Prepared by L. de Grace C.A. a user perspective Sixth Canadian Edition FINANCIAL ACCOUNTING John Wiley & Sons Canada, Ltd. ©2011 CHAPTER ONE Overview 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 John Wiley & Sons Canada, Ltd. ©2011

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 John Wiley & Sons Canada, Ltd. ©2011

Forms of Organization  Profit-seeking entities  Governing organizations  Service entities  Not-for-profit entities John Wiley & Sons Canada, Ltd. ©2011

Forms of Organization  Sole proprietorships  Partnerships  Limited partnerships  Joint ventures  Crown corporations  Corporations John Wiley & Sons Canada, Ltd. ©2011

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 John Wiley & Sons Canada, Ltd. ©2011

 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 John Wiley & Sons Canada, Ltd. ©2011

 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, Development of Accounting Standards John Wiley & Sons Canada, Ltd. ©2011

Characteristics of Accounting Information  Understandability  Comparability  Relevance Predictive value Confirmatory value  Reliability Faithful Representation Substance over form Neutrality Prudence Completeness John Wiley & Sons Canada, Ltd. ©2011

Constraints of Accounting Information  Timeliness  Balance between benefits and cost  Balance between qualitative characteristics John Wiley & Sons Canada, Ltd. ©2011

Business Activities  Financing Activities  Investing Activities  Operating Activities John Wiley & Sons Canada, Ltd. ©2011

Financing Activities  Borrowing money  Repaying loans  Issuing shares  Repurchasing shares  Paying dividends on shares John Wiley & Sons Canada, Ltd. ©2011

Investing Activities  Purchase or sale of property, plant, and equipment  Investments or sale of investments in the shares of other companies John Wiley & Sons Canada, Ltd. ©2011

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 John Wiley & Sons Canada, Ltd. ©2011

Annual Report  Corporate profile  Message to shareholders  Management’s Discussion and Analysis  Board of directors and management  Financial section John Wiley & Sons Canada, Ltd. ©2011

Financial Section Components  Statement of Management’s Responsibility  Auditor’s report  Financial statements  Statement on corporate governance John Wiley & Sons Canada, Ltd. ©2011

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 John Wiley & Sons Canada, Ltd. ©2011

Independent Auditors’ Report  Independent professional accountants’ opinion about the fairness of the presentation and conformity to accounting guidelines  Ethical considerations John Wiley & Sons Canada, Ltd. ©2011

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 John Wiley & Sons Canada, Ltd. ©2011

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 John Wiley & Sons Canada, Ltd. ©2011

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 John Wiley & Sons Canada, Ltd. ©2011

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) John Wiley & Sons Canada, Ltd. ©2011

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 John Wiley & Sons Canada, Ltd. ©2011

Assets  Examples Cash Short-term (temporary) investments Accounts receivable Inventory Prepaid expenses Capital assets John Wiley & Sons Canada, Ltd. ©2011

Liabilities Amounts that the company owes to others Probable future sacrifice of resources: cash, services, or goods John Wiley & Sons Canada, Ltd. ©2011

Liabilities  Examples Bank indebtedness Accounts payable Notes payable Dividends payable Accrued liabilities Taxes payable Long-term debt Future income tax liabilities John Wiley & Sons Canada, Ltd. ©2011

Liquidity  Assets and liabilities are listed on the balance sheet in liquidity order  Liquidity: how quickly the company can turn the asset into cash John Wiley & Sons Canada, Ltd. ©2011

Basic Accounting Equation Assets = Liabilities + Shareholders’ Equity OR Shareholders’ Equity = Assets - Liabilities (Net Assets) John Wiley & Sons Canada, Ltd. ©2011

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 John Wiley & Sons Canada, Ltd. ©2011

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 John Wiley & Sons Canada, Ltd. ©2011

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 John Wiley & Sons Canada, Ltd. ©2011

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 John Wiley & Sons Canada, Ltd. ©2011

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 John Wiley & Sons Canada, Ltd. ©2011

Professional Accounting Organizations in Canada  Canadian Institute of Chartered Accountants (CAs)  CMA Canada: Certified Management Accountants (CMAs)  Certified General Accountants’ Association of Canada (CGAs) John Wiley & Sons Canada, Ltd. ©2011

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 John Wiley & Sons Canada, Ltd. ©2011

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 John Wiley & Sons Canada, Ltd. ©2011