ACCOUNTING
a FINANCIAL user perspective
Sixth Canadian Edition
CHAPTER ONE
Overview of Corporate Financial Accounting
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2011
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
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2011
Corporate Financial Reporting
Financ ial s tate me nts : reports
summarizing a companys performance
during a particular period.
Annual re po rt: reports the results of the
companys activities during the year
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2011
F orms of Organization
Profit-seeking entities
Governing organizations
Service entities
Not-for-profit entities
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2011
F orms of Organization
Sole proprietorships
Partnerships
Limited partnerships
J oint ventures
Crown corporations
Corporations
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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
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2011
Users of Financial
S tatement Information
Internal users:
Management
Board of Directors
External users:
Shareholders
Potential investors
Creditors
Regulators
Taxing authorities
Other corporations, including
competitors
Security analysts
Credit-rating agencies
Labour unions
J ournalists
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2011
Development of Accounting
S tandards
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
J anuary 1, 2011.
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2011
Characteristics of Accounting
Information
Understandability
Comparability
Relevance
Predictive value
Confirmatory value
Reliability
Faithful
Representation
Substance over
form
Neutrality
Prudence
Completeness
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2011
Constraints of Accounting
Information
Timeliness
Balance between benefits and cost
Balance between qualitative
characteristics
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2011
Business Activities
Financing Activities
Investing Activities
Operating Activities
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F inancing Activities
Borrowing money
Repaying loans
Issuing shares
Repurchasing shares
Paying dividends on shares
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Investing Activities
Purchase or sale of property,
plant, and equipment
Investments or sale of
investments in the shares of
other companies
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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
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Annual Report
Corporate profile
Message to shareholders
Managements Discussion and Analysis
Board of directors and management
Financial section
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F inancial Section Components
Statement of Managements Responsibility
Auditors report
Financial statements
Statement on corporate governance
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S tatement of
Managements 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
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2011
Independent Auditors Report
Independent professional accountants
opinion about the fairness of the
presentation and conformity to accounting
guidelines
Ethical considerations
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F inancial Statements
Statement of Comprehensive Income
Statement of Financial Position
Income Statement; Statement of Earnings
Balance Sheet
Statement of Cash Flows
Statement of Changes in Shareholders
E quity
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2011
S tatement 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 over of
equipment several years of benefits
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2011
S tatement of Comprehensive
Income
Common items
Sales revenues
Other income
Cost of goods sold
Selling, general, and administrative expenses
Amortization, interest, and income tax
expenses
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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)
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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
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2011
Assets
Examples
Cash
Short-term (temporary) investments
Accounts receivable
Inventory
Prepaid expenses
Capital assets
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2011
Liabilities
Amounts that the company owes to others
Probable future sacrifice of resources:
cash, services, or goods
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Liabilities
Examples
Bank indebtedness
Accounts payable
Notes payable
Dividends payable
Accrued liabilities
Taxes payable
Long-term debt
Future income tax
liabilities
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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
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Basic Accounting Equation
As s e ts = Liabilitie s + S hare ho lde rs
Equity
OR
S hare ho lde rs Equity = As s e ts Liabilitie s
(Ne t As s e ts )
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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
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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
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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
Chang e in Re taine d Earning s = Ne t Inc o me Divide nds
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2011
Statement of Cash Flows
Measures inflows and outflows of cash during a
specific period of time
Sections
Ope rating Ac tivitie s
Financ ing Ac tivitie s
All inflows & outflows related to the companys sale of
goods or services
Transactions that either generate new funds from investors
or return funds to investor
Inve s ting Ac tivitie s
Inflows and outflows related to long-term assets
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Notes to the Financial
S tatements
More detail about specific referenced items
Includes the Summary of Accounting
P olicies
Includes information about various
segments of the company
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2011
P rofessional Accounting
Organizations in Canada
Canadian Institute of Chartered Accountants
(CAs)
CMA Canada: Certified Management
Accountants (CMAs)
Certified General Accountants Association of
Canada (CGAs)
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2011
Professional Accounting
Organizations in Canada
Click on one of the links below to find out more
on accounting as a profession:
CICA
CMACanada
CGACanada
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2011
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2011