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Chapter 1

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FINANCIAL FINANCIAL ACCOUNTING ACCOUNTING A U s e r P e r s p e c t i v e A U s e r P e r s p e c t i v e Third Canadian Edition Third Canadian Edition Hoskin Hoskin Fizzell Fizzell
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Page 1: Chapter 1

FINANCIALFINANCIAL ACCOUNTINGACCOUNTING

A U s e r P e r s p e c t i v eA U s e r P e r s p e c t i v e

Third Canadian EditionThird Canadian Edition

Hoskin Hoskin FizzellFizzell

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Overview of Corporate Overview of Corporate Financial ReportingFinancial Reporting

11

C h a p t e r

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Accounting:Accounting: an information system an information system in which the underlying economic in which the underlying economic conditions of organizations and conditions of organizations and individuals are recorded, individuals are recorded, summarized, reported, and summarized, reported, and understoodunderstood

Overview of Corporate Overview of Corporate Financial ReportingFinancial Reporting

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Financial statements:Financial statements: reports summarizing a reports summarizing a company’s performance company’s performance during a particular periodduring a particular period

Corporate Financial Corporate Financial ReportingReporting

Annual report:Annual report: reports reports the results of the the results of the company’s activities company’s activities during the yearduring the year

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Profit-seeking entitiesProfit-seeking entities Governing organizationsGoverning organizations Service entitiesService entities Not-for-profit entitiesNot-for-profit entities

Forms of OrganizationForms of Organization

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Sole proprietorshipsSole proprietorships PartnershipsPartnerships Limited partnershipsLimited partnerships Joint venturesJoint ventures Crown corporationsCrown corporations CorporationsCorporations

Forms of Organization Forms of Organization Conducting BusinessConducting Business

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Corporate Financial Corporate Financial ReportingReporting

Shareholders’ equity:Shareholders’ equity: initial initial investment in the business entity investment in the business entity in the form of cash or propertyin the form of cash or property

Share:Share: document that represents document that represents ownership in the corporationownership in the corporation

Shareholders:Shareholders: owners owners

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Internal users:Internal users:– Management Management

– Board of Board of DirectorsDirectors

Users of Financial Users of Financial Statement InformationStatement Information

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Users of Financial Users of Financial Statement InformationStatement Information External users:External users:

– ShareholdersShareholders– Potential Potential

investorsinvestors– CreditorsCreditors– RegulatorsRegulators– Taxing Taxing

authoritiesauthorities

– Other corporationsOther corporations– Security analystsSecurity analysts– Credit-rating Credit-rating

agenciesagencies– Labour unionsLabour unions

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Development of Development of Accounting StandardsAccounting Standards GAAPGAAP

– Generally Accepted Accounting Generally Accepted Accounting PrinciplesPrinciples

– Set by Canadian Institute of Set by Canadian Institute of Chartered AccountantsChartered Accountants

– Published in the Published in the CICA HandbookCICA Handbook

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UnderstandabilityUnderstandability RelevanceRelevance ReliabilityReliability ComparabilityComparability

Characteristics of Characteristics of Accounting Accounting InformationInformation

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Financing ActivitiesFinancing Activities Investing ActivitiesInvesting Activities Operating ActivitiesOperating Activities

Business ActivitiesBusiness Activities

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Borrowing moneyBorrowing money Repaying loansRepaying loans Issuing sharesIssuing shares Repurchasing sharesRepurchasing shares Paying dividends on Paying dividends on

sharesshares

Financing ActivitiesFinancing Activities

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Purchase or sale of Purchase or sale of property, plant, and property, plant, and equipmentequipment

Investments or sale of Investments or sale of investments in the shares investments in the shares of other companiesof other companies

Investing ActivitiesInvesting Activities

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Sales to Sales to customerscustomers

Collection of Collection of amounts owed amounts owed by customersby customers

Purchase of Purchase of inventoryinventory

Payment of Payment of amounts owed to amounts owed to supplierssuppliers

Payment of Payment of expensesexpenses

Payment of taxesPayment of taxes

Operating ActivitiesOperating Activities

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Corporate profileCorporate profile Report to the shareholdersReport to the shareholders Management’s discussionManagement’s discussion Board of directors and Board of directors and

managementmanagement Financial sectionFinancial section

Annual ReportAnnual Report

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Financial Section Financial Section ComponentsComponents

Statement of Management Statement of Management ResponsibilityResponsibility

Auditor’s reportAuditor’s report Financial statementsFinancial statements Statement on Corporate Statement on Corporate

GovernanceGovernance

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Income StatementIncome Statement Balance SheetBalance Sheet Statement of Retained EarningsStatement of Retained Earnings Statement of Cash FlowsStatement of Cash Flows Notes to the financial statementsNotes to the financial statements

Financial StatementsFinancial Statements

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Also known as the Also known as the Statement of Statement of EarningsEarnings

Describes the results of the Describes the results of the operating activities of the current operating activities of the current periodperiod

Income StatementIncome Statement

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Common itemsCommon items– Sales revenuesSales revenues– Other incomeOther income– Cost of goods soldCost of goods sold– Selling, general, and administrative Selling, general, and administrative

expensesexpenses– Amortization, interest, and income Amortization, interest, and income

tax expensestax expenses

Income StatementIncome Statement

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Also known as the Also known as the Statement of Statement of Financial PositionFinancial Position

Financial status of the company Financial status of the company at a particular point in timeat a particular point in time

Lists what is owned (assets) and Lists what is owned (assets) and what is owed (liabilities), what is owed (liabilities), measuring net worth measuring net worth (shareholders’ equity)(shareholders’ equity)

Balance SheetBalance Sheet

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Basic Accounting Basic Accounting EquationEquation

Assets = Liabilities + Assets = Liabilities +

Shareholders’ Shareholders’ EquityEquity

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CharacteristicsCharacteristics– Something that has probable future Something that has probable future

value that can be measuredvalue that can be measured– The company owns or has the right The company owns or has the right

to use the probable future valueto use the probable future value– The event that gave the company The event that gave the company

the ownership or right has already the ownership or right has already occurredoccurred

AssetsAssets

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ExamplesExamples– CashCash– Short-term (temporary) investmentsShort-term (temporary) investments– Accounts receivableAccounts receivable– InventoryInventory– Prepaid expensesPrepaid expenses– Capital assetsCapital assets

AssetsAssets

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Assets and liabilities are listed on Assets and liabilities are listed on the balance sheet in liquidity the balance sheet in liquidity orderorder

LiquidityLiquidity:: how quickly the how quickly the company can turn the asset into company can turn the asset into cashcash

LiquidityLiquidity

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Amounts that the company owes Amounts that the company owes to othersto others

Probable future sacrifice of Probable future sacrifice of resources: cash, services, or resources: cash, services, or goodsgoods

LiabilitiesLiabilities

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ExamplesExamples– Bank Bank

indebtednessindebtedness– Accounts Accounts

payablepayable– Notes payableNotes payable– Dividends Dividends

payablepayable

– Accrued Accrued liabilitiesliabilities

– Taxes payableTaxes payable– Long-term debtLong-term debt

LiabilitiesLiabilities

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Value of the shareholders’ Value of the shareholders’ interest in the company as interest in the company as measured by the accounting measured by the accounting guidelinesguidelines

ExamplesExamples– Share capitalShare capital– Retained earningsRetained earnings

Shareholders’ EquityShareholders’ Equity

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Represents the shares that have Represents the shares that have been issued by the companybeen issued by the company

Usually stated at an amount Usually stated at an amount equal to what was originally paid equal to what was originally paid by investors for the sharesby investors for the shares

Share CapitalShare Capital

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The earnings of the company (as The earnings of the company (as measured on the Income measured on the Income Statement) that have been kept Statement) that have been kept (retained) and not paid out in the (retained) and not paid out in the form of dividendsform of dividends

Change in Retained Earnings Change in Retained Earnings = Net Income - Dividends = Net Income - Dividends

Retained EarningsRetained Earnings

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Measures inflows and outflows of Measures inflows and outflows of cash during a specific period of cash during a specific period of timetime

SectionsSections– Cash from operating activitiesCash from operating activities– Cash from financing activities Cash from financing activities – Cash from investing activitiesCash from investing activities

Statement of Cash Statement of Cash FlowsFlows

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Notes to the Notes to the Financial StatementsFinancial Statements

More detail about specific More detail about specific referenced itemsreferenced items

Includes the Summary of Includes the Summary of Accounting PoliciesAccounting Policies

Includes information about Includes information about various segments of the companyvarious segments of the company

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Statement ofStatement of Management Management ResponsibilityResponsibility Contains a statement by Contains a statement by

management that it is responsible management that it is responsible for the contents of the annual for the contents of the annual reportreport

Discusses steps taken to ensure Discusses steps taken to ensure safekeeping of assets and the safekeeping of assets and the practise of ethical and responsible practise of ethical and responsible managementmanagement

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Independent Auditors’ Independent Auditors’ ReportReport

Independent professional Independent professional accountants’ opinion about the accountants’ opinion about the fairness of the presentation and fairness of the presentation and conformity to accounting conformity to accounting guidelinesguidelines

Ethical considerationsEthical considerations

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Professional Accounting Professional Accounting Organizations in CanadaOrganizations in Canada

Canadian Institute of Chartered Canadian Institute of Chartered Accountants (CAs)Accountants (CAs)

CMA Canada: Certified CMA Canada: Certified Management Accountants (CMAs)Management Accountants (CMAs)

Certified General Accountants’ Certified General Accountants’ Association of Canada (CGAs)Association of Canada (CGAs)

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Copyright © 2003 John Wiley & Sons Canada, Ltd. All rights Copyright © 2003 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Request for further information Licensing Agency) is unlawful. Request for further information should be addressed to the Permissions Department, John should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his / her own use only and not for distribution or copies for his / her own use only and not for distribution or resale. The author and the publisher assume no responsibility resale. The author and the publisher assume no responsibility for errors, omissions, or damages, caused by the use of these for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.programs or from the use of the information contained herein.

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