FINANCIAL ACCOUNTING A USER PERSPECTIVE Hoskin Fizzell Davidson Second Canadian Edition

Overview of Corporate Financial Reporting Chapter One

Corporate Financial Reporting Accounting: the system whereby the underlying economic conditions of organizations and individuals are recorded, summarized, reported and understood.

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

Forms of Business sole proprietorships partnerships joint ventures crown corporations corporations

Corporate Financial Reporting Shareholders’ equity: initial investment in the business entity Share: document that represents ownership in the corporation Shareholders: owners

Users of Financial Statements Internal users: –Management –Board of Directors External users: –Shareholders – Regulators –Potential investors – Taxing authorities –Creditors – Others

Generally Accepted Accounting Principles GAAP: –accounting guidelines –set by Canadian Institute of Chartered Accountants –published in the CICA Handbook

Characteristics of Accounting Information Understandability Relevance Reliability Comparability

Business Activities Financing Activities: –Borrowing money –Repaying loans –Issuing shares –Repurchasing shares –Paying dividends on shares

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

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

Annual Report Summary of financial highlights Auditors’ report Financial statements Supporting schedules

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

Financial Statements Income Statement: –measures the operating performance of a company over a period of time

Financial Statements Income Statement: –Revenues (money or resources flowing into the company as a result of sales transactions) –Expenses (money or resources flowing out of the company related to sales transactions –Revenues — Expenses = Net Income

Financial Statements Balance Sheet: –measures the resources controlled by a company (assets) and the claims to those resources (liability and equity holders) at a given point

Basic Accounting Equation Assets = Liabilities + Shareholders’ Equity

Assets Something of value that the company owns or has the right to use Examples: –cash, temporary investments, accounts receivable, inventory, prepaid expenses, capital assets

Liabilities Amounts that the company owes to others Examples: –bank indebtedness, accounts payable, notes payable, dividends payable, accrued liabilities, taxes payable, long-term debt

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

Shareholders’ Equity Value of the shareholders’ interest in the company as measured by the accounting guidelines. Examples: –share capital, retained earnings

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.

Retained Earnings The earnings (as measured on the Income Statement) of the company that have been retained and not paid out in the form of dividends. Change in Retained Earnings = Net Income - Dividends

Financial Statements Statement of Cash Flows: –measures the change in cash flow over a period of time –sections: Operating activities Financing activities Investing activities

Auditors’ Report Professional accountants’ opinion as to whether the financial statements fairly present the results of the company’s operations Ethical considerations

Professional Accounting Organizations in Canada Canadian Institute of Chartered Accountants: (CAs) CMA Canada: Certified Management Accountants (CMAs) Certified General Accountants’ Association of Canada (CGAs)