Post on 31-Dec-2015
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
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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
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Forms of Organization
Profit-seeking entities Governing organizations Service entities Not-for-profit entities
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Forms of Organization
Sole proprietorships Partnerships Limited partnerships Joint ventures Crown corporations Corporations
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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
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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
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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
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Characteristics of Accounting Information
Understandability Comparability Relevance
• Predictive value • Confirmatory
value
Reliability• Faithful
Representation• Substance over
form• Neutrality• Prudence• Completeness
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Constraints of Accounting Information
Timeliness Balance between benefits and cost Balance between qualitative
characteristics
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Business Activities
Financing Activities Investing Activities Operating Activities
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Financing Activities
Borrowing money Repaying loans Issuing shares Repurchasing shares Paying dividends on
shares
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Investing Activities
Purchase or sale of property, plant, and equipment
Investments or sale of investments in the shares of other companies
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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
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Annual Report
Corporate profile Message to shareholders Management’s Discussion and
Analysis Board of directors and management Financial section
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Financial Section Components
Statement of Management’s Responsibility
Auditor’s report Financial statements Statement on corporate governance
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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
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Independent Auditors’ Report
Independent professional accountants’ opinion about the fairness of the presentation and conformity to accounting guidelines
Ethical considerations
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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
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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
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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
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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)
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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
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Assets
Examples• Cash• Short-term (temporary) investments• Accounts receivable• Inventory• Prepaid expenses• Capital assets
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Liabilities
• Amounts that the company owes to others
• Probable future sacrifice of resources: cash, services, or goods
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Liabilities
Examples• Bank
indebtedness• Accounts payable• Notes payable• Dividends payable
• Accrued liabilities
• Taxes payable• Long-term debt• Future income
tax liabilities
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Liquidity
Assets and liabilities are listed on the balance sheet in liquidity order
Liquidity: how quickly the company can turn the asset into cash
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Basic Accounting Equation
Assets = Liabilities + Shareholders’ Equity
OR
Shareholders’ Equity = Assets - Liabilities
(Net Assets)
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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
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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
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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
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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
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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
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Professional Accounting Organizations in Canada
Canadian Institute of Chartered Accountants (CAs)
CMA Canada: Certified Management Accountants (CMAs)
Certified General Accountants’ Association of Canada (CGAs)
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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
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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
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