Prepared by L. de Grace C.A. a user perspective Sixth Canadian Edition FINANCIAL ACCOUNTING John...

Prepared by L. de Grace C.A.

a user perspectiveSixth Canadian Edition

FINANCIAL ACCOUNTING

John Wiley & Sons Canada, Ltd. ©2011

CHAPTER ONEOverview of Corporate Financial Accounting

Overview of Corporate Financial Reporting

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


Corporate Financial Reporting

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

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


Forms of Organization

Profit-seeking entities Governing organizations Service entities Not-for-profit entities


Forms of Organization

Sole proprietorships Partnerships Limited partnerships Joint ventures Crown corporations Corporations


Corporate Financial Reporting

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

Share: document that represents ownership in the corporation

Shareholders: owners


External users:• Shareholders• Potential investors• Creditors• Regulators• Taxing authorities

• Other corporations, including competitors

• Security analysts• Credit-rating agencies• Labour unions• Journalists

Users of Financial Statement Information

Internal users:• Management • Board of Directors


IFRS• International Financial Reporting Standards• Set by International Accounting Standards

Board (IASB) in junction with International Organization of Securities Commissions (IOSCO)

• Canadian public companies must adopt IFRS by January 1, 2011.

Development of Accounting Standards


Characteristics of Accounting Information

Understandability Comparability Relevance

• Predictive value • Confirmatory

value

Reliability• Faithful

Representation• Substance over

form• Neutrality• Prudence• Completeness


Constraints of Accounting Information

Timeliness Balance between benefits and cost Balance between qualitative

characteristics


Business Activities

Financing Activities Investing Activities Operating Activities


Financing Activities

Borrowing money Repaying loans Issuing shares Repurchasing shares Paying dividends on

shares


Investing Activities

Purchase or sale of property, plant, and equipment

Investments or sale of investments in the shares of other companies


Operating Activities

Sales to customers

Collections of amounts owed by customers

Purchases of inventory

Payments of amounts owed to suppliers

Payments of expenses

Payments of taxes


Annual Report

Corporate profile Message to shareholders Management’s Discussion and

Analysis Board of directors and management Financial section


Financial Section Components

Statement of Management’s Responsibility

Auditor’s report Financial statements Statement on corporate governance


Statement of Management’s Responsibility

Contains a statement by management that it is responsible for the contents of the annual report

Outlines steps taken to ensure safekeeping of assets and the practice of ethical and responsible management


Independent Auditors’ Report

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

Ethical considerations


Financial Statements

Statement of Comprehensive Income• Income Statement; Statement of Earnings

Statement of Financial Position• Balance Sheet

Statement of Cash Flows Statement of Changes in Shareholders’

Equity


Statement of Comprehensive Income

Describes the revenues and expenses of the current period

Expenses may also be recognized in a future period• ie. Depreciation expense allocates the

cost of equipment over several years of benefits


Statement of Comprehensive Income

Common items Sales revenues Other income Cost of goods sold Selling, general, and administrative

expenses Amortization, interest, and income tax

expenses


Statement of Financial Position

Financial status of the company at a particular point in time

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


Assets

Characteristics• Something that has probable future

value that can be measured• The company can control the benefit

from the future value through ownership or rights to use the assets

• The event that gave the company the ownership or right has already occurred


Assets

Examples• Cash• Short-term (temporary) investments• Accounts receivable• Inventory• Prepaid expenses• Capital assets


Liabilities

• Amounts that the company owes to others

• Probable future sacrifice of resources: cash, services, or goods


Liabilities

Examples• Bank

indebtedness• Accounts payable• Notes payable• Dividends payable

• Accrued liabilities

• Taxes payable• Long-term debt• Future income

tax liabilities


Liquidity

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

Liquidity: how quickly the company can turn the asset into cash


Basic Accounting Equation

Assets = Liabilities + Shareholders’ Equity

OR

Shareholders’ Equity = Assets - Liabilities

(Net Assets)


Shareholders’ Equity

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

Usually composed of at least two accounts:• Share capital• Retained earnings


Share Capital

Represents the shares that have been issued by the company

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


Retained Earnings

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

Change in Retained Earnings = Net Income - Dividends


Statement of Cash Flows

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

Sections• Operating Activities

All inflows & outflows related to the company’s sale of goods or services

• Financing Activities Transactions that either generate new funds from

investors or return funds to investor• Investing Activities

Inflows and outflows related to long-term assets


Notes to the Financial Statements

More detail about specific referenced items

Includes the Summary of Accounting Policies

Includes information about various segments of the company


Professional Accounting Organizations in Canada

Canadian Institute of Chartered Accountants (CAs)

CMA Canada: Certified Management Accountants (CMAs)

Certified General Accountants’ Association of Canada (CGAs)


Click on one of the links below to find out more on accounting as a profession:

CICA

CMA Canada

CGA Canada

Professional Accounting Organizations in Canada


Copyright © 2011John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his / her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

Copyright


Date post:	31-Dec-2015
Category:	Documents
Upload:	robert-oneal
View:	213 times
Download:	0 times

Prepared by L. de Grace C.A. a user perspective Sixth Canadian Edition FINANCIAL ACCOUNTING John...

Documents