expectations of higher future profits than can actually be achieved because the bank’s projections are based on incorrect historical information. 3. Joe might assume that past projects were more profitable than they really were. He might therefore reject new projects based on the assumption that he does not need to increase his sales above current levels in order to earn target profit levels. Exercise 2 The following are six questions that users of accounting information might ask about Redpath Auto Towing (Redpath). Instructions For each question, indicate who the decision maker is and whether it is an external or internal user. Decision Decision maker External or internal a. operations generate sufficient cash Can Redpath’s to make payments on a term loan? b. Does Redpath have sufficient assets to provide security for a mortgage loan? c. Should Redpath continue its current business, or look for more profitable opportunities in a different line of business? d. Were the profit sharing bonuses paid to unionized employees equal to the percentage of profit stated in the employment contract? e. Was the amount of goods and services taxes (GST) that Redpath remitted to the tax department equal to 5% of its revenue, as required by law? f. Does Redpath have enough money in the bank to pay out drawings to the owner? Solution Exercise 2 (10 min) Decision Decision maker External or internal a. operations generate sufficient cash Banker External Can Redpath’s to make payments on a term loan? b. Does Redpath have sufficient assets to provide Banker/lender External security for a mortgage loan? c. Should Redpath continue its current business, or Management Internal look for more profitable opportunities in a different line of business? d. Were the profit sharing bonuses paid to unionized Employee union External employees equal to the percentage of profit stated in the employment contract? e. Was the amount of goods and services taxes Tax assessor External (GST) that Redpath remitted to the tax department (Canada Revenue equal to 5% of its revenue, as required by law? Agency) f. Does Redpath have enough money in the bank to Owner Internal pay out drawings to the owner?
expectations of higher future profits than can actually be achieved because the bank’s projections are based on incorrect historical information. 3. Joe might assume that past projects were more profitable than they really were. He might therefore reject new projects based on the assumption that he does not need to increase his sales above current levels in order to earn target profit levels. Exercise 2 The following are six questions that users of accounting information might ask about Redpath Auto Towing (Redpath). Instructions For each question, indicate who the decision maker is and whether it is an external or internal user. Decision Decision maker External or internal a. Can Redpath’s operations generate sufficient cash to make payments on a term loan? b. Does Redpath have sufficient assets to provide security for a mortgage loan? c. Should Redpath continue its current business, or look for more profitable opportunities in a different line of business? d. Were the profit sharing bonuses paid to unionized employees equal to the percentage of profit stated in the employment contract? e. Was the amount of goods and services taxes (GST) that Redpath remitted to the tax department equal to 5% of its revenue, as required by law? f. Does Redpath have enough money in the bank to pay out drawings to the owner? Solution Exercise 2 (10 min) Decision Decision maker External or internal a. Can Redpath’s operations generate sufficient cash to make payments on a term loan? Banker External b. Does Redpath have sufficient assets to provide security for a mortgage loan? Banker/lender External c. Should Redpath continue its current business, or look for more profitable opportunities in a different line of business? Management Internal d. Were the profit sharing bonuses paid to unionized employees equal to the percentage of profit stated in the employment contract? Employee union External e. Was the amount of goods and services taxes (GST) that Redpath remitted to the tax department equal to 5% of its revenue, as required by law? Tax assessor (Canada Revenue Agency) External f. Does Redpath have enough money in the bank to pay out drawings to the owner? Owner Internal
Accounting-Principle-6th-Edition-Part-1-2-and-3-Test-Bank.docx