Chapter 2 The Balance Sheet!Quiz on Friday Sep 12Let’s go over Ex 3 (P29)

Claims against the Assets•We learned yesterday that we list the assets on the left side of the balance sheet. •Who is entitled to these assets? •The answer is shown on the right side of the balance sheet: Both the creditors (lenders) and owners have a claim on the assets.

Claims against the Assets•Thinking about assets and claims against them will help you understand why the fundamental accounting equation is written as A = L + OE•Assets = Creditors’ claims against the assets (L) + Owner’s claim against the assets (OE)

Claims against the Assets•If the business went bankrupt today, who would take possession of the assets? •Both creditors (Liabilities) and owners (Owner’s Equity) would claim the assets. •But the creditors (lenders) would obtain their money first and then (if there is any money left over,) the owner will obtain money.

Claims against the AssetsLet’s say that the business went bankrupt. (Page 31 example)

•If the supplies, furniture, equipment and automobile are sold as “used item” price, the money we get from selling them would be lower than what is recorded in Balance Sheet. =(Fair Market Value < Book value)

Claims against the Assets

•In this example, we only obtained $37,571 (FMV) instead of $49,121.(Book value)• This means we lost $11,550 from selling the furniture, equipment and car. •Then the $11,550 amount will not hit the creditors’ claim but this amount will hit only what the owner will receive.

Claims against the Assets•The creditors will receive 100% of what they can claim whereas the owner will receive only 22615 instead of 34165. •Only the owner takes the loss. •On the other hand, if the assets were sold at higher price than the book value, then only the owner will benefit from the selling.

Claims against the Assets•For example, if the selling price was $59121, then the owner will take home $44165 (owners made $10000 profit). The creditors take only their original principal of 14956.

Accounting Standards

-Historically, the Canadian Institute of Chartered Accountants (CICA) has established the accounting standards for Canadian accountant. -CICA made CICA Handbook and updated regularly.-The most important part of the CICA handbook contains Canadian Generally Accepted Accounting Principles (Canadian GAAP)

Accounting Standards

-Accounting Standards Board is governing body in Canada. (AcSB) like Police in accounting-Canadian Public Corporation (their stocks are traded in stock exchange. Examples are Air Canada and Bell Canada) must use IFRS (International Financial Reporting Standards) rule whereas non-public companies in Canada can use the Accounting Standard for Private Enterprises (ASPE) = Canadian GAAP. (since Jan 1 2011)

IFRS and Balance Sheet Formats•Figure 2.11 (Page 36) shows the

pattern of balance sheet under Canadian GAAP. •Small companies in Canada still use ASPE (or Canadian GAAP) •However, Canadian public companies have to use IFRS rule instead of Canadian GAAP, so they will follow Figure 2.12 (Page 36).

IFRS Balance Sheet Formats

•The order of both sides of the balance sheet has turned upside down. (e.g. Long term asset first and then current asset) •The name of Balance Sheet is Statement of financial position under IFRS.

Classwork / Homework

• P32 Review Questions (1-5)•P32 Exercises 1 and 2•P37 Review #1, 2, 3, 4, 5,6, 7