Can you see any similarities? Differences? Briefly explain.

3. Management has a responsibility to maintain internal control over assets and day-to-day activities. How does this relate to their responsibilities to the shareholders?

4. HBC and Sears are known to be competitors. Do these companies use similar business strategies? Use specific examples from the balance sheet and income statement to support your answer.

5. Apply the Scott Formula analysis (on a comparative two-year, after-tax basis) for both HBC and Sears and summarize the data in a table format. Comment on the results. Show all calculations.

6. Assume you just inherited $100,000 from a family estate. Would you be willing to invest this money in either HBC or Sears? Predict which company you think will demonstrate a stronger performance in the future. Justify your answer.

Note: By the time you read this, Sears and HBC will have completed another fiscal year (or more) and this new information could improve your understanding and help you prepare a more complete analysis. If requested by your Instructor, visit the companies’ Web sites (or search www.sedar.com) and look for the more recent annual report(s).