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

2 Overview of Corporate Financial Reporting 1 C h a p t e r

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

4 Financial statements: reports summarizing a company’s performance during a particular period Financial statements: reports summarizing a company’s performance during a particular period Corporate Financial Reporting Annual report: reports the results of the company’s activities during the year Annual report: reports the results of the company’s activities during the year

5 Profit-seeking entities Profit-seeking entities Governing organizations Governing organizations Service entities Service entities Not-for-profit entities Not-for-profit entities Forms of Organization

6 Sole proprietorships Sole proprietorships Partnerships Partnerships Limited partnerships Limited partnerships Joint ventures Joint ventures Crown corporations Crown corporations Corporations Corporations Forms of Organization Conducting Business

7 Corporate Financial Reporting Shareholders’ equity: initial investment in the business entity in the form of cash or property Shareholders’ equity: initial investment in the business entity in the form of cash or property Share: document that represents ownership in the corporation Share: document that represents ownership in the corporation Shareholders: owners Shareholders: owners

8 Internal users: Internal users: –Management –Board of Directors Users of Financial Statement Information

9 External users: External users: –Shareholders –Potential investors –Creditors –Regulators –Taxing authorities –Other corporations –Security analysts –Credit-rating agencies –Labour unions

10 Development of Accounting Standards GAAP GAAP –Generally Accepted Accounting Principles –Set by Canadian Institute of Chartered Accountants –Published in the CICA Handbook

11 Understandability Understandability Relevance Relevance Reliability Reliability Comparability Comparability Characteristics of Accounting Information

12 Financing Activities Financing Activities Investing Activities Investing Activities Operating Activities Operating Activities Business Activities

13 Borrowing money Borrowing money Repaying loans Repaying loans Issuing shares Issuing shares Repurchasing shares Repurchasing shares Paying dividends on shares Paying dividends on shares Financing Activities

14 Purchase or sale of property, plant, and equipment Purchase or sale of property, plant, and equipment Investments or sale of investments in the shares of other companies Investments or sale of investments in the shares of other companies Investing Activities

15 Sales to customers Sales to customers Collection of amounts owed by customers Collection of amounts owed by customers Purchase of inventory Purchase of inventory Payment of amounts owed to suppliers Payment of amounts owed to suppliers Payment of expenses Payment of expenses Payment of taxes Payment of taxes Operating Activities

16 Corporate profile Corporate profile Report to the shareholders Report to the shareholders Management’s discussion Management’s discussion Board of directors and management Board of directors and management Financial section Financial section Annual Report

17 Financial Section Components Statement of Management Responsibility Statement of Management Responsibility Auditor’s report Auditor’s report Financial statements Financial statements Statement on Corporate Governance Statement on Corporate Governance

18 Income Statement Income Statement Balance Sheet Balance Sheet Statement of Retained Earnings Statement of Retained Earnings Statement of Cash Flows Statement of Cash Flows Notes to the financial statements Notes to the financial statements Financial Statements

19 Also known as the Statement of Earnings Also known as the Statement of Earnings Describes the results of the operating activities of the current period Describes the results of the operating activities of the current period Income Statement

20 Common items Common items –Sales revenues –Other income –Cost of goods sold –Selling, general, and administrative expenses –Amortization, interest, and income tax expenses Income Statement

21 Also known as the Statement of Financial Position Also known as the Statement of Financial Position Financial status of the company at a particular point in time 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) Lists what is owned (assets) and what is owed (liabilities), measuring net worth (shareholders’ equity) Balance Sheet

22 Basic Accounting Equation Assets = Liabilities + Shareholders’ Equity Shareholders’ Equity

23 Characteristics Characteristics –Something that has probable future value that can be measured –The company owns or has the right to use the probable future value –The event that gave the company the ownership or right has already occurred Assets

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

25 Assets and liabilities are listed on the balance sheet in liquidity order Assets and liabilities are listed on the balance sheet in liquidity order Liquidity: how quickly the company can turn the asset into cash Liquidity: how quickly the company can turn the asset into cash Liquidity

26 Amounts that the company owes to others Amounts that the company owes to others Probable future sacrifice of resources: cash, services, or goods Probable future sacrifice of resources: cash, services, or goods Liabilities

27 Examples Examples –Bank indebtedness –Accounts payable –Notes payable –Dividends payable –Accrued liabilities –Taxes payable –Long-term debt Liabilities

28 Value of the shareholders’ interest in the company as measured by the accounting guidelines Value of the shareholders’ interest in the company as measured by the accounting guidelines Examples Examples –Share capital –Retained earnings Shareholders’ Equity

29 Represents the shares that have been issued by the company 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 Usually stated at an amount equal to what was originally paid by investors for the shares Share Capital

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

31 Measures inflows and outflows of cash during a specific period of time Measures inflows and outflows of cash during a specific period of time Sections Sections –Cash from operating activities –Cash from financing activities –Cash from investing activities Statement of Cash Flows

32 Notes to the Financial Statements More detail about specific referenced items More detail about specific referenced items Includes the Summary of Accounting Policies Includes the Summary of Accounting Policies Includes information about various segments of the company Includes information about various segments of the company

33 Statement of Management Responsibility Contains a statement by management that it is responsible for the contents of the annual report Contains a statement by management that it is responsible for the contents of the annual report Discusses steps taken to ensure safekeeping of assets and the practise of ethical and responsible management Discusses steps taken to ensure safekeeping of assets and the practise of ethical and responsible management