1. Financial Statements and Business Decisions
Chapter 1: Financial Statements and Business Decisions
Office hours : Tuesday : 11:00 – 12:30
Wed : 10:30-12:00
Optional lab sessions : Friday 12:30 – 2:20pm
Introduction : What is Accounting ?
Summary => Financial Report or statements. The Major financial reports (ASPE) : Balance Sheet, Income Statement, Cash Flow Statement, Earning Statement
IFRS (International Financial Report Statement) : Statement of Financial position, statement of Comprehensive Income, Statement of Changes in Equity, Statement of Cash Flows
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2. Understanding the Business
The Players
Investors
Creditors
Managers
1. Purchase materials and labour
The Business Operations
2. Manufacture product
Individuals and groups who provide the initial capital to a business are called investors. Creditors provide the company with resources but do not own a share of the company. For example, a bank may lend funds to the company that must be repaid in the future along with interest. The bank is a creditor of the company. Most companies hire managers to oversee the day-to-day operations of the business. The managers are responsible to the owners of the company.
For a manufacturing company, business operations begin when materials are purchased from suppliers, and workers are paid for labour. The materials and workers are used to manufacture a product. That product is sold to customers of the company. Finally, cash is collected from the customers for the products sold which allows creditors and workers to be paid.
4. Collect cash from customers and pay creditors
3. Sell products to customers
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3. Understanding the Business
Business owners (called investors or shareholders) look for two sources of possible gain:
Sell
ownership
interest in the
future for more
than they
paid.
Receive a
portion of the
company’s
earnings in cash
(dividends).
Investors—individuals who buy small percentages of large corporations—make their purchases hoping to gain in two ways. They hope to receive a portion of what the company earns in the form of cash payments called dividends, and they hope to eventually sell their share of the company at a higher price than they paid.
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4. Business Background
Creditors lend money to a company for a specific length of time and gain by charging interest on the money loaned.
Loan
Creditors lend money to a company for a specific length of time. They gain by charging interest on the money they lend. When a company exchanges money with its lenders and owners, these are called financing activities. When a company buys or sells property, such as roasting equipment used in producing coffee products, these are called investing activities.
Mel’s
Diner
Interest
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5. Understanding Business Operations
Manufacturers either make the parts needed to produce its products or buy the parts from suppliers.
Manufacturer
Product
Customer
Manufacturers either make the parts needed to produce its products or buy the parts from suppliers.
Retailers generally purchase goods and resell them (they do not manufacture, but rather strictly buy and sell).
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6. The Accounting System Reports information to decision makers
Managers
(internal decision makers)
Reports
information
to decision
makers
Collects and processes
financial information
Investors and Creditors
(external decision makers)
The accounting system begins by collecting and processing financial information. This financial information is organized into reports that are distributed to decision-makers. The decision-makers may rely on the reports to make certain important determinations about the future.
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7. The Accounting System Accounting System Financial Accounting Reports
Periodic financial statements and related disclosures
Managerial Accounting Reports
Detailed plans and continuous performance reports
External Decision Makers
Investors, creditors,
suppliers, customers, etc.
Internal Decision Makers
Managers throughout the
organization
The accounting system collects and processes financial information about an organization and reports that information to decision makers. The accounting system provides financial accounting reports which include periodic financial statements and related disclosures to external decision makers. These decision-makers include investors, creditors, suppliers, customers, union representatives, and all other interested parties. The accounting system also provides managerial accounting reports including detailed plans and continuous performance reports. These reports are used by internal decision makers throughout the organization to make decisions about pricing, production, quality, and numerous other day-to-day activities.
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8. The Accounting System and Decision Makers
An organized format used by companies to accumulate the dollar effects of transactions.
Cash
Inventory
Equipment
Notes Payable
In the process of accounting we use accounts to help us organize information about various transactions. These transactions can be both external, events with parties outside of the business, or internal, that is events that take place within the business organization.
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9. Information Conveyed in Financial Statements
When studying the financial statements you should focus on these questions:
What categories of items (often called elements) are reported on each of the four statements? (What type of information does a statement convey, and where can you find it?)
What time period (monthly, quarterly, annual) is covered by the financial statements?
How are the elements within a statement related? These relationships are usually described by an equation that tells you how the elements fit together.
Why is each element important to managers’, owners’ or creditors’ decisions? (How important is the information to decision makers?)
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10. External Financial Reporting
Financial statements are often referred to as having been prepared using GAAP (Generally Accepted Accounting Principles)
In Canada, GAAP can be either:
IFRS: International Financial Reporting Standards (IASB)
ASPE: Accounting Standards for Private Enterprise (AcSB)
Companies that trade their securities (debt or equity) in a public market are required to use IFRS
Those companies that do not meet the above criteria, have an option of using either IFRS or ASPE (most will chose ASPE because it is less complex)

11. The Four Basic Financial Statements -IFRS
STATEMENT OF FINANCIAL POSITION – reports the amount of assets (resources owned), liabilities (amounts owed), and shareholders’ equity of an accounting entity at a point in time.
STATEMENT OF COMPREHENSIVE INCOME – reports the revenues less the expenses of the accounting period.
STATEMENT OF CHANGES IN EQUITY – reports the way that profit, distribution of profit (dividends), and other changes to shareholders’ equity affected the financial position of the company during the accounting period.
STATEMENT OF CASH FLOWS – reports inflows (receipts) and outflows (payments) of cash during the accounting period in the categories of operating, investing, and financing.
Companies usually publish four basic financial statements, as follows:
STATEMENT OF FINANCIAL POSITION – reports the amount of assets (resources owned), liabilities (amounts owed), and shareholders’ equity of an accounting entity at a point in time.
STATEMENT OF COMPREHENSIVE INCOME – reports the revenues less the expenses of the accounting period.
STATEMENT OF CHANGES IN EQUITY – reports the way that profit, distribution of profit (dividends), and other changes to shareholders’ equity affected the financial position of the company during the accounting period.
STATEMENT OF CASH FLOWS – reports inflows (receipts) and outflows (payments) of cash during the accounting period in the categories of operating, investing, and financing.
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12. The Four Basic Financial Statements-ASPE12
The Four Basic Financial Statements-ASPE
BALANCE SHEET– reports the amount of assets (resources owned), liabilities (amounts owed), and shareholders’ equity of an accounting entity at a point in time.
STATEMENT OF INCOME – reports the revenues less the expenses of the accounting period AND other gains and losses.
STATEMENT OF RETAINED EARNINGS – reports the accumulation of profits that have not been distributed to shareholders, distribution of profit (dividends) of the company during the accounting period.
STATEMENT OF CASH FLOWS – reports inflows (receipts) and outflows (payments) of cash during the accounting period in the categories of operating, investing, and financing.
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13. The Statement of Financial Position
Typical Account Titles
Assets Cash Short-Term Investment Trade Receivables Notes Receivable Inventory (to be sold) Supplies Prepaid Expenses Long-Term Investments Land Equipment Buildings Intangibles
Liabilities Trade Payables Accrued Liabilities Notes Payable Taxes Payable Deferred Revenue Bonds Payable
The purpose of the statement of financial position is to report the financial position (assets, liabilities and shareholders’ equity) of an entity at a particular point in time. Here is a list of the statement of financial position (balance sheet) accounts grouped into categories. These categories on the statement of financial position, also known as elements, are assets, liabilities, and shareholders’ equity.
In this course we will discuss all of these accounts in detail.
Shareholders’ Equity Contributed Capital Retained Earnings
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14. The Statement of Financial Position
Elements
Assets
Economic resources controlled by the entity as a result of past business events from which future economic benefits may be obtained.
Liabilities
Debts or legal obligations of the entity that result from past business events.
Shareholders’ Equity
Amount of financing provided by owners of the corporation and from earnings over time.
Assets are economic resources owned by the company. The exact list of assets depends on the individual company. All assets are expected to provide future benefits to the company.
Liabilities are the company’s debts or obligations.
Shareholders’ equity generally consists of two parts. First, share capital indicates the amount of financing provided by owners of the business. Next, retained earnings is the amount of profit that has been earned by the company that has been reinvested in the business. A portion of profit is typically distributed to shareholders in the form of dividends and the remainder is retained by the business.
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15. The Statement of Financial Position The Accounting Equation
A = L + SE
(Assets)
(Liabilities)
(Shareholders’ Equity)
Economic Resources
Sources of Financing for Economic Resources
Liabilities: From Creditors Shareholders’ Equity: From Shareholders
The basic accounting equation shows a company’s financial position: the economic resources (assets) that the company owns and the sources of financing for those assets (liabilities and shareholders’ equity) are always equal. Assets are economic resources of the company that have some future economic benefit. Liabilities are the company’s debts or obligations. Shareholders’ equity indicates the amount of financing provided by owners of the business and earnings of the company since inception.
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16. The Statement of Financial Position
Here is a sample statement of financial position. Notice the four-line heading for our statement of financial position. The heading includes the name of the company (Sun-Rype Products Ltd.), the title of the financial statement (Statement of Financial Position), the specific date of the statement (at December 31, 2012), and a unit of measure (in thousands of Canadian dollars). When preparing the statement of financial position, the basic accounting equation of assets equal liabilities plus shareholders’ equity holds true.
On this statement of financial position, total assets are equal to total liabilities and shareholders’ equity, at an amount of $90,973.
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17. The Statement of Comprehensive Income
Typical Account Titles
Revenues Sales Revenue Fee Revenue Interest Revenue Rent Revenue
Expenses Cost of Sales Wages Expense Rent Expense Interest Expense Depreciation Expense Advertising Expense Insurance Expense Repair Expense Income Tax Expense
The statement of comprehensive income (income statement) reports the revenues less the expenses of the accounting period. Here is a list of typical account titles on the income statement, grouped into the categories of revenues and expenses.
The first category, or element, is revenues. Companies earn revenues from the sale of goods and services to customers. A few examples of revenues include sales revenue, interest revenue and rent revenue.
Expenses represent the dollar amount of resources used to earn revenues during the period. Examples are wages expense, rent expense, and advertising expense.
When revenues exceed expenses for the period, the company has earned profit (also called net income or net earnings). If expenses are greater than revenues in the period, the company incurred a net loss.
As with the statement of financial position (balance sheet) accounts, we will discuss each of these revenue and expense accounts as we move through the course.
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18. Statement of Comprehensive Income
Here is an example of a statement of comprehensive income. Notice our standard four-line heading. The first line contains the name of the company. The second line is the name of the financial statement, in this case the words “statement of comprehensive income.” The third line is the accounting period covered by the income statement, for example, “for the year ended December 31, 2012.” While the statement of financial position (balance sheet) has a date for a point in time, the income statement covers of period of time. The fourth line indicates the unit of measure, in this case, “thousands of Canadian dollars, except for EPS”.
On the income statement, we subtract expenses from revenues to arrive at net earnings (also called net income or profit).
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19. Statement of Comprehensive Income
Revenues
Earnings from the sale of goods or services.
Revenue is recognized in the period in which
goods and services are sold, not necessarily
the period in which cash is received.
When will the revenue from this transaction be recognized?
June 2015
Cash from sale
collected on June 10. X
May 2015
$1,000 sale made
on May 25.
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20. Statement of Comprehensive Income
Revenues
Earnings from the sale of goods or services.
Revenue is recognized in the period in which
goods and services are sold, not necessarily
the period in which cash is received.
When will the revenue from this transaction be recognized?
May 2015
$1,000 revenue
recognized in May
June 2015
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21. Statement of Comprehensive Income
Expenses
The dollar amount of resources used up by the entity to earn revenues during a period.
An expense is recognized in the period in which
goods and services are used, not necessarily
the period in which cash is paid.
When will the expense for this transaction be recognized?
May 2015
June 2015
Paid $75 cash on May 11
for newspaper ad. X
Ad appears
on June 8.
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22. Statement of Comprehensive Income
Expenses
The dollar amount of resources used up by the entity to earn revenues during a period.
An expense is recognized in the period in which
goods and services are used, not necessarily
the period in which cash is paid.
When will the expense for this transaction be recognized?
May 2015
June 2015
Advertising expense
recognized in June.
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23. Statement of Changes in Equity
Equity, beginning of the period Plus: Net earnings for the year
Plus: Other comprehensive income
Less: Dividends
Plus/Less: Other changes, net
Equity, end of the period
The purpose of the statement of changes in equity is to report the reinvestment of earnings from the company gained during the current period (net earnings and other comprehensive income) less the dividends paid to shareholders of the company plus or minus any other changes in equity.
The statement begins with last period’s ending equity, and then adds profit and other comprehensive income reported on the income statement for this year. Next, any dividends declared during the period are subtracted to arrive at ending retained earnings.
The earnings of the company can either be retained by the corporation or distributed to the shareholders through dividends.
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24. Statement of Changes in Equity24
Statement of Changes in Equity
Here is an example of a statement of changes in equity for Sun-Rype Products Ltd for the year ended December 31, 2012.
Notice that when a formal statement of changes in equity is prepared, the format of the title is similar to the other financial statements. The first line contains the name of the company. The second line is the name of the financial statement, in this case the words “statement of changes in equity.” The third line is the accounting period covered, for example “for the year ended December 31, 2012.” Like the income statement, the statement of changes in equity covers of period of time. Some companies show dollar amounts in thousands or millions.
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25. Statement of Cash Flows
Because
revenues reported
do not always equal
cash collected. . .
. . . and expenses
reported do not
always equal
cash paid . . .
Net earnings are
usually not equal
to the change
in cash for
the period.
Because revenues reported do not always equal cash collect, and expenses reported do not always equal cash paid, the net earnings shown on the statement of comprehensive income (income statement) is usually not equal to the change in cash for the period.
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26. Statement of Cash Flows26
Statement of Cash Flows
The Statement of Cash Flows reports inflows and outflows of cash during the accounting period using three categories: operating, investing, and financing activities.
On the statement of cash flows, operating activities involve the cash provided and used in the normal business operations of the company. This section of the statement includes cash collected from the sale of products to customers, cash paid to suppliers for materials and to employees for the labor to manufacture and distribute the product. In addition, we show cash paid for interest and taxes.
Investing activities involve the purchase or sale of long-term productive assets, the lending of monies to others, and the receiving principal payments back from those loans. When we purchase a long-term productive asset, it’s a cash outflow; when we sell a productive asset, it’s a cash inflow. When we loan funds to others, it’s a cash outflow; when we receive principal payments on those loans, it’s a cash inflow.
Financing activities involve borrowing and repaying amounts from financial institutions and the sale or repurchase of the company’s shares. In addition, the payment of a cash dividend is classified as a financing activity. When we borrow money from a financial institution, it’s a cash inflow; repaying the principal amount is a cash outflow. When the company sells shares, it’s a cash inflow; if the company repurchases its own shares, it’s a cash outflow. The payment of cash dividends is always a cash outflow.
The statement ends with a reconciliation of cash.
Notice that our three-line heading contains the name of the company, the name of the financial statement and the time period covered by the statement. In addition, The Nestle Group shows dollar amounts in thousands. The income statement, statement of changes in equity, and statement of cash flows cover a period of time.
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27. Relationships Among the Statements
Net earnings from the income statement results in an increase in ending retained earnings on the statement of changes in equity.
Income Statement
Revenues
$ 152,795
Statement of Changes in Equity
Expenses
151,518
Beginning retained earnings
$ 27,914
Net earnings
$ 1,267
1,267
Dividends
(500)
Ending retained earnings
$ 28,681
Several relationships exist among the individual financial statements. First, net earnings reported on the income statement flows to the statement of changes in equity (through the retained earnings component) and increases the retained earnings account balance. In this example, the $1,267 net earnings reported on the income statement increases retained earnings on the statement of changes in equity.
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28. Relationships Among the Statements
Ending retained earnings from the statement of changes in equity is one of the three components of shareholders’ equity on the statement of financial position.
Statement of Changes in Equity
Statement of Financial Position
Retained Earnings
Cash
$ 3,727
Beginning retained earnings
$ 27,914
Other assets
87,246
Net earnings
1,267
Total assets
$ 90,973
Dividends
(500)
Liabilities
$ 43,937
Ending retained earnings
$ 28,681
Contributed capital
18,421
Retained earnings
28,681
Other equity components
(66)
Total liabilities and equity
Another relationship that exists among the financial statements is that ending retained earnings from the statement of changes in equity is one of the three components of shareholders’ equity on the statement of financial position (balance sheet). In this example, the $28,681 ending retained earnings from the statement of changes in equity also appears on the Statement of Financial Position.
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29. Relationships Among the Statements
The change in cash on the statement of cash flows is added to the beginning-of-year balance in cash to arrive at end-of-year cash on the statement of financial position.
Statement of Cash Flows
Statement of Financial Position
Cash flows from operating activities
$ 17,933
Cash
$ ,727
Cash flows from investing activities
(1,418)
Other assets
87,246
Cash flows from financing activities
(13,359)
Total assets
$ 90,973
Change in cash
$ 3,156
Liabilities
$ 43,937
Beginning cash balance
571
Contributed capital
18,421
Ending cash balance
$ 3,727
Retained earnings
28,681
Other equity components
(66)
Total liabilities and equity
$ 90,973
On the Statement of Cash Flows, the total increase or decrease in cash from the three categories of activities is added to the beginning of the year cash balance to arrive at the end of the year cash balance. This amount also appears on the Statement of Financial Position. In this example, the decrease of cash during the period of $3,156 is added from the beginning cash balance of $3,159, to arrive at end-of-period cash balance of $3,727. The end-of-period cash balance of $3,727 also appears on the statement of financial position.
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30. 30
Notes
All financial statements should be accompanied by notes which provide the reader with supplemental information about the financial condition and results of operations of the company.
Three types . . .
Describe accounting rules applied.
Present additional detail about an item on the financial statements.
Provide additional information about an item not on the financial statements.
All financial statements should be accompanied by notes which provide the reader with supplemental information about the financial condition and results of operations of the company. These notes provide supplemental information about the financial condition of a company, without which the financial statements cannot be fully understood.
There are three basic types of notes. The first type provides descriptions of the accounting rules applied in the company’s financial statements. The second presents additional detail about a line on the financial statement. For example, it is common to find a note that describes the details of a long-term debt agreement. The last type of note provides additional financial disclosures about items not listed in the financial statements. For example, a company may lease, rather than purchase, major pieces of machinery and equipment.
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31. Management Uses of Financial Statements
Marketing managers and credit managers use customers’ financial statements to decide whether to extend credit.
Purchasing managers use suppliers’ financial statements to decide whether suppliers have the resources to meet the demand for products.
Financial statements provide information to investors and creditors. Managers within the company also use the information on the financial statements. The Marketing and credit managers use financial information for preparing budgets or for determining whether or not to extend credit to a customer. A purchasing manager may use a supplier’s financial statement to see whether or not the supplier has the resources necessary to meet the company’s demands. Employees and union representatives may use financial information in contract negotiations.
Employees’ union and human resource managers use the company’s financial statements as a basis for contract negotiations over pay rates.
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32. Responsibilities for the Accounting Communication Process
Effective communication means that the recipient understands what the sender intends to convey.
To have effective communication, those receiving the information must understand what the sender intended to convey. Informed decision makers need to understand accounting rules and accounting measurement practices to understand the message conveyed.
Decision makers need to understand
accounting measurement rules.
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33. Responsibilities for the Accounting Communication Process
International Financial Reporting Standards (IFRS)
The Rules
Decision makers need to understand the measurement rules applied in computing the numbers on the financial statements. These rules are called International Financial Reporting Standards or IFRS for publicly accountable enterprises (or with accounting standards for private enterprises in Canada, called ASPE, the term used is Generally Accepted Accounting Principles, or GAAP).
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34. How are IFRS and Generally Accepted Accounting Principles Determined?
Our accounting system has a long and distinguished history. An Italian monk named Luca Pacioli, published the first elements of double-entry bookkeeping in 1494.
Prior to 1933, the management teams of most companies were largely free to choose their own financial reporting practices.
Luca Pacioli, an Italian monk and mathematician, first published the elements of our double-entry bookkeeping system in Until the stock market crash of 1929, most companies decided on their own accounting principles. There was little uniformity or comparability of accounting information. The U.S. Congress stepped in to regulate accounting measurement with the Securities Act in 1933 and the Securities Exchange Act in These acts created the Securities and Exchange Commission (SEC) and gave it broad powers to determine the measurement rules for financial statements that companies must provide to shareholders.
In Canada, provincial securities legislation created securities commissions, most notably the Ontario Securities Commission (OSC), to regulate the flow of financial information provided by publicly traded companies whose shares trade on Canadian stock exchanges, such as the Toronto Stock Exchange. Similar to the SEC, the OSC plays an influential role in promotion, surveillance, and enforcement of sound accounting practices by publicly traded companies.
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35. Generally Accepted Accounting Principles
Securities Act of 1933
Securities and Exchange Act of 1934
The Securities and Exchange Commission (SEC)
has been given broad powers to determine
measurement rules for financial statements in the U.S.
The Ontario Securities Commission (OSC)
measurement rules for financial statements in Canada.
Following the dramatic stock market decline of 1929, the Securities Act of 1933 and the Securities Exchange Act of 1934 were passed into law by the U.S. Congress. These acts created the Securities and Exchange Commission (SEC) and gave it broad powers to determine the measurement rules for financial statements that companies issuing stock to the public must provide to shareholders.
The Ontario Securities Commission (OSC) has been given broad powers to determine measurement rules for financial statements in Canada.
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36. Generally Accepted Accounting Principles
The OSC has worked closely with the
accounting profession to
work out the detailed rules that have
become known as GAAP.
Currently, the Accounting Standards Board (AcSB)
is recognized as the body to formulate GAAP in Canada.
The Ontario Securities Commission has worked with organizations of professional accountants to establish groups that are given the primary responsibilities to work out the detailed rules that become generally accepted accounting principles. In Canada, currently, the Accounting Standards Board (AcSB) has the responsibility to formulate generally accepted accounting principles.
In the United States, currently, the Financial Accounting Standards Board (FASB) has the responsibility to formulate generally accepted accounting principles.
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37. Generally Accepted Accounting Principles
Companies incur the cost of preparing the financial statements and bear the following economic consequences . . .
Effects on the selling price of shares.
Effects on the amount of bonuses received by managers and other employees.
Loss of competitive information to other companies.
Generally accepted accounting principles (GAAP) are of great interest to the companies that must prepare financial statements, their auditors, and the readers of the statements. Companies and their managers and owners are most directly affected by the information presented in financial statements. Companies incur the cost of preparing the statements and bear the major economic consequences of their publication, which include, among others,
1. Effects on the selling price of a company’s shares.
2. Effects on the amount of bonuses received by management and employees.
3. Loss of competitive information to other companies.
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38. International Perspective International Financial Reporting Standards
Since 2002, there has been substantial movement toward the adoption of International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).
Examples of jurisdictions currently requiring the use of IFRS include:
• All countries in the European Union
• Australia and New Zealand
• Hong Kong, China, India, Malaysia, and South Korea
• Israel and Turkey
• Argentina, Brazil and Chile
• Canada and Mexico
In the United States, the Securities and Exchange Commission (SEC) now allows foreign companies whose shares are traded in the U.S. to use IFRS and is considering allowing the same for domestic companies in the future.
Since 2002, there has been substantial movement toward the adoption of International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). The use of IFRS is increasing, with many countries or jurisdictions either currently requiring IFRS or committed to require IFRS in the future. In the United States, the Securities and Exchange Commission now allows foreign companies whose stock is traded in the U.S. to use IFRS and is considering allowing the same for domestic companies in the future. In Canada, IFRS is required for publicly accountable enterprises beginning on January 1, 2011 while accounting standards for private enterprises can be used for private entity’s. To prepare you for this, we will point out key differences between IFRS and ASPE (accounting standards for private enterprises) starting in Chapter 7. The basic principles and practices we discuss in Chapters 1 through 6 apply equally to both sets of standards.
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39. Management Responsibility and the Demand for Auditing
To ensure the accuracy of the company’s financial information, management:
Maintains a system of controls.
Hires outside independent auditors.
Forms a committee of the board of directors to review these two safeguards.
Primary responsibility for the information in the financial statements lies with management, represented by the highest officer of the company and the highest financial officer. Companies take three important steps to assure investors that the company’s records are accurate: (1) they maintain a system of controls over both the records and the assets of the company, (2) they hire outside independent auditors to verify the fairness of the financial statements, and (3) they form a committee of the board of directors to oversee the integrity of these other two safeguards.
These responsibilities are often reiterated in a formal report of management or management certification in the annual report. These three safeguards and a management certification are required for companies with publicly traded shares.
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40. The CPAB issues detailed auditing standards that auditors must follow.
Independent Auditors
Auditors express an opinion as to the fairness of the financial statements.
Independent auditors have responsibilities that extend to the general public.
The CPAB issues detailed auditing standards that auditors must follow.
Overall, I believe
these financial
statements are
fairly stated.
Management prepares the financial statements for a company and an independent auditor is hired to express an opinion as to the fairness of the financial statement presentation. They are responsible to the general public for the opinions they render.
The Canadian Public Accounting Board (CPAB) is the private sector body given the primary responsibility to issue detailed auditing standards. They work in consultation with the Chartered Professional Accountants of Canada (CPA Canada) {previously Canadian Institute of Chartered Accountants (CICA)} and the Ontario Securities Commission (OSC) to set standards for the audits of public companies.
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41. Independent Auditors An audit involves . . .
Examining the financial reports to ensure compliance with GAAP.
Examining the underlying transactions incorporated into the financial statements.
Expressing an opinion as to the fairness of presentation of financial information.
An independent audit involves the examination of the financial reports (prepared by the management of the entity) to ensure that they represent what they claim to and conform with generally accepted accounting principles (GAAP). In performing an audit, the independent CPA, CA (or a CGA in some Canadian provinces) examines the underlying transactions and the accounting methods used to account for these transactions. Because of the enormous number of transactions, the CPA, CA does not examine each of these transactions. Rather, professional approaches are used to ascertain beyond reasonable doubt that transactions were measured and reported properly. Based on the audit, the independent auditor issues a report expressing an opinion as to the fairness of the presentation of the financial information.
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42. Accounting Designations
Chartered Professional Accountant = CPA
(newly amalgamated organization of many provincial CA, CMA, and CGA organizations effective January 1, 2013)
Chartered Accountant = CA
Certified Management Accountant = CMA
Certified General Accountant = CGA
Certified Public Accountant = CPA*
(* in USA)
In Canada, an accountant may be designated as a Chartered Professional Accountant (CPA), {prior to the amalgamation of the predecessor organizations on January 1, 2013 an accountant may have been designated as a Chartered Accountant (CA), a Certified General Accountant (CGA), or a Certified Management Accountant (CMA)}. These accounting designations are granted by the respective professional accounting organizations on completion of specific educational programs and experience requirements. Professional accountants can offer various accounting services to the public, but only CPA, CAs and CGAs (in most Canadian provinces) are permitted to issue audit reports of publicly traded companies because they have certain responsibilities that extend to the general public as well as to the specific business that pays for their services.
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43. Ethics, Reputation, and Legal Liability
The Chartered Professional Accountants of Canada (CPA) and the Canadian Institute of Chartered Accountants (CA) require that all members adhere to a professional code of ethics. The other accounting professions have similar requirements.
If financial statements are to be of any value to decision makers, users must have confidence in the fairness of the information they present. Users will have greater confidence in the information if they know that the people who audited the statements were required to meet professional standards of ethics and competence. The Chartered Professional Accountants of Canada (CPA Canada) and the Canadian Institute of Chartered Accountants (CICA) requires all of its members to adhere to a professional code of ethics and professional auditing standards, and auditors of public companies must register with and comply with standards set by the Canadian Public Accounting Board (CPAB). Failure to comply with the rules of conduct can result in serious professional penalties. CPA, CAs’ reputations for honesty and competence are their most important assets. The potential economic effects of damage to reputation, malpractice liability, and potential fines provide even stronger incentives to abide by professional standards.
Code of Ethics
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44. Ethics, Reputation, and Legal Liability
A CPA’s reputation for honesty and competence is his/her most important asset.
Like physicians and lawyers, a CPA’s reputation for honesty and competency is his or her most important asset. Like physicians and lawyers, CPAs, CAs, CMAs, and CGAs are liable for malpractice.
Like physicians, CPAs, CAs, CMAs, and CGAs
have liability for malpractice.
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45. Appendix 1A: Types of Business Entities
Sole Proprietorship: owned by a single individual.
Partnership: owned by two or more individuals.
Corporation: ownership represented by shares of stock.
Advantages of a Corporation
Limited liability
Continuity of life
Ease of transfer of ownership
Opportunity to raise large amounts of money
Disadvantage of a Corporation
Double taxation
This textbook emphasizes accounting for profit-making business entities. Appendix 1A discusses three types of business entities: sole proprietorship, partnership, and corporation. A sole proprietorship is owned by one person; it usually is small in size and is common in the service, retailing, and farming industries. A partnership is owned by two or more persons known as partners. A partnership is not legally separate from its owners and each general partner has unlimited liability. In a corporation ownership is represented by shares. The owners are called shareholders or stockholders.
In terms of economic importance, the corporation is the dominant form of business organization in Canada. This dominance is caused by the many advantages of the corporate form: (1) limited liability for the shareholders, (2) continuity of life, (3) ease in transferring ownership (shares), and (4) opportunities to raise large amounts of money by selling shares to a large number of people. The primary disadvantage of a corporation is that its income may be subject to double taxation (income is taxed when it is earned and again when it is distributed to shareholders as dividends).
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46. Appendix 1B: Employment in the Accounting Profession Today
Career Opportunities
Public Accounting
Audit and Assurance Services
Management Consulting Services
Tax Services
Employment by Organizations
Internal accounting
External reporting
Tax planning
Various other functions
Employment in the Public and Not-for-Profit Sector
Professional Designations
CPA CA
CMA
Appendix 1B discusses employment opportunities in the accounting profession. An accountant may be licensed as a chartered professional accountant (CPA), or a chartered accountant, or CA. An accountant may also be licensed as a certified management accountant, or CMA, or a certified general accountant, or CGA.
Career opportunities include careers in public accounting firms. Accounting firms usually render three types of services: audit or assurance services, management consulting services, and tax services.
Another option for employment for accountants is working with individual profit-making and non-profit organizations. A primary function of the accountants in organizations is to provide data that are useful for internal managerial decision making and for controlling operations. The functions of external reporting, tax planning, control of assets, and a host of related responsibilities normally are also performed by accountants in industry.
There are also career opportunities for accountants in governmental units, from the local to the international level. The same holds true for other not-for-profit organizations such as hospitals and universities.
CGA
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47. End of Chapter 1
End of chapter 1.