Chapter 1


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Chapter 1

  1. 1. FINANCIAL ACCOUNTING A U s e r P e r s p e c t i v e Third Canadian Edition Hoskin  Fizzell
  2. 2. <ul><li>Overview of Corporate Financial Reporting </li></ul>1 C h a p t e r
  3. 3. <ul><li>Accounting: an information system in which the underlying economic conditions of organizations and individuals are recorded, summarized, reported, and understood </li></ul>Overview of Corporate Financial Reporting
  4. 4. <ul><li>Financial statements: reports summarizing a company’s performance during a particular period </li></ul>Corporate Financial Reporting <ul><li>Annual report: reports the results of the company’s activities during the year </li></ul>
  5. 5. <ul><li>Profit-seeking entities </li></ul><ul><li>Governing organizations </li></ul><ul><li>Service entities </li></ul><ul><li>Not-for-profit entities </li></ul>Forms of Organization
  6. 6. <ul><li>Sole proprietorships </li></ul><ul><li>Partnerships </li></ul><ul><li>Limited partnerships </li></ul><ul><li>Joint ventures </li></ul><ul><li>Crown corporations </li></ul><ul><li>Corporations </li></ul>Forms of Organization Conducting Business
  7. 7. Corporate Financial Reporting <ul><li>Shareholders’ equity: initial investment in the business entity in the form of cash or property </li></ul><ul><li>Share: document that represents ownership in the corporation </li></ul><ul><li>Shareholders: owners </li></ul>
  8. 8. <ul><li>Internal users: </li></ul><ul><ul><li>Management </li></ul></ul><ul><ul><li>Board of Directors </li></ul></ul>Users of Financial Statement Information
  9. 9. Users of Financial Statement Information <ul><li>External users: </li></ul><ul><ul><li>Shareholders </li></ul></ul><ul><ul><li>Potential investors </li></ul></ul><ul><ul><li>Creditors </li></ul></ul><ul><ul><li>Regulators </li></ul></ul><ul><ul><li>Taxing authorities </li></ul></ul><ul><ul><li>Other corporations </li></ul></ul><ul><ul><li>Security analysts </li></ul></ul><ul><ul><li>Credit-rating agencies </li></ul></ul><ul><ul><li>Labour unions </li></ul></ul>
  10. 10. Development of Accounting Standards <ul><li>GAAP </li></ul><ul><ul><li>Generally Accepted Accounting Principles </li></ul></ul><ul><ul><li>Set by Canadian Institute of Chartered Accountants </li></ul></ul><ul><ul><li>Published in the CICA Handbook </li></ul></ul>
  11. 11. <ul><li>Understandability </li></ul><ul><li>Relevance </li></ul><ul><li>Reliability </li></ul><ul><li>Comparability </li></ul>Characteristics of Accounting Information
  12. 12. <ul><li>Financing Activities </li></ul><ul><li>Investing Activities </li></ul><ul><li>Operating Activities </li></ul>Business Activities
  13. 13. <ul><li>Borrowing money </li></ul><ul><li>Repaying loans </li></ul><ul><li>Issuing shares </li></ul><ul><li>Repurchasing shares </li></ul><ul><li>Paying dividends on shares </li></ul>Financing Activities
  14. 14. <ul><li>Purchase or sale of property, plant, and equipment </li></ul><ul><li>Investments or sale of investments in the shares of other companies </li></ul>Investing Activities
  15. 15. <ul><li>Sales to customers </li></ul><ul><li>Collection of amounts owed by customers </li></ul><ul><li>Purchase of inventory </li></ul><ul><li>Payment of amounts owed to suppliers </li></ul><ul><li>Payment of expenses </li></ul><ul><li>Payment of taxes </li></ul>Operating Activities
  16. 16. <ul><li>Corporate profile </li></ul><ul><li>Report to the shareholders </li></ul><ul><li>Management’s discussion </li></ul><ul><li>Board of directors and management </li></ul><ul><li>Financial section </li></ul>Annual Report
  17. 17. Financial Section Components <ul><li>Statement of Management Responsibility </li></ul><ul><li>Auditor’s report </li></ul><ul><li>Financial statements </li></ul><ul><li>Statement on Corporate Governance </li></ul>
  18. 18. <ul><li>Income Statement </li></ul><ul><li>Balance Sheet </li></ul><ul><li>Statement of Retained Earnings </li></ul><ul><li>Statement of Cash Flows </li></ul><ul><li>Notes to the financial statements </li></ul>Financial Statements
  19. 19. <ul><li>Also known as the Statement of Earnings </li></ul><ul><li>Describes the results of the operating activities of the current period </li></ul>Income Statement
  20. 20. <ul><li>Common items </li></ul><ul><ul><li>Sales revenues </li></ul></ul><ul><ul><li>Other income </li></ul></ul><ul><ul><li>Cost of goods sold </li></ul></ul><ul><ul><li>Selling, general, and administrative expenses </li></ul></ul><ul><ul><li>Amortization, interest, and income tax expenses </li></ul></ul>Income Statement
  21. 21. <ul><li>Also known as the Statement of Financial Position </li></ul><ul><li>Financial status of the company at a particular point in time </li></ul><ul><li>Lists what is owned (assets) and what is owed (liabilities), measuring net worth (shareholders’ equity) </li></ul>Balance Sheet
  22. 22. Basic Accounting Equation <ul><li>Assets = Liabilities + </li></ul><ul><li> Shareholders’ Equity </li></ul>
  23. 23. <ul><li>Characteristics </li></ul><ul><ul><li>Something that has probable future value that can be measured </li></ul></ul><ul><ul><li>The company owns or has the right to use the probable future value </li></ul></ul><ul><ul><li>The event that gave the company the ownership or right has already occurred </li></ul></ul>Assets
  24. 24. <ul><li>Examples </li></ul><ul><ul><li>Cash </li></ul></ul><ul><ul><li>Short-term (temporary) investments </li></ul></ul><ul><ul><li>Accounts receivable </li></ul></ul><ul><ul><li>Inventory </li></ul></ul><ul><ul><li>Prepaid expenses </li></ul></ul><ul><ul><li>Capital assets </li></ul></ul>Assets
  25. 25. <ul><li>Assets and liabilities are listed on the balance sheet in liquidity order </li></ul><ul><li>Liquidity : how quickly the company can turn the asset into cash </li></ul>Liquidity
  26. 26. <ul><li>Amounts that the company owes to others </li></ul><ul><li>Probable future sacrifice of resources: cash, services, or goods </li></ul>Liabilities
  27. 27. <ul><li>Examples </li></ul><ul><ul><li>Bank indebtedness </li></ul></ul><ul><ul><li>Accounts payable </li></ul></ul><ul><ul><li>Notes payable </li></ul></ul><ul><ul><li>Dividends payable </li></ul></ul><ul><ul><li>Accrued liabilities </li></ul></ul><ul><ul><li>Taxes payable </li></ul></ul><ul><ul><li>Long-term debt </li></ul></ul>Liabilities
  28. 28. <ul><li>Value of the shareholders’ interest in the company as measured by the accounting guidelines </li></ul><ul><li>Examples </li></ul><ul><ul><li>Share capital </li></ul></ul><ul><ul><li>Retained earnings </li></ul></ul>Shareholders’ Equity
  29. 29. <ul><li>Represents the shares that have been issued by the company </li></ul><ul><li>Usually stated at an amount equal to what was originally paid by investors for the shares </li></ul>Share Capital
  30. 30. <ul><li>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 </li></ul><ul><li>Change in Retained Earnings = Net Income - Dividends </li></ul>Retained Earnings
  31. 31. <ul><li>Measures inflows and outflows of cash during a specific period of time </li></ul><ul><li>Sections </li></ul><ul><ul><li>Cash from operating activities </li></ul></ul><ul><ul><li>Cash from financing activities </li></ul></ul><ul><ul><li>Cash from investing activities </li></ul></ul>Statement of Cash Flows
  32. 32. Notes to the Financial Statements <ul><li>More detail about specific referenced items </li></ul><ul><li>Includes the Summary of Accounting Policies </li></ul><ul><li>Includes information about various segments of the company </li></ul>
  33. 33. Statement of Management Responsibility <ul><li>Contains a statement by management that it is responsible for the contents of the annual report </li></ul><ul><li>Discusses steps taken to ensure safekeeping of assets and the practise of ethical and responsible management </li></ul>
  34. 34. Independent Auditors’ Report <ul><li>Independent professional accountants’ opinion about the fairness of the presentation and conformity to accounting guidelines </li></ul><ul><li>Ethical considerations </li></ul>
  35. 35. Professional Accounting Organizations in Canada <ul><li>Canadian Institute of Chartered Accountants (CAs) </li></ul><ul><li>CMA Canada: Certified Management Accountants (CMAs) </li></ul><ul><li>Certified General Accountants’ Association of Canada (CGAs) </li></ul>
  36. 36. <ul><li>Copyright © 2003 John 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. </li></ul>Copyright