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Solution Manual for Financial Reporting and Analysis, 7th
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1-2
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website,
in whole or part.
investors that prefer to delegate buying and selling decisions to professionals.
Analysts rely on information about the economy, individual industries, and
particular companies when providing these services. As a group, analysts
constitute probably the largest single source of demand for financial
accounting information—without it, their jobs would be difficult, if not
impossible, to do effectively.

1-3
in whole or part.
d) Managers demand financial accounting information to help them carry out
their responsibilities to shareholders. Financial accounting information is used
by managers to assess the profitability and health of individual business units
and the company as a whole. Their compensation often depends on financial
statement numbers like earnings per share, return on equity, return on capital
employed, sales growth, and so on. Managers often use a competitor’s
financial statements to benchmark profit performance, cost structures,
financial health, capabilities, and strategies.
e) Current employees demand financial accounting information to monitor
payouts from profit-sharing plans and employee stock ownership plans
(ESOPs). Employees also demand financial accounting information to gauge
a company’s long-term viability and the likelihood of continued employment,
as well as payouts under company-sponsored pension and health-care
programs. Unionized employees have other reasons to demand financial
statements, and those are described in Requirement 2 which follows.
f) Lenders use financial accounting information to help determine the
principal amount, interest rate, term, and collateral required on loans they
make. Loan agreements often contain covenants that require a company to
maintain minimum levels of various accounting ratios. Because covenant
compliance is measured by accounting ratios, lenders demand financial
accounting information so they can monitor the borrower’s compliance with
loan terms.
g) Suppliers demand financial accounting information about current and
potential customers to determine whether to grant credit, and on what terms.
The incentive to monitor a customer’s financial condition and operating
performance does not end after the initial credit decision. Suppliers monitor
the financial condition of their customers to ensure that they are paid for the
products, materials, and services they sell.
h) Debt-rating agencies like Moody’s or Standard & Poor’s help lenders and
investors assess the default risk of debt securities offered for sale. Rating
agencies need financial accounting information to evaluate the level and
volatility of the company’s expected future cash flows.
i) Taxing authorities (one type of government regulatory agency) use
financial accounting information as a basis for establishing tax policies.
Companies or industries that appear to be earning “excessive” profits may be
targeted for special taxes or higher tax rates. Keep in mind, however, that
taxing authorities in the United States and many other countries are allowed

1-4
in whole or part.
to set their own accounting rules. These tax accounting rules, and not GAAP,
determine a company’s taxable income.
Other government agencies are often customers of the company. In this
setting, financial information can serve to help resolve contractual disputes
between the company and its customer (the agency) including claims that the
company is earning excessive profits. Financial accounting information can
also be used to determine if the company is financially strong enough to
deliver the ordered goods and services.
Financial accounting information is also used in rate-making deliberations
and monitoring of regulated monopolies such as public utilities.
Requirement 2:
Student responses will vary, but examples are shareholder activist groups
(CalPERS), labor unions, and customers.
Shareholder activist groups demand financial accounting information to
help determine how well the company’s current management team is
doing, and whether the managers are being paid appropriately.
Labor unions demand financial accounting information to help formulate or
improve their bargaining positions with employer companies. Union
negotiators may use financial statements showing sustained or improved
profitability as evidence that employee wages and benefits should be
increased.
Customers demand financial accounting information to help determine if
the company will be able to deliver the product on a timely basis and
provide product support after delivery.

1-5
in whole or part.
P1-2. Incentives for voluntary disclosure (LO 1-3)
Requirement 1:
a) Companies compete with one another for financial capital in debt and
equity markets. They want to obtain financing at the lowest possible cost. If
investors are unsure about the “quality” of a company’s debt and equity
securities—the risks and returns of investment—they will demand a lower
price (higher rate of return) than would otherwise be the case. Companies
have incentives to voluntarily provide information that allows investors and
lenders to assess the expected risk and return of each security. Failing to do
so means lenders may charge a higher rate of interest for the added
informational risk, and stock investors will give the company less cash for its
common or preferred stock.
b) Companies compete with one another for talented managers and
employees. Information about a company’s past financial performance, its
current health, and its prospects is useful to current and potential employees
who are interested in knowing about long-term employment opportunities,
present and future salary and benefit levels, and advancement opportunities
at the company. To attract the best talent, companies have incentives to
provide financial information that allows prospective managers and
employees to assess the risk and potential rewards of employment.
c) Companies and their managers also compete with one another in the
“market for corporate control.” Here companies make offers to buy or merge
with other companies. Managers of companies that are the target of a friendly
merger or tender offer—a deal they want done—have incentives to disclose
information that raises the bid price. Examples include forecasts of increased
sales and earnings growth. Managers of companies that are the target of
unfriendly (hostile) offers—deals they don’t want done—have incentives to
disclose information that shows the company is best left in the hands of
current management. Hostile bidders often put a different spin on the same
financial information, arguing that it shows just how poorly current
management has run the company.

1-6
in whole or part.
Requirement 2:
Student responses will vary, but here are some examples:
Competitive forces from within the industry (i.e., other firms in the industry
are voluntarily disclosing information about order backlogs, customer
turnover, or other key performance indicators).
Demands by financial analysts for expanded or increased disclosure by
the firm.
Demands by shareholder activist groups such as CalPERS.
Demands by debt rating agencies such as Moody’s and Standard &
Poor’s.
Pressure from governmental regulatory agencies such as the Securities
and Exchange Commission. Firms may believe that disclosing certain
information voluntarily may prevent the Securities and Exchange
Commission from mandating more detailed disclosures at a later date.
Demands from institutional investors (e.g., mutual funds, pension funds,
insurance companies, etc.) that hold the company’s securities.
Requirement 3:
The following examples are press release items that could be disclosed
voluntarily: forecasts of current quarter or annual earnings; forecasts of
current quarter or annual sales; forecasts of earnings growth for the next 3 to
5 years; forecasts of sales growth for the next 3 to 5 years; capital
expenditure plans or budgets; research and development plans or budgets;
new product developments; patent applications and awards; changes in top
management; details of corporate restructurings, spin-offs, reorganizations,
plans to discontinue various divisions and/or lines-of-business;
announcements of corporate acquisitions and/or divestitures; announcements
of new debt and/or equity offerings; and announcements of short-term
financing arrangements such as lines of credit. Other student responses are
possible.
The advantage of releasing such information in press releases is that the
news is made available to external parties on a far more timely basis than if
disclosure occurred in quarterly or annual financial statements. Press
releases also give management an opportunity to help shape how the facts
are interpreted.

1-7
in whole or part.
P1-3. Costs of disclosure (LO 1-3)
Requirement 1:
a) Information costs include costs to obtain, gather, collate, maintain,
summarize, and communicate financial statement data to external users.
Examples are the cost of computer hardware and software, fees paid to audit
financial statement data, salaries and wages paid to corporate accounting
staff in charge of the firm’s financial accounting system, and costs to print and
mail annual reports to shareholders or make them available electronically on
the company’s web site.
b) Competitive disadvantage costs occur when competitors are able to use
the information in ways detrimental to the company. Examples include
highlighting highly profitable products and services or geographical areas,
technological innovations, new markets or product development plans, and
pricing or advertising strategies.
c) Litigation costs are costs to defend the company against actions brought
by shareholder and creditor lawsuits. These suits claim that previous
information about the company’s operating performance and health was
misleading, false, or not disclosed in a timely manner. Examples include the
direct costs paid to lawyers to defend against the suits, liability insurance
costs, loss of reputation, the productive time lost by managers and
employees as they prepare to defend themselves and the company against
the suit.
d) Political costs arise when, for example, regulators and politicians use
profit levels to argue that a company is earning excessive profits. Regulators
and politicians advance their own interests by proposing taxes on the
company or industry in an attempt to reduce the level of “excessive”
profitability. These taxes represent a wealth transfer from the company’s
shareholders to other sectors of the economy. Managers of companies in
politically sensitive industries sometimes adopt financial reporting practices
that reduce the level of reported profitability to avoid potential political costs.
Requirement 2:
Student responses to this question may vary. One possible cost is when
disclosure commits managers to a course of action that is not optimal for the
company. For example, suppose a company discloses earnings and sales
growth rate goals for a new product or market. If these projections become
unreachable, managers may drop selling prices, offer “easy” credit terms, or
overspend on advertising in an attempt to achieve the sales and earnings
growth goals.

1-8
in whole or part.
P1-4. Determining why financial reporting rules differ (LO 1-5)
A country’s financial reporting philosophy evolves from and reflects the
specific legal, political, and financial institutions within the country. External
investors are a much more important source of financial capital in Canada
and the United States than they have historically been in Germany and
Japan. Consequently, financial accounting and reporting standards in
Canada and the U.S. have evolved to meet this public financial market
demand for information—what the chapter describes as the economic
performance approach.
Financial accounting and reporting standards in German and Japan tend to
reflect the commercial and tax law approach described in the chapter. In
Germany and Japan, only a small amount of capital has been provided by
individual investors through public financial markets. The primary source of
capital for German companies has been several large banks—and the
government itself. Labor unions have also played an important corporate
governance role in German companies. Large banks provide much of the
financing in Japan. Along with the German labor unions, these few important
capital providers wield great power including the ability to acquire information
directly from the firm. Because of this concentrated power and the
insignificance of the public financial market in these two countries, financial
reporting standards tend to conform to income tax rules or commercial law.

1-9
in whole or part.
P1-5. Generally accepted accounting principles (GAAP) (LO 1-4)
Requirement 1:
What are generally accepted accounting principles (GAAP)? GAAP refers to
the network of conventions, rules, guidelines and procedures that shape the
financial reporting practices of businesses and non-profit organizations. GAAP
comes from two main sources: (1) written pronouncements by designated
standards-setting organizations such as the FASB, IASB and SEC; and (2)
accounting practices that have evolved over time as preparers and auditors
dealt with new business transactions and circumstances not yet described in
written pronouncements. The FASB’s Accounting Standards Codification is
now the sole authoritative source for written GAAP, although suggested
implementation guidelines are provided by industry trade groups and the
AICPA through its various industry guides.
Requirement 2:
Why is GAAP important to independent auditors and to external users?
Independent auditors provide reasonable assurance that the financial
statements of the companies they audit “present fairly, in all material respects”
the financial position, results of operations, and cash flows “in conformity with
U.S. generally accepted accounting principles.” It is therefore essential that
independent auditors possess a thorough understanding of GAAP and how it
applies to each specific client.
The goal of GAAP in the United States and most other developed countries is
to ensure that a company’s financial statements represent faithfully its
economic condition and performance. GAAP achieves this goal by providing a
framework for determining when to record a business transaction or event
(recognition), what dollar amount to record (measurement), how summary
information is to be displayed in financial statements (presentation), and what
additional information to provide in the notes (disclosure). External users
benefit when the GAAP framework ensures that the resulting statements and
notes accurately convey information about a company’s true economic
condition and performance.
Requirement 3:
Describe the FASB organization and how it establishes new accounting
standards. Although the Securities and Exchange Commission (SEC) has
ultimate legal authority to determine accounting principles in the United States,
it has looked to private-sector organizations to establish these principles.
Today, the private sector standards setting organization is the FASB. It exists
as an independent group with seven full-time members and a large staff.

1-10
in whole or part.
Board members are appointed for five-year terms and are required to sever all
ties with the companies and institutions they served prior to joining the board.
The FASB follows a “due process” procedure in developing accounting
standards and updates that involves three steps: (1) Discussion-memorandum
stage; (2) Exposure-draft stage; and (3) Voting stage. Public comments on
discussion memoranda and exposure drafts are invited, and public hearings
are sometimes held.
Requirement 4:
Describe the IASB organization and its role in establishing new accounting
standards. The International Accounting Standards Board, formed in 1973,
works to formulate accounting standards, promote their worldwide acceptance,
and achieve greater convergence of financial reporting regulations, standards,
and procedures across countries. Members are drawn from professional
accounting organizations and businesses around the world.
Requirement 5:
How does the Securities and Exchange Commission (SEC) influence the
financial reporting practices of U.S. companies? The SEC retains statutory
power over the financial accounting and reporting practices of registrant
companies. This power includes the ability to issue financial accounting and
reporting rules as well as to enforce compliance with the rules it issues or those
issued by standards-setting organizations (e.g., FASB) as designated by the
SEC.

1-11
in whole or part.
P1-6. Relevance versus faithful representation (LO 1-1)
Requirement 1:
The Blue Book average price is more relevant to the car buying decision than
is the list (or “sticker”) price shown on the manufacturer’s web site. Why?
Because it better represents the price you can expect to pay for the
automobile.
The Blue Book price describes the average price actually paid by recent
buyers for comparably equipped automobiles. Actual prices are the result of
arms-length negotiations between willing buyers and sellers, and thus reflect
what you can expect to pay (on average) when you negotiate your automobile
purchase. The list (“sticker”) price is just a suggested retail price—the actual
negotiated price is often considerably less (but sometimes can be more) than
the manufacturer’s list price.
Requirement 2:
The Blue Book price of $19,500 is less representationally faithful than the
manufacturer’s list price. To understand why, notice that recent selling prices
have ranged from $18,000 to $22,000. This means that while you can expect
to pay $19,500 on average for the automobile, it may cost you as little as
$18,000 or as much as $22,000. On the other hand, there is little (if any)
variation in the manufacturer’s list price—comparably equipped cars have
essentially the same list price.
In this setting, reliability refers to price variation and there is more variation
(less reliability) in the underlying Blue Book prices than there is in the
manufacturer’s list price.

1-12
in whole or part.
P1-7. Accounting Information Characteristics (LO 1-1)
Requirement 1:
“Cash” and “Net accounts receivable” are both relevant to the loan decision
because they provide information about cash flows and thus about the
company’s ability to make principal and interest payments as they come due.
The balance in “Accumulated depreciation”, on the other hand, says nothing
about the company’s current or future cash. Consequently, this information is
not relevant to the loan decision.
Requirement 2:
“Cash” is the most representationally faithful balance sheet item. The
amount of cash on hand and in the bank at a particular moment in time can
be determined with a high degree of accuracy. “Net accounts receivable” is
less so because its determination requires estimates of future sales returns
and bad debts. These estimates, which are essential to the accounting
process, reduce the faithful representation of this balance sheet item.
“Accumulated depreciation” is also less representationally faithful than “Cash”
because its measurement requires estimates of salvage (residual) value and
useful life.
P1-8. Accounting Conservatism (LO 1-1)
Requirement 1:
Accounting conservatism requires that the land now be shown on the balance
sheet at the lower amount $3 million, its estimated fair market value, rather
that at the $5 million you paid two months ago. Conservatism is the practice
of recording possible losses—in this case, the decline in value of the land—
as soon as they become probable and measurable.
Requirement 2:
Accounting conservatism requires that the land continue to be shown on the
balance sheet at the price paid two months ago ($3 million) rather than the
higher estimated fair value ($5 million). Conservatism records losses as soon
as they are probable and measurable, but additional requirements must be
met to record gains (as you will soon discover in Chapter 2).

1-13
in whole or part.
P1-9. Factors Affecting Financial Reporting (LO 1-2, LO 1-3, LO 1-4)
1) Accounting is not an exact science. One reason this is the case is that
many financial statement numbers are based on estimates of future
conditions (e.g., future bad debts and warranty claims). Another reason is that
there is no single accounting method that is best for all companies and
situations. Thus, different companies use different methods to account for
similar transactions (e.g., depreciation of property and the valuation of
inventory).
2) While some managers may select accounting methods that produce the
most accurate picture of a company’s performance and condition, other
managers may make financial reporting decisions that are self-serving and
strategic. Consider the following examples:
Managers who receive a bonus based on reported earnings or return on
equity may make financial reporting decisions that accelerate revenue
recognition and delay expense recognition in order to maximize the
present value of their bonus payments.
Managers who must adhere to limits on financial accounting ratios in debt
covenants may make reporting decisions designed to avoid violation of
these contracts.
More generally, managers are likely to make financial reporting decisions
that portray them in a good light.
The moral is that financial analysts should approach financial statements with
some skepticism because management has tremendous influence over the
reported numbers.
3) This is probably true. Financial accounting is a slave to many masters.
Many different constituencies have a stake in financial accounting and
reporting practices—existing shareholders, prospective shareholders,
financial analysts, managers, employees, lenders, suppliers, customers,
unions, government agencies, shareholder activist groups, and politicians.
The amount and type of information that each group demands is likely to be
different. As a result, accounting standards in the United States reflect the
outcome of a process where each constituency tries to advance its interests.
Examples illustrating the politics of accounting standards are interspersed
throughout this book.

1-14
in whole or part.
4) This is false. Even without mandatory disclosure rules by the FASB and
SEC, companies have incentives to voluntarily disclose information that helps
them obtain debt and equity financing at the lowest possible cost. Failure to
do so results in higher cost of debt and equity capital.
5) This is true. If the information is value-relevant—meaning, important for
investors to know—there is no obvious reason not to disclose the information
except when doing so places the company at a competitive disadvantage.
6) The best response is that the statement is false because:
Managers have incentives to develop and maintain a good relationship
with financial analysts. Failing to disclose value-relevant information (good
or bad) on a timely basis can damage this relationship.
Under the U.S. securities laws, shareholders can sue managers for failing
to disclose material financial information on a timely basis. To reduce
potential legal liability under shareholder lawsuits, managers have
incentives to disclose even bad news in a timely manner.
7) This may be true or false. If a company discloses so little information that
investors and lenders cannot adequately assess the expected return and risk
of its securities, then its cost of capital will be high. In this case, managers are
doing shareholders a disservice by not disclosing more information to
financial markets. If, on the other hand, increased disclosure harms the
company’s competitive advantage, managers have helped shareholders.

1-15
in whole or part.
P1-10. Economic Consequences of Accounting Standards (LO 1-3)
Requirement 1:
There are several economic consequences that could arise when companies
are forced to alter their past accounting methods—in this case, by recording a
new liability and corresponding expense.
Mandatory changes in accounting methods of this sort can disrupt contracts
that are defined in terms of accounting ratios. One example is a loan
agreement that restricts the firm from exceeding some maximum debt-to-
equity ratio. The accounting change will add additional dollars to debt and
simultaneously subtract dollars from equity, and thus may cause the firm to
violate its lending agreement. The costs associated with violating the
agreement represent an economic consequence of the accounting change.
In response to the possibility of violating the loan agreement, management
may decide to sell some otherwise productive assets. The cash raised could
then be used to pay down debt, and the accounting gain would increase
reported equity. This would soften the adverse effect of the accounting
change on the company’s debt-to-equity ratio. But notice that the asset sale is
occurring only in response to the accounting change—and thus it too
represents an economic consequence of the change.
And, as described in requirement 2, management may decide to reduce or
curtail employee healthcare benefits so that the recorded liability (and
expense) is as small as possible. This benefit reduction becomes an
economic consequence borne by employees of the company.
Requirement 2:
There are widely divergent views on whether the FASB should consider the
economic consequences of its actions when formulating accounting
standards.
On the one hand, SFAC No. 2 states that “neutrality” is a desired
characteristic of financial statement information. Neutrality means that the
information cannot be selected to favor one set of interested parties over
another. So, real liabilities cannot remain unrecorded just because recording
them may cause some firms to violate their lending agreements. When
applied to the standard setting process, neutrality means that the FASB

1-16
in whole or part.
should ignore the economic consequences of alternative accounting
practices.
A more practical problem is that it is exceedingly difficult to quantify those
consequences in any meaningful way. How can the FASB determine which
firms will likely violate their lending agreements or what it will cost them if they
do so? And what about the economic consequences of likely changes in
management’s actions (e.g., asset sale, reduced employee benefits, etc.)?
Even if the FASB was able to quantify all of the potential consequences
associated with a particular proposed accounting change, it would still face
the gargantuan task of deciding whether the total benefits outweighed the
total costs to the various parties involved. For example, should lenders be
favored and employees harmed by requiring heath care liabilities to be shown
on the balance sheet? Or, should lenders be harmed and employees favored
by keeping health care liabilities off the balance sheet?
Of course, the interested parties themselves fervently believe the FASB
should consider the economic consequences of alternative accounting
practices when formulating standards. To do otherwise, they argue, is to
ignore a simple fact that mandatory accounting changes sometimes have real
consequences.

1-17
in whole or part.
P1-11. Two Sets of Books (LO 1-1)
Requirement 1:
Companies maintain a set of “tax” books to properly compute taxable income
according to IRS rules. Companies maintain a set of GAAP books to properly
compute net income, balance sheet amounts, and cash flows according to
SEC and FASB rules. Because IRS rules differ from GAAP, two sets of books
are required.
Requirement 2:
There are several reasons why it might not be a good idea to force
companies to issue the same financial statements for both IRS and SEC
purposes. For instance:
The two regulatory agencies have entirely different financial reporting
goals. The IRS is concerned with the timely collection of tax revenues in
accordance with federal income tax law. The SEC (and the FASB) is
concerned with ensuring that firms provide timely information useful for
decision making purposes. There is no reason to believe that the same set
of “books”—accounting procedures—can serve both purposes equally
well.
IRS rules for computing taxable income are determined by tax laws
intended to achieve a variety of social purposes. The resulting income
measure may not be particularly useful for other purposes like equity
valuation or credit risk assessment.
Political compromises have a substantial impact on tax law, and thus on
IRS accounting. Requiring IRS and SEC conformity (i.e., a single set of
books) would expose GAAP financial reporting standards to these same
political winds.

1-18
in whole or part.
P1-12. Accounting quality and the audit committee (LO 1-4)
1) By identifying the key business and financial risks facing the company, the
audit committee can ensure that those risks are properly disclosed in the
MD&A (Management Discussion & Analysis) section of the annual report. A
second reason is that management’s answers may also flag areas where
subjective accounting judgments and estimates are used in preparing the
financial statements (see 2).
2) By identifying areas where subjective judgments and estimates are used,
the audit committee can probe management about the “quality” (objectivity
and accuracy) of the estimates, benchmark to estimates of other firms, and
gauge the impact of estimate changes on the financial statements. Estimated
uncollectible accounts receivable is a concrete example. Here the audit
committee will want to know how this year’s estimate was determined, the
reason for any change from last year, and how the estimate compares to
estimates for other firms in the industry.
The answers to this question—how are those judgments made and estimates
determined—are important for the reasons outlined above. They help the
audit committee gauge the “quality” of the accounting judgments (e.g., when
to record revenue) and estimates (e.g., the uncollectible portion of accounts
receivable).
3) By identifying significant areas where the company’s accounting policies
were difficult to determine, the audit committee can probe management about
its choice of accounting methods in situations where GAAP may not provide
clear guidance. This way the audit committee can uncover practices that
might be overly aggressive or overly conservative in portraying the firm’s true
economic performance and condition.
4) Significant accounting deviations from usual industry practice are a “red
flag” for stock analysts and investors. That’s because the deviation is often
viewed as an indication that the financial statements are being “managed” to
look better than they should. The audit committee will want to probe
management about the reason for any deviation from industry practice, and
gain confidence that the chosen practice more accurately reflects the
economic fundamentals of the business or transaction. The audit committee
may also want management to better explain its choice of accounting
practices in the annual report.
5) Changes in accounting methods can sometimes have a dramatic impact
on financial statements and on the company’s stock price if investors react

1-19
in whole or part.
negatively to the change. The audit committee will want to probe
management about the reason for the change, and gain confidence that the
new accounting method better reflects the economic fundamentals of the
business or transaction. The audit committee may also want management to
take special steps in communicating the change to the marketplace.
6) Here the audit committee is asking for a “heads up” about potential
changes in accounting practices—both those required by GAAP and those
made voluntarily by management. See 4 and 5 above for reasons why the
audit committee might want to know about possible accounting changes in
advance.
7) “Serious problems” can include internal control lapses, incomplete
documentation of transactions, errors (inadvertent failure to record a
transaction), and accounting “irregularities” (intentionally booking revenue
earlier than GAAP allows). The audit committee is interested in knowing
about these problems because they can signal accounting system
weaknesses, lax internal controls, and culture of dishonesty or deception that
threatens management credibility and financial statement integrity.
8) There are two reasons the audit committee is interested in the answer to
this question. First, outsiders may have uncovered a real accounting quality
threat that is as yet unknown to the committee. Second, the committee may
want management to address outsiders’ concerns—real or imagined—so that
management credibility and financial statement integrity remains intact.
9) The answers to this question can also uncover areas where accounting
quality can be threatened. The committee will want to also hear from the
auditor about the nature of the dispute and its resolution.

1-20
in whole or part.
P1-13. Worldwide Convergence of Accounting Standards (LO 1-6)
Requirement 1:
There are at least two arguments supporting worldwide convergence of
accounting standards. These arguments involve the claimed benefits of
increased financial statement transparency and comparability.
One argument for a common set of accounting standards is the global
convergence of financial markets themselves. Foreign stocks and foreign
investors make up an increasing fraction of the trading activity on most major
stock exchanges today. A single set of worldwide accounting standards
would eliminate local financial reporting differences, provide a common frame
of reference for interpreting corporate financial reports, and thereby facilitate
market efficiency. The gist of this argument is that convergence yields
enhanced comparability across companies domiciled in different countries.
A second—and more controversial—argument is based on the notion that
IASB standards are superior to those in use locally. According to this view,
worldwide convergence eliminates local GAAP deficiencies and thus yields
financial statements that better reflect the underlying economics of the
business (enhanced transparency). These improvements in the quality of
financial statement information then yield increased financial market
efficiency.
As this chapter has stressed, the economics of accounting standard setting
involves complicated cost and benefit tradeoffs. So, an obvious potential
disadvantage of worldwide convergence is that, for many individual firms, the
cost of convergence may exceed the benefits obtained. This might be
especially true for small, publicly traded companies that rarely need access to
new financial capital. A second disadvantage is the potential loss of
competition in the market for accounting standards themselves. No single set
of standards are likely to be universally preferred by all firms and all investors
al of the time. Elimination of local standards may stifle financial reporting
innovation.
Requirement 2:
According to Mr. Tweedie’s remarks, convergence will likely increase investor
confidence in China’s capital markets and financial reports. This benefits the
Chinese investor who buys stocks in local companies by ensuring that: (1)
high quality financial information is readily available to support buy/sell
decisions (better transparency); and (2) capital markets are efficient in
reflecting that information in stock prices.

1-21
in whole or part.
Requirement 3:
U.S. investors benefit in several ways. First, the cost of processing financial
statement information about Chinese companies is reduced because U.S.
investors would no longer need to be knowledgeable in both local and global
GAAP (enhanced comparability). Second, the firm’s cost of compliance with
diverse accounting standards (a point mentioned in Mr. Tweedie’s remarks)
may also be reduced. This savings presumable makes the firm more
valuable which benefits all investors.

1-22
in whole or part.
P1-14. Debt Covenants and Aggressive Accounting Practices (LO 1-4)
Requirement 1:
When a company violates its debt covenants, lenders can respond in any of
several ways. They can simply waive the violation which is akin to a “slap on
the wrist”. Or, they can amend the loan agreement and thereby charge a
higher rate of interest, accelerate repayment terms, or impose more stringent
covenants on the borrower. (Chapter 7 tells you more.) If the lender refuses
to waive or amend the loan terms, the borrowed amount becomes due
immediately and this action may force the borrower to declare bankruptcy.
Requirement 2:
Although the details of the company’s EBITDA covenant are not spelled out
in the company’s press release, Friedman’s is required to maintain a
minimum level of profitability (measured using EBITDA) over several periods.
Aggressive accounting practices—premature revenue recognition or delayed
expense recognition—could be used to keep EBITDA above the minimum
required in the loan agreement. Examples might include underestimation of
future uncollectibles, inappropriate capitalization of operating expenses,
recognizing as sold items jewelry that is just being held pending approval by
the customer.
Requirement 3:
Friedman’s is required to maintain a minimum ratio of accounts payable to
inventory. To avoid violating this minimum ratio requirement, the company
could understate its actual inventory balance.

1-23
in whole or part.
P1-15. Toshiba Corporation (LO 1-6)
Requirement 1:
The company’s 2015 annual report opens with a Management Discussion
and Analysis typical of U.S. companies. This MD&A contains a five-year
summary of selected income statement and balance sheet accounts, a review
of operations and key performance indicators (e.g., ROE, Debt/Equity),
results by geographical region and industry segment, capital expenditures
and construction plans, along with a discussion of cash flows and treasury
stock transactions. The MD&A also describes significant risk factors that the
company and its businesses must confront.
Requirement 2:
The following financial statements are included in the 2015 annual report:
Consolidate Balance Sheets, Statements of Income, Shareholders Equity and
Cash Flows each denominated in Japanese yen and for the most recent year,
in U.S. dollars.
Requirement 3:
According to Note 2 Summary of Significant Accounting Policies, the
company’s financial statements are prepared in accordance with Japanese
GAAP. However, “certain adjustments and reclassifications have been
incorporated in the accompanying consolidated financial statements to
conform with accounting principles generally accepted in the United States.
These adjustments were not recorded in the statutory books of account.” In
other words, Toshiba uses Japanese GAAP for its statutory (domestic)
financial statements but U.S. GAAP in the consolidated statements displayed
in this English-language annual report. Conformity to U.S. GAAP is
confirmed in the Report of Independent Auditors.
Requirement 4:
In this case, the answer lies in the response to Requirement 3: No difference
exist because Toshiba uses U.S. GAAP in the consolidated financial
statements displayed in the company’s English-language annual report.

1-24
in whole or part.
P1-16. Carrefour Group (LO 1-5)
Requirement 1:
The company’s 2015 “annual report” contains summary consolidated financial
statements of income, financial position, and cash flow. No financial
statement notes are included in the annual report, although selected financial
results by geographical segment are reported.
Requirement 2:
Most of the annual report is devoted to describing the company, its strategic
goals and core values including the customer value proposition: brand
strategy, store configuration and development goals, convenience and
pricing. A section of the annual report discusses the company’s commitment
to socially responsible business activities including employee relations and
environmental footprint. The concluding section of the annual report provides
biographical information about the company’s board of directors and top
executives.
Requirement 3:
The company’s 2015 “financial report” contains detailed consolidate financial
statements (financial position, income, shareholders’ equity, and cash flows)
along with comprehensive notes to those statements. The financial
statement amounts are denominated in euros.
Requirement 4:
Carrefour’s consolidated financial statements are prepared in accordance
with International Financial Reporting Standards (IFRS) as approved by the
European Union.
Requirement 5:
The order in which individual accounts are listed by Carrefour Group on the
asset side and liabilities/equity side of the statement of financial position is
the reverse of what is common among U.S. companies. For example, the
first asset listed is Goodwill, followed by other intangibles and long-term
investments. Next come current assets, starting with inventories and ending
with Cash and non-current assets held for sale. The liabilities/equity portion
of the balance sheet lists shareholders’ equity accounts first, followed by
long-term borrowing and other long-term obligations, with current liabilities
(short-term borrowing and accounts payable) shown last.

1-25
in whole or part.
Financial Reporting and Analysis (7th Ed.)
Chapter 1 Solutions
The Economic and Institutional Setting for Financial Reporting
Cases
Cases
C1-1. Novartis AG: Form 20-F Reconciliation (LO 1-6)
Requirement 1:
For 2006, the difference between IFRS net income from continuing
operations ($7,019) and US GAAP net income from continuing operations
($5,150) is $1,869 million.
Requirement 2:
Most people would argue that Novartis management would prefer to report
the high dollar amount (IFRS net income) rather than the lower US GAAP
amount. Reporting higher net income paints a more favorable picture of
company profitability. However, doing so may also attract unwanted attention
from labor unions, politicians, regulatory agencies, and the financial press.
Requirement 3:
Which is warmer, a room with a temperature of 22.2 Celsius or one where the
temperature is 72 Fahrenheit? Even though “72” is bigger than “22.2”, neither
room is warmer than the other. The difference in measurement scale
readings (72 versus 22.2) does not translate into a difference in actual
temperature.
Sophisticated investors understand that a similar concept applies to income
measured using two different accounting scales: US GAAP and IFRS.
Moreover, most investors realize that the absolute dollar level reported by a
company is less important than whether earnings are increasing, decreasing,
or remaining flat relative to their level one year ago.
Requirement 4:
Investors who contemplate buying (selling) a foreign company’s stock traded
on a U.S. stock exchange may evaluate its relative profit performance against
that of familiar U.S. companies. The Form 20-F reconciliation aids this
comparison process by providing investors with an earnings measure that is
directly comparable to those reported by U.S. companies.

1-26
in whole or part.
Requirement 5:
Form 20-F reconciliations of IFRS earnings to U.S. GAAP earnings are less
important to investors in this setting. There may be rare cases where
investors who contemplate buying (selling) a foreign company’s stock traded
on a foreign stock exchange want to evaluate its relative profit performance
against that of familiar U.S. companies that also are traded on the same
foreign exchange. If so, the Form 20-F reconciliation aids this comparison
process by providing investors with an earnings measure that is directly
comparable to those reported by U.S. companies.

1-27
in whole or part.
C1-2. Henley Manufacturing Inc.: Announcing sales and earnings goals (LO
1-3)
Requirement A:
1) Potential costs of announcing earnings and sales goals include:
(a) possible shareholder lawsuits if goals are not met; (b) loss of reputation if
goals are not met; (c) disclosure may convey information to competitors about
the profitability of products or market territories; (d) managers may take
dysfunctional actions—ease credit terms, decrease advertising expenditures,
reduce R&D expenditures—near the end of the accounting period if it looks
like the goals will not be met.
Potential benefits include: (a) investors can better understand the risks and
rewards of stock ownership because they know more about the
management’s plans; (b) disclosure may improve relationships with lead
investors and analysts, especially if it’s part of an ongoing communications
strategy and not just a one-time event; (c) investor and creditor uncertainty
may be reduced, thus lowering the company’s cost of debt and equity
financing.
2) Should management disclose its earnings and sales goals? It depends on
whether the benefits outweigh the costs, and on how confident management
is that the goals can be achieved.
Easily achievable goals are likely to be disclosed without much reservation.
Difficult goals are less likely to be disclosed because management may not
want to risk disappointing investors if results fall short of target. One way to
avoid disappointment is to make the goals less specific—for example, “sales
are expected to increase by as much as 15%” or “sales are expected to be up
substantially next year.”
3) In all likelihood, the recommendation would change. Consideration would
now be given to the fact that, as the planning horizon increases, it becomes
more and more difficult to forecast accurately. For example, major changes in
market-wide and industry-wide competitive conditions over the next two or
three years could have a dramatic impact on whether or not the goals can be
achieved.
Requirement B:
In this case, the nature of the goals is quite varied. In all likelihood, investors
and financial analysts are going to be more interested in profitability and cash
flow forecasts than in other financial aspects of the company. As a result, it

1-28
in whole or part.
is reasonable to recommend disclosure of the following goals—subject to the
cost and benefit considerations mentioned earlier: annual sales growth of
15%; annual earnings growth of 20%; a return on net tangible assets of 16%;
a return on common equity of 20%; a minimum profit margin of 5%.

1-29
in whole or part.
C1-3. Fortress International: Disclosing major customers (LO 1-2)
1) The SEC requires firms to alert financial statement readers about major
customers that contribute 10% or more to annual sales. Such information
helps investors and analysts assess sales volatility and the potential impact
on profitability of the loss of major customers. The information is especially
important for companies operating in industries characterized by high
customer concentration and intense competition.
2) Financial analysts might use these disclosures in the following ways:
To assess customer risk. The more revenue a company derives from a
single customer or small group of customers, the greater the adverse
impact on profitability if one or more of these customers is lost to a
competitor or simply goes out of business.
By studying a firm’s major customers (i.e., the products they sell, expected
future demand for such products, untapped markets in other countries or
geographical areas), an analyst can determine the likelihood of increased
future sales to that customer and, hence, profits to the selling company.
However, the name of a major customer need not be disclosed so analysts
may not always be able to specifically target such information.
3) Fortress International (now TSS Inc.) offers planning, design, engineering,
construction management, commissioning and maintenance services for
specialized facilities such as data centers, communications rooms, call
centers, laboratories, trading floors, network operations centers, medical
facilities and similar environments.
The primary reason major customers might monitor the financial health of
Fortress International is to ensure that Fortress can be relied upon as a
supplier of facilities services for new or existing locations. Customers are
likely to be interested in monitoring Fortress’s overall profitability (i.e., the
income statement), financial health and the mix of debt and equity financing
(i.e., the balance sheet), and cash flow generating ability (i.e., the cash flow
statement).
4) Fortress monitors the financial health of key customers to ensure that they
will be a continuing source of demand for its services in the future. Fortress is
likely to monitor expansion plans, facilities utilization, overall profitability,
financial health and debt levels, and cash flow generating ability.

1-30
in whole or part.
C1-4. The gap in GAAP (LO 1-4)
1) Advantages of allowing managers some flexibility in the choice of financial
reporting methods include:
Accounting must serve as a slave to many masters. Stated differently,
financial accounting information is used for many purposes including
valuation, credit analysis, and contracting, and no single set of financial
reporting methods would serve each of these purposes equally well. By
allowing managers some latitude in the choice of financial reporting
methods, they can weigh the trade-offs implicit in making the firm’s
financial reports informative for each of these potential uses.
If managers have some latitude in their choice of financial reporting
methods, they can adapt the firm’s financial reporting practices to changes
in the firm’s economic characteristics and/or environment over time. For
example, a change in the rate of technological advance in a firm’s industry
may mean that new long-term assets should be written off at a faster rate
than was previously the case. For example, a company that previously
used straight-line depreciation may now find that accelerated depreciation
presents the most accurate picture of the firm’s economic environment.
2) The current financial reporting system in the United States is really a
combination of the two approaches.
On the one hand, firms have latitude in the selection of accounting methods
to summarize various transactions and events. Examples include inventory
valuation where firms may select from LIFO, FIFO, or weighted average;
depreciation policy where they may select from straight-line or accelerated
methods such as sum-of-the-years’-digits or declining-balance methods; and
accounting for oil and gas exploration costs where firms may apply the
full-cost or the successful-efforts method.
On the other hand, there are numerous cases where the FASB (or SEC) has
mandated a single accounting method or treatment for various transactions or
events. Examples include research and development expenditures which
must be expensed in the year incurred; leases which must be capitalized and
reported as liabilities on the balance sheet if certain criteria are met;
accounting for foreign currency translation; and accounting for pension
benefits and other postemployment benefits other than pensions.

1-31
in whole or part.
3) The advantages of a single set of accounting methods include:
Facilitates comparability of financial information across firms at a point in
time and over time. This may be appealing to financial analysts because it
potentially makes their work easier.
Ease of verification by the auditing profession. This may lead to fewer
shareholder lawsuits against the company or its auditors for aggressive
financial reporting decisions made by managers. External auditors may
find the ease of verification beneficial to them.
The disadvantages of a single set of accounting methods include:
Assumes that the financial performance and condition of all firms can
adequately be captured by a single set of accounting methods. Implicitly
assumes that firms are homogeneous. Moreover, that all firms have
identical economic features and characteristics and face identical
economic environments.
Assumes that a single set of accounting methods serves all the potential
uses of financial statement information (e.g., valuation, credit analysis, and
contracting).
The advantages of allowing flexibility in the choice of financial reporting
methods include:
Firms can tailor their choice of financial reporting methods to the specifics
of their economic environment and circumstances. For example,
depending on whether the prices of its input products are increasing or
decreasing, FIFO may be a more realistic choice of inventory valuation
method for income determination purposes when compared to LIFO (or
vice versa). As another example, in industries where long-term aspects
are subject to a rapid rate of technological advance and change,
accelerated depreciation methods may be superior for income
determination purposes when compared to straight-line (or vice versa).
The disadvantages of allowing some flexibility in the choice of financial
reporting methods include:
May detract from making comparisons across firms at a point in time and
over time.

1-32
in whole or part.
Managers may use their discretion over reporting methods to distort the
firm’s performance. They might adopt financial reporting practices that
create the appearance of profitability in an attempt to hide or cover up poor
operating performance. They might also adopt financial reporting practices
that accelerate the recognition of revenues and delay the recognition of
expenses in an attempt to maximize the present value of payouts from
bonus plans tied to reported profitability.

1-33
in whole or part.
C1-5. Landfil’s accounting change (LO 4)
Here are the major positions outlined at the meeting:
“It’s consistent with GAAP and fully disclosed.” While true, this approach may not be
comforting to analysts and investors concerned about whether capitalization makes
the company look more profitable than it really is. Given the steep price decline at
Chambers Development, analysts and investors will be scanning their radar screens
for other capitalization companies, and they will surely discover Landfil’s accounting.
Unless capitalization can be strongly defended, the company’s share price is likely to
fall.
“We capitalize, and we’re proud of it!” The heart of this strategy is the notion that the
company has already made the “correct” accounting decision—one that fairly
portrays the profit performance and asset base of Landfil. If investors and analysts
can be convinced, continued use of capitalization should not result in a share price
decline…but can they be convinced?
“We can afford to change.” Even if capitalization is the “best” (most appropriate)
accounting method for Landfil, it still might be advantageous to change. First, a
change to immediate expensing will dispel any remaining skepticism on the part of
investors and analysts. Second, it demonstrates management’s confidence in the
company’s prospects and its ability to absorb the dollar impact of the change. But
this strategy is risky—investors and analysts may incorrectly presume that
capitalization was being used to “manage” reported earnings. This may cause them
to question the company’s other accounting methods and the quality of its financial
reports.

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The morning had ended most disastrously for the British. The beloved
and trusted general was still in death, and near him lay his friend and aide-
de-camp, mortally wounded. All along the line from Fort George to Erie,
the evil tidings sped. How the news of defeat was brought to Fort Erie is
told by an officer[3] of the 100th stationed there. He relates how on the
morning of October 13th the booming of distant artillery was faintly heard.
Hunger and fatigue were no longer remembered, and the men were ordered
to turn out under arms, and were soon on their way to the batteries opposite
the enemy's station at Black Rock. The letter continues:—
"We had not assumed our position long, when an orderly officer of the
Provincial Dragoons rode up and gave the information that the enemy were
attempting to cross at Queenston, and that we must annoy them by every
means in our power along the whole line, as was being done from Niagara
to Queenston. The command was no sooner given than, bang, went off
every gun we had in position. The enemy's guns were manned and returned
the fire, and the day's work was begun. It was about two o'clock in the
afternoon when another dragoon, not wearing sword or helmet, bespattered
horse and man with foam and mud, rode up. Said an old 'green tiger'[4] to
me, 'Horse and man jaded, sir, depend upon it he brings bad news' 'Step
down and see what news he brings.' Away my veteran doubles and soon
returns. I knew from poor old Clibborn's face something dreadful had
occurred. 'What news, Clibborn—what news, man?' I said, as he advanced
toward the battery that was still keeping up a brisk fire.
"Clibborn walked on, perfectly unconscious of the balls that were
ploughing up the ground around him. He uttered not a word, but shook his
head. The pallor and expression of his countenance indicated the sorrow of
his soul. I could stand it no longer. I placed my hand on his shoulder. 'For
heaven's sake, tell us what you know.' In choking accents he revealed his
melancholy information. 'General Brock is killed, the enemy has possession
of Queenston Heights.' Every man in the battery was paralyzed. They
ceased firing. A cheer from the enemy on the opposite side of the river
recalled us to our duty. They had heard of their success down the river.
"Our men who had in various ways evinced their feelings, some
weeping, some swearing, some in mournful silence, now exhibited

General
Sheaffe
demoniac energy. The heavy guns were loaded, traversed and fired as if
they were field pieces. 'Take your time, men, don't throw away your fire,
my lads.' 'No, sir, but we will give it to them hot and heavy.' All the guns
were worked by the forty men of my company as if they wished to avenge
the death of their beloved chief."[5]
At Niagara, the other extremity of the line, in obedience to General
Brock's last order, sent from Queenston, a brisk fire had been kept up all
morning with the American fort opposite, whence hot shot poured on the
little town, threatening to envelop it in flames. Captain Vigareaux, R.E., by
a daring act of valour, saved a powder magazine from being ignited. As at
Fort Erie, news of the disaster at Queenston only impelled the artillerymen
to redouble their exertions. So well directed was their fire that by mid-day
the American fort was silenced.
Major-General Sheaffe had, early in the morning, in
obedience to a summons from General Brock, prepared to
march to Queenston with about four companies of the 41st,
three hundred and eighty rank and file, and nearly the same number of
militia, together with the car brigade under Captain Holcroft. News of the
repulse and the loss of the general was followed by a second despatch,
telling of Lieutenant-Colonel Macdonell's attempt to take the hill, which
had ended so disastrously.
General Sheaffe, with the field pieces of the car brigade, arrived at
Vrooman's Point about eleven o'clock, and found there the handful of troops
who had retreated to that place to await his arrival. Captain Holcroft's
company, with the heavy guns, was placed in position to command the
landing at Lewiston, and to prevent any more troops from crossing. The
general decided that it was useless to attempt a charge up the hill in the face
of the addition that had been made to the enemy's force, and their
commanding position on the heights. He determined, therefore, to make a
long detour through the fields and woods behind Queenston. His force had
been strengthened by about one hundred and fifty Mohawk Indians, under
Chief Norton, who had come from the lake shore near Niagara, had skirted
the village of St. Davids near Queenston, and then had silently moved
eastwards through the dense forest, hemming the Americans in. About two

The battle
p.m. Major Merritt's troop of cavalry appeared on the scene, and later still, a
detachment of the 41st and two flank companies of militia arrived from
Chippawa.
It was three o'clock in the afternoon when the real battle
of Queenston Heights began. General Sheaffe had gradually
advanced towards the battery on the mountain held by the enemy. One spirit
animated all the men, a fierce desire to avenge the death of their beloved
chief, and to drive the aggressors back from Canadian soil. The main body
on the right consisted of the 41st, and the flank companies of the Niagara
militia, with two field pieces, 3-pounders, which had been dragged up the
hill. The left consisted of the Mohawk Indians and a company of coloured
troops, refugee slaves from the United States. The Light Company of the
49th, with the companies of York and Lincoln militia, formed the centre. In
all a little over a thousand men, of whom half were regulars.
The Indians were the first to advance, and the Americans, who were
expecting an attack from quite another direction, were completely taken by
surprise. General Sheaffe had succeeded in reaching their rear unseen.
There was scarcely time for them to change their front when a fierce
onslaught was made on them from all sides, the Indians uttering their
terrific war whoop, and the rest of the troops joining in the shout.
In vain did the American officers, among them Winfield Scott, attempt to
rally their men. A panic seized them in the face of the determined fire that
was poured upon them, and, scarcely waiting to fire a volley, they fled by
hundreds down the mountain, only to meet more of their enemies below.
There was no retreat possible for them. It was indeed a furious and
avenging force that pressed upon them, and drove them to the brink of that
river whose deep waters seemed to offer a more merciful death than that
which awaited them above. They fell in numbers. "The river," says one who
was present,[6] "presented a shocking spectacle, filled with poor wretches
who plunged into the stream with scarcely a prospect of being saved."
Many leaped from the side of the mountain, and were dashed to pieces on
the rocks below.
At last the fire from the American batteries at Lewiston ceased, and the
battle was over in one short hour. Brock was indeed avenged. Two officers

His monument
were now seen approaching bearing a white flag. They were conducted up
the mountain to General Sheaffe, and with difficulty the slaughter was
stopped. By the surrender, General Wadsworth and over nine hundred men,
including sixty officers, were made prisoners of war. It was a complete
victory, but dimmed by a national loss. That loss was felt through the two
years of fighting that followed the battle of Queenston Heights. Sheaffe,
who succeeded the fallen general, was lacking in the qualities that are
requisite for a successful commander. His conduct at the taking of York in
1813, proved his unfitness for the position. Procter who had been left in
command on the western frontier also lacked the firmness in action and
fertility of resource that characterized the leader who had opened the
campaign so brilliantly. But the influence which the lost leader wielded on
the youth of the province lived after him, and stimulated them throughout
the long struggle "to keep the land inviolate." Under Vincent and Harvey
and Drummond and Macdonell and de Salaberry they fought as veterans,
and when at the close of the war they laid down their arms not one foot of
Canadian territory was occupied by the enemy.
Three times were Sir Isaac Brock's funeral rites observed. First, on that
sad October day when a pause came in the conflict, and minute guns from
each side of the river bore their token of respect from friend and foe for the
general who had fallen in the midst of the battle. He was laid to rest first in
the cavalier bastion of Fort George which he himself had built. Dark days
were yet to fall on Canada, when shot and shell poured over that grave in
the bastion, and fire and sword laid the land desolate; but the spirit kindled
by Brock in the country never failed, and though his voice was stilled, the
echo of his words remained and the force of his example.
When peace came again, a grateful country resolved to
raise to his memory a monument on the field where he fell,
and twelve years afterwards a solemn procession passed again over that
road by the river, and from far and near those who had served under him
gathered to do him honour. A miscreant from the United States shattered
this monument on April 13th, 1840, a crime that was execrated in that
country as well as in Canada.

A tribute
In order to take immediate steps to repair the desecration, Sir George
Arthur, the governor-general, called upon the militia of Upper Canada and
the regular troops then in the country, to assemble on Queenston Heights on
June 30th of that year. The summons was obeyed with enthusiasm, and no
greater civil and military display had ever been held in Canada. The youths
whom Isaac Brock had led were gray-headed men now, judges and
statesmen, the foremost in the land, but they had not forgotten him, and
once again, in eloquent words, the story was told of how he had won the
undying love and respect of the people.
A resolution was unanimously passed, that another
monument, higher and nobler still, should be built in place
of the one destroyed. No public money was asked, but the regular troops,
officers and men, and the militia gave a freewill offering. In due time the
sum of fifty thousand dollars was raised. While the monument was
building, General Brock's body was placed in a private burying-ground in
Mr. Hamilton's garden at the foot of the hill. In 1854, more than forty years
after the battle, the column was finished, and once again a long procession
followed the hero's bier. Nor was this all. In 1860 there was a notable
gathering on that historic hill, when King Edward VII, then Prince of Wales,
came to do honour to the dead hero, and laid the topmost stone on the cairn
that marks the spot where he fell. One hundred and sixty survivors of the
volunteers of 1812 were present. Sir John Beverley Robinson was their
spokesman. In his address to the prince he said: "In the long period that has
elapsed very many have gone to their rest, who, having served in higher
rank than ourselves, took a more conspicuous part in that glorious contest.
We rejoice in the thought that what your Royal Highness has seen and will
see of this prosperous and happy province will enable you to judge how
valuable a possession was saved to the British Crown by the successful
resistance made in the trying contest in which it was our fortune to bear a
part, and your Royal Highness will then be able to judge how large a debt
the empire owed to the lamented hero Brock, whose gallant and generous
heart shrank not in the darkest hour of the conflict, and whose example
inspired the few with the ability and spirit to do the work of many." In reply
the prince said: "I have willingly consented to lay the first stone of this
monument. Every nation may, without offence to its neighbours,
commemorate its heroes, their deeds of arms, and their noble deaths. This is

no taunting boast of victory, no revival of long passed animosities, but a
noble tribute to a soldier's fame, the more honourable because he readily
acknowledges the bravery and chivalry of the people by whose hands he
fell. I trust that Canada will never want such volunteers as those who fought
in the last war nor her volunteers be without such a leader. But no less I
fervently pray that your sons and grandsons may never be called upon to
add other laurels to those which you so gallantly won."
The noble shaft on Queenston Heights dominates a wide expanse of land
and lake. Deep and strong is the current of the river that flows at its base,
but not deeper and stronger than the memory of the man who sleeps below.
[1] This letter appears in full in the present writer's "Ten Years of Upper Canada." When
that book was published the name of the writer of the letter was not known, as the
manuscript containing it found in the archives at Ottawa was not signed. Happily, from a
draft of the letter which was among the Robinson family papers, it was discovered that the
writer of this admirable account of the battle of Queenston Heights was Lieutenant
Robinson, afterwards the distinguished Sir John Beverley Robinson, chief justice of Upper
Canada.
[2] This command, the author thinks, is the origin of the report that Brock's dying words
were, "Push on, brave York Volunteers." It is more probable that this was the occasion on
which he used them.
[3] Captain Driscoll.
[4] The 49th Regiment was known by that sobriquet.
[5] "Laura Secord," by Mrs. Curzon.
[6] Lieutenant J. B. Robinson.
INDEX

A
ABERCROMBY, GENERAL, 13, 14, 15, 16, 20, 21, 34, 64
Act, non-importation, 85
Adams, United States brig, 178, 256
Albany, 50, 192, 203, 233
Amherstburg, Fort (Malden), description of, 59; 41st Regiment at, 74; assistant
quartermaster-general stationed at, 80; Indians gather there, 152; militia at, 177; Brock
gives his attention to, 196; Colonel Procter arrives, 216; Brock and his squadron set
out for, 230-2; the advance expected, 235; first skirmish, 236; Brock's general order
from, 247-8; another attack expected, 273-4; Captain Muir returns to, 275
Amherst, General Lord, 35, 70, 179
Amiens, peace of, 9, 30-1, 43, 78
Armistice, the, 233, 261, 270-2, 276
Armstrong, General, 81; American minister in Paris, 112
Assembly, House of, 76, 143-5, 183, 184, 228, 229
B
BABY, COLONEL, 209, 229, 248
Bâton Rouge, on the Mississippi, 7, 139
Baynes, Colonel, adjutant-general, letters to Brock, 134, 137-8, 145, 155, 180, 185, 204,
205, 208; Brock writes to, 183, 185, 198; sent to General Dearborn with the
proposition for an armistice, 233
Bédard, Captain, 105; arrest of, 127-9; release of, 145; appointed judge, 158
Bowes, Colonel, 69, 73, 78

Bonaparte, Napoleon, 6, 9, 23, 24, 30, 38, 40, 41, 45, 71, 140, 167, 188
Brock, Daniel de Lisle, 70
Brock, Elizabeth, wife of John E. Tupper, 71
Brock, Irving, 71, 102, 131, 132, 140, 143, 162, 163
Brock, Isaac, his birthplace, 1; family of, 5, 6; sent to school, 7; obtains a commission by
purchase, 7; purchases his lieutenancy, 8; gazetted as captain, 8; service in the West
Indies, 9; purchases a majority, 10; becomes senior lieutenant-colonel of the 49th, 10;
associated with Nelson and Stewart, 24-5; leads the 49th, 27; arrives in Canada, 33; at
York, 48, 60-3; in command at Fort George, 64; his report, 64-7; at Quebec, 69; made
a full colonel, 70; as commander-in-chief, 75; his correspondence with President
Dunn, 76, 77; correspondence about Indian affairs, 78; looks into accounts, 79, 80;
supervises the marine department, 80; in Quebec, 86, 90; on military service, 96; letter
to Colonel Gordon, 97; letters to Ross Cuthbert, 98, 102; leaves Quebec and takes
command in Montreal, 99; appointed acting brigadier-general, 99; letter to his brother
Irving, 102; returns to Quebec, 115; longing for service in Europe, 123, 124; settled at
Fort George, 133; his books, 135-6; letters, 140; a visit to York, 143; correspondence
with Sir James Craig, 149, 151, 152, 176; made major-general, 157; appointed
president and administrator of the government of Upper Canada, 159; misfortune to,
161-7; declines permission to return to England, 180-1; his measures in the House of
Assembly, 184-5; preparations for war, 189-90; letter to Colonel Baynes, 198; general
order from Niagara, 205-6; general order from Fort George, 212-13; his appeal, 219-
21; his powers in his combined military and civil capacity, 225-7; describes Tecumseh,
247; general order from Amherstburg, 247-8; demands Hull's surrender of Detroit,
250-1; celebrates the victory, 258; regrets the armistice, 261; letter to his brothers,
266-8; receives congratulations from Sir George Prevost, 268-9; writes from Fort
George, 272-3; letter re the attack on Fort Wayne, 276-7; letter to Savery Brock, 280-
1; regiments under his immediate command, 287; his report of the loss of the Detroit
and the Caledonia, 290-3; appointed a knight of the Order of the Bath, 296; last letter
to Sir George Prevost, 298; his ride to Queenston, 298-301; orders the evacuation of
the redan battery, 303; leads the attack on the heights, 304; his death, 304; funeral
rites, 312-15
Brock, John, father of Sir Isaac, 6
Brock, Mary, wife of T. Potenger, 71
Brock, Savery, 15, 17, 18, 19, 27, 71, 123, 132, 161, 162, 163, 166
Brock, William, 5, 70, 124, 161, 163, 165, 167

Brownstown, 237, 238, 243, 245
Bruyères, Lieutenant-Colonel, 157, 230
C
Caledonia, brig, 210; captured by Americans, 289-92
Cameron, Captain, 299, 301, 306
Canadien, Le, newspaper, 92, 104, 116, 127, 147
Canning, George, secretary of war, 81, 83, 84, 85, 118, 119, 120, 122
Carleton, Sir Guy, see Lord Dorchester.
Castlereagh, Lord, 103, 118; succeeds the Marquis of Wellesley in office, 191
Chambers, Captain, 218, 235; major, 247
Champagny, Napoleon's secretary of war, 111, 172
Château de Ramezay, Brock quartered at, 101
Château St. Louis, 34, 46, 75, 90
Chesapeake, the, 82-6
Chippawa, Fort, 53, 58, 202, 310
Constitution, American frigate, 123, 284
Copenhagen, 23, 26, 30, 31, 106, 124
Craig, Sir James, governor-general and commander-in-chief, 90-2; his first duty, 93;
appoints Brock brigadier-general, 99; writes to Lord Castlereagh, 103; distrusts the
French Canadians, 104; refers to the effect of the embargo, 115; asks for
reinforcements, 118; prorogues the House, 127; seizes the press of Le Canadien, 127;
unwilling to grant Brock leave of absence, 130; ill health, 142; last public act, 145; his
triumph over the assembly, 145; utterly broken down, 147; in reference to the Indians,
149, 153; leaves Canada, 156; his death, 156

D
DEAN, private, 236-7, 258
Dearborn, Fort, (Chicago), 174, 266
Dearborn, General (United States), 192, 233, 261, 285
Decrees, Bayonne, 122; Berlin, 81-2, 93, 105, 172, 193; Milan, 110, 172, 193
Detroit, formerly the Adams, 274; captured by the Americans, 289-92
Detroit, Fort, 53, 54, 177, 190-1, 195, 197, 218, 235, 238, 245; its attack and capture, 248-
60
Dorchester, Lord, (Sir Guy Carleton), 34, 36-8, 47, 53, 56, 75, 103, 152
Drummond, Major-General, 115, 157
Dunn, Thomas, president and acting governor, 69, 73, 76, 77, 86, 94, 96, 157
E
EGMONT op Zee, 17, 18
Elliott, Colonel, 230, 245, 280
Elmsley, Chief Justice, 69, 76
Embargo, the, 85, 108; effect of, 109; repeal of, 113
Emulous, vessel, 224
Erie, Fort, 53, 59, 178, 181, 206, 216

F
FITZ GIBBON, COLONEL, 18, 66, 67
Florida, West, 42, 43, 112, 139
G
GALLATIN, secretary of the United States navy, 81, 108
Ganges, battleship, 27
Gazette, Upper Canada, 57; Quebec, 93; Montreal, 93
George, Fort, description of, 56; planned by Simcoe, 58; Procter commands at, 74; boats
kept at, 80; Brock winters at, 153; magazines prepared at, 182; Brock's headquarters,
204; counter appeal issued from, 217; another proclamation from, 219; Myers in
charge of affairs at, 225; prisoners at, 263-4; Brock buried there, 313
Glegg, Captain, A.D.C., 204, 207, 232, 251, 255, 259, 271, 302
Glengarry Fencibles, proposed, 97-8; the corps raised, 180; Brock proposes giving grants
of land to members of, 185; part of the force for the defence of the frontier, 201
Gore, Sir Francis, lieutenant-governor of Upper Canada, 8, 78, 97, 138, 159, 167-8
Guerriére, H.M.S., 173, 284
H
HARRISON, GENERAL, ("Old Tippecanoe"), 175-6
Henry, John, agent on secret mission, 120, 186-8
Hull, General, marches for Michigan, 203; his advance, 208-9; occupies Sandwich, 213;
his proclamation to the people of Canada, 213-14; loses heavy baggage and stores,
218; writes to Washington, 236; abandons Sandwich for Detroit, 238; receives and

refuses Brock's demand to surrender, 251; surrenders, 255; criticized, 257; as prisoner
of war, 261; home on parole, 283; trial and sentence, 283-4
Humphrey, Captain of the Leopard, 83
Hunter, sloop of war, 178, 217, 218, 243, 249
Hunter, General, lieutenant-governor of Upper Canada, 45, 50, 51, 59, 60, 63, 65, 69
J
JEFFERSON, PRESIDENT, 38, 41, 43, 108, 112, 113, 259, 285
K
KEMPT, COLONEL, afterwards General Sir James, 140-1
Kingston, 56, 65, 173-9, 203, 229, 268
L
Leopard, the, 82-3
Lewiston, 285, 299, 300, 303, 309, 311
Little Belt, a corvette, 173
Louisiana, handed back to France, 38; its purchase, 41-3
Lovett, John, secretary to General Van Rensselaer, 264, 286

M
MACDONELL, LIEUTENANT-COLONEL, chosen as aide-de-camp, 230; sent with the
demand for the surrender of Detroit, 251; goes back to Detroit to arrange the terms of
capitulation, 255; at Vrooman's Point, 301-2; at the battle of Queenston Heights, 305-
6.
McArthur, Colonel, United States, 203, 249
Madison, President, 120, 139, 173, 187, 213
Maguaga, 238-43, 245
Malden, Fort, see Amherstburg.
Michilimackinac, Fort, 53, 177, 205, 210-11, 227-8
N
NAPOLEON, EMPEROR, 71, 72, 73, 81, 82, 98, 105, 106-8, 111-13, 117-19, 125-6, 172,
188
Nelson, Lord, 24-30, 47
Niagara (Newark), 60; invasion expected between Fort Erie and, 178; Brock gives his
attention to, 195; general order from, 205; well fortified, 225
Niagara, Fort (U.S.), 54-6; its attack suggested, 219; stores and troops arriving, 269, 274;
silenced, 309
Nichol, Lieutenant-Colonel, 206, 207, 248, 253
Non-Intercourse, Bill, 120
O
ORDERS-IN-COUNCIL, 93, 106, 111; withdrawal of, 120-1, 223, 269

P
PANET, LIEUTENANT-COLONEL, speaker of the assembly, 104, 105, 115
President, United States frigate, 173
Prevost, Sir George, arrives in Halifax, 101; assumes command, 157-8; letter from Brock
to, 178-9; hampered by home instructions, 184; cautious and forbearing, 190, 194-5,
216, 288, 204; receives word of declaration of war, 207-8; despatch from Brock to,
223; correspondence re Brock's powers, 226-7; his views concerning the capture of
Fort Michilimackinac, 227-8; congratulates Brock, 268-9; advises evacuation of
Detroit, 277
Procter, Lieutenant-Colonel, commands at Fort George, 74; to assume command between
Niagara and Fort Erie, 205-6; sent to Amherstburg, 216; sends a detachment to
Brownstown, 237; in charge of the western district, 247; in command at Detroit, 262;
letter from Brock to, 293; compared with Brock, 312
Q
QUEBEC, description of, 33-4; centre of society, 46; mutineers and deserters sentenced at,
63; Brock quartered at, 69; 49th and 100th Regiments there, 74; fortifications of, 75-7,
94; boats at, 80; old, 89-98; gaiety in, 132; House of Assembly at, 143-5; the town
militia volunteers, 205
Queenston, 58, 61, 206; battle of Queenston Heights, 298-312
R
RIDOUT, SURVEYOR-GENERAL, letter from, 168
Roberts, Captain, 202, 205, 210, 227

Robinson, Lieutenant, afterwards Sir John Beverley, 298, 299 (note), 302, 305, 314
Rolette, Lieutenant, 218, 243, 292
Rottenburg, Colonel Baron de, 123, 134, 137, 217
Ryland, H. W., secretary, 47, 86, 92, 105, 120, 129, 145-7, 186, 203
S
SACKETTS HARBOUR, 178, 201, 269, 270, 271
Sandwich, 50, 213, 218, 229, 238, 248, 250, 251
Saumarez, Admiral Lord de, 6, 124
Sheaffe, Lieutenant-Colonel, at Egmont op Zee, 19; in command in Jersey, 22; at Fort
George, 48; mutiny under, 61-4; in Quebec, 74; a hint from Thornton, 159; major-
general on the staff, 223; at Queenston Heights, 309-12
St. George, Colonel, 214, 216, 218, 236, 247
St. Joseph, Fort, 74, 202, 204, 210, 227
T
TECUMSEH, Indian chief, 150-1, 174-6, 237-8, 243, 245-7, 251, 254, 257
V
VAN RENSSELAER, MAJOR-GENERAL, 284, 285, 288
Van Rensselaer, Colonel, 284 (note), 300

Vincent, Colonel, 124, 134, 229
Vesey, Colonel, 138-9, 153-4; made major-general, 157
W
WADSWORTH, BRIGADIER-GENERAL, 213
Wayne, Fort, a base of supplies for the United States army, 262; unsuccessful expedition
against, 274-5
William Henry, Fort, 80, 283
Wyndham, Rt. Hon. Sir W., secretary of the colonies, 75
Y
YORK, DUKE OF, 13, 15, 16, 20-1, 64, 70, 155, 159
York (Toronto), 45, 51; seat of government, 57; number of vessels at, 80; its fortifications
begun, 182; House of Assembly opened at, 183; news of declaration of war reaches
Brock at, 204; Brock returns to, 221-3

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