copyright © 2014 mcgraw-hill ryerson limited 1-1 powerpoint author: robert g. ducharme, macc, cpa,...

Copyright © 2014 McGraw-Hill Ryerson Limited

1-1

PowerPoint Author:

Robert G. Ducharme, MAcc, CPA, CAUniversity of Waterloo, School of Accounting and Finance

FINANCIALACCOUNTINGFifth Canadian Edition LIBBY, LIBBY, SHORT, KANAAN, GOWING

FINANCIALACCOUNTINGFifth Canadian Edition LIBBY, LIBBY, SHORT, KANAAN, GOWING

Financial Statements and Business Decisions

Chapter 1

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Understanding the Business

The PlayersInvestors Creditors

Managers

The Business

Operations

1. Purchase materialsand labour

2. Manufactureproduct

3. Sell productsto customers

4. Collect cash fromcustomers and pay

creditors

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Business owners (called investors or shareholders) look for two sources of possible gain:

Sellownership

interest in thefuture for more

than they paid.

Receive aportion of thecompany’s

earnings in cash(dividends).

Understanding the Business

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Creditors lend money to a company for a specific length of time and gain by charging interest on the money

loaned.

Mel’sDiner

Loan

Interest

Business Background

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Manufacturers either make the parts needed to produce its products or buy the parts from

suppliers.

Manufacturer Product Customer

Understanding Business Operations

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The Accounting System

Collects and processesfinancial information

Reportsinformationto decision

makers

Managers(internaldecisionmakers)

Investors and

Creditors(externaldecisionmakers)

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External Decision MakersInvestors, creditors,

suppliers, customers, etc.

Internal Decision MakersManagers throughout the

organization

The Accounting System

Accounting System

Financial Accounting ReportsPeriodic financial statements and

related disclosures

Managerial Accounting ReportsDetailed plans and continuous

performance reports

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The Accounting System and Decision Makers

Cash

Equipment

Inventory

Notes Payable

An organized format used by companies to accumulate the dollar effects of

transactions.

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Information Conveyed in Financial Statements

When studying the financial statements you should focus on these questions:

1. What categories of items (often called elements) are reported on each of the four statements? (What type of information does a statement convey, and where can you find it?)

2. What time period (monthly, quarterly, annual) is covered by the financial statements?

3. How are the elements within a statement related? These relationships are usually described by an equation that tells you how the elements fit together.

4. Why is each element important to managers’, owners’ or creditors’ decisions? (How important is the information to decision makers?)

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External Financial Reporting

Financial statements are often referred to as having been prepared using GAAP (Generally Accepted Accounting Principles)

In Canada, GAAP can be either: IFRS: International Financial Reporting Standards (IASB) ASPE: Accounting Standards for Private Enterprise (AcSB)

Companies that trade their securities (debt or equity) in a public market are required to use IFRS

Those companies that do not meet the above criteria, have an option of using either IFRS or ASPE (most will chose ASPE because it is less complex)

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The Four Basic Financial Statements -IFRS

1. STATEMENT OF FINANCIAL POSITION – reports the amount of assets (resources owned), liabilities (amounts owed), and shareholders’ equity of an accounting entity at a point in time.

2. STATEMENT OF COMPREHENSIVE INCOME – reports the revenues less the expenses of the accounting period.

3. STATEMENT OF CHANGES IN EQUITY – reports the way that profit, distribution of profit (dividends), and other changes to shareholders’ equity affected the financial position of the company during the accounting period.

4. STATEMENT OF CASH FLOWS – reports inflows (receipts) and outflows (payments) of cash during the accounting period in the categories of operating, investing, and financing.

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The Four Basic Financial Statements-ASPE

1. BALANCE SHEET– reports the amount of assets (resources owned), liabilities (amounts owed), and shareholders’ equity of an accounting entity at a point in time.

2. STATEMENT OF INCOME – reports the revenues less the expenses of the accounting period AND other gains and losses.

3. STATEMENT OF RETAINED EARNINGS – reports the accumulation of profits that have not been distributed to shareholders, distribution of profit (dividends) of the company during the accounting period.

4. STATEMENT OF CASH FLOWS – reports inflows (receipts) and outflows (payments) of cash during the accounting period in the categories of operating, investing, and financing.

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The Statement of Financial Position

AssetsCashShort-Term InvestmentTrade ReceivablesNotes ReceivableInventory (to be sold)SuppliesPrepaid ExpensesLong-Term InvestmentsLandEquipmentBuildingsIntangibles

AssetsCashShort-Term InvestmentTrade ReceivablesNotes ReceivableInventory (to be sold)SuppliesPrepaid ExpensesLong-Term InvestmentsLandEquipmentBuildingsIntangibles

LiabilitiesTrade PayablesAccrued LiabilitiesNotes PayableTaxes PayableDeferred Revenue Bonds Payable

LiabilitiesTrade PayablesAccrued LiabilitiesNotes PayableTaxes PayableDeferred Revenue Bonds Payable

Shareholders’ EquityContributed CapitalRetained Earnings

Shareholders’ EquityContributed CapitalRetained Earnings

Typical Account Titles

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ElementsAssets

Economic resources controlled by the entity as a result of past business events from which future economic benefits may be obtained.

LiabilitiesDebts or legal obligations of the entity that result from past business events.

Shareholders’ EquityAmount of financing provided by owners of the corporation and from earnings over time.


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The Statement of Financial PositionThe Accounting Equation

A = L + SE(Assets) (Liabilities) (Shareholders’

Equity)

Economic Resources

Sources of Financing for Economic Resources

Liabilities: From CreditorsShareholders’ Equity: From Shareholders

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ASSETSCash 3,727 Trade receivables 14,047 Inventories 29,149 Prepayments 502 Property, plant, and equipment 42,041 Goodwill 1,061 Other assets 446 Total assets $ 90,973

LIABILITIESTrade payables 25,672 Short-term borrowings 3,646 Provisions 1,687 Long-term borrowings 8,781 Other liabilities 4,151 Total liabilities 43,937 SHAREHOLDERS' EQUITYContributed capital 18,421 Retained earnings 28,681 Other components (66) Total shareholders' equity 47,036 Total liabilities and shareholders' equity $ 90,973

SUN-RYPE PRODUCTS LTD.Statement of Financial Position

(in thousands of Canadian dollars)At December 31, 2012


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The Statement of Comprehensive Income

RevenuesSales RevenueFee RevenueInterest RevenueRent Revenue

RevenuesSales RevenueFee RevenueInterest RevenueRent Revenue

ExpensesCost of SalesWages ExpenseRent ExpenseInterest ExpenseDepreciation ExpenseAdvertising ExpenseInsurance ExpenseRepair ExpenseIncome Tax Expense

ExpensesCost of SalesWages ExpenseRent ExpenseInterest ExpenseDepreciation ExpenseAdvertising ExpenseInsurance ExpenseRepair ExpenseIncome Tax Expense

Typical Account Titles

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Statement of Comprehensive Income

Revenues Net sales $ 152,795Expenses Cost of sales 125,474 Sales and marketing 11,699 Distribution 6,813 General and administrative 5,987 Finance costs 708 Total expenses 150,681 Earnings before income taxes 2,114 Income tax expense 847 Net earnings for the year $ 1,267Other comprehensive income (loss) Foreign currency translation differences (13) Total comprehensive income (loss) for the year $ 1,254

Earnings per share $ 2.92

SUN-RYPE PRODUCTS LTD.Statement of Comprehensive Income

(in thousands of Canadian dollars, except for EPS)For the Year Ended December 31, 2012

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June 2015

Cash from salecollected on June 10.X

May 2015

$1,000 sale madeon May 25.

X

RevenuesEarnings from the sale of goods or services.


Revenue is recognized in the period in whichgoods and services are sold, not necessarily

the period in which cash is received.

When will the revenue from this transaction be recognized?

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May 2015

$1,000 revenuerecognized in May

June 2015


When will the revenue from this transaction be recognized?

Earnings from the sale of goods or services.

Revenue is recognized in the period in whichgoods and services are sold, not necessarily

the period in which cash is received.

Revenues

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May 2015 June 2015

Paid $75 cash on May 11 for newspaper ad.

X

Ad appearson June 8.

X

ExpensesThe dollar amount of resources used up by the entity

to earn revenues during a period.


An expense is recognized in the period in whichgoods and services are used, not necessarily

the period in which cash is paid.

When will the expense for this transaction be recognized?

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May 2015 June 2015

Advertising expenserecognized in June.


The dollar amount of resources used up by the entity to earn revenues during a period.

An expense is recognized in the period in whichgoods and services are used, not necessarily

the period in which cash is paid.

When will the expense for this transaction be recognized?

Expenses

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Statement of Changes in Equity

Equity, beginning of the periodPlus: Net earnings for the yearPlus: Other comprehensive incomeLess: DividendsPlus/Less: Other changes, netEquity, end of the period

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Statement of Changes in Equity

Contributed Retained OtherCapital Earnings Components

Balance as at Jan. 1, 2012 $ 18,518 $ 27,914 ($ 53) Net earnings for the year 1,267 Other comprehensive income (loss) (13) Repurchase and cancellation of shares (97) Distribution of dividends (500) Balance as at Dec. 1, 2012 $ 18,421 $ 28,681 ($ 66)

SUN-RYPE PRODUCTS LTD.Statement of Changes in Equity

(in thousands of Canadian dollars)For the Year Ended December 31, 2012

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Because revenues reported do not always equal

cash collected. . .

. . . and expensesreported do not

always equalcash paid . . .

Net earnings areusually not equal

to the changein cash forthe period.

Statement of Cash Flows

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Statement of Cash Flows

Operating activities Cash collected from customers 152,181 Cash paid to trade suppliers (111,202) Cash paid for operating expenses (23,907) Cash paid for interest (826) Cash received for taxes (income tax refund) 1,690 Net cash flow from operating activities 17,936 Investing Activities Cash paid to purchase property, plant, and equipment (1,418) Net cash flow used for investing activities (1,418) Financing Activities Cash received from borrowings 1,502 Repayment of borrowings (14,264) Repurchase of own shares (97) Cash paid for dividends (500) Net cash provided by financing activities (13,359) Net increase in cash during the year 3,159 Cash at beginning of year 571 Effect of exchange rate changes on cash (3) Cash at end of year 3,727$

SUN-RYPE PRODUCTS LTD.Statement of Cash Flows

(in thousands of Canadian dollars)For the Year Ended December 31, 2012

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Relationships Among the Statements

1. Net earnings from the income statement results in an increase in ending retained earnings on the statement of changes in equity.

Income Statement

Revenues $ 152,795 Statement of Changes in Equity Expenses 151,518 Beginning retained earnings $ 27,914 Net earnings $ 1,267 Net earnings 1,267 Dividends (500) Ending retained earnings $ 28,681

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2. Ending retained earnings from the statement of changes in equity is one of the three components of shareholders’ equity on the statement of financial position.

Statement of Changes in Equity Statement of Financial PositionRetained Earnings Cash $ 3,727

Beginning retained earnings $ 27,914 Other assets 87,246 Net earnings 1,267 Total assets $ 90,973 Dividends (500) Liabilities $ 43,937 Ending retained earnings $ 28,681 Contributed capital 18,421 Retained earnings 28,681 Other equity components (66)

Total liabilities and equity $ 90,973

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3. The change in cash on the statement of cash flows is added to the beginning-of-year balance in cash to arrive at end-of-year cash on the statement of financial position.

Statement of Cash Flows Statement of Financial Position Cash flows from operating activities $ 17,933 Cash $ 3,727 Cash flows from investing activities (1,418) Other assets 87,246 Cash flows from financing activities (13,359) Total assets $ 90,973 Change in cash $ 3,156 Liabilities $ 43,937 Beginning cash balance 571 Contributed capital 18,421 Ending cash balance $ 3,727 Retained earnings 28,681 Other equity components (66)

Total liabilities and equity $ 90,973

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Notes

All financial statements should be accompanied by notes which provide the reader with supplemental

information about the financial condition and results of operations of the company.

Three types . . .Describe accounting rules applied.Present additional detail about an item on the

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Marketing managers and credit managers use customers’ financial statements to decide

whether to extend credit.

Purchasing managers use suppliers’ financial statements to decide whether suppliers have the

resources to meet the demand for products.

Employees’ union and human resource managers use the company’s financial

statements as a basis for contract negotiations over pay rates.

Management Uses of Financial Statements

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Decision makers need to understandaccounting measurement rules.

Decision makers need to understandaccounting measurement rules.

Responsibilities for the Accounting Communication Process

Effective communication means that the recipient understands what the

sender intends to convey.

Effective communication means that the recipient understands what the

sender intends to convey.

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Responsibilities for the Accounting Communication Process

International Financial Reporting Standards

(IFRS)

The Rules

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How are IFRS and Generally Accepted Accounting Principles Determined?

Our accounting system has a long and distinguished history. An

Italian monk named Luca Pacioli, published the first elements of

double-entry bookkeeping in 1494.

Prior to 1933, the management teams of most companies were largely free to choose their own

financial reporting practices.

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The Securities and Exchange Commission (SEC)has been given broad powers to determine

measurement rules for financial statements in the U.S.The Ontario Securities Commission (OSC)has been given broad powers to determine

measurement rules for financial statements in Canada.

The Securities and Exchange Commission (SEC)has been given broad powers to determine

measurement rules for financial statements in the U.S.The Ontario Securities Commission (OSC)has been given broad powers to determine

measurement rules for financial statements in Canada.

Securities Act of 1933Securities and Exchange Act of 1934

Securities Act of 1933Securities and Exchange Act of 1934

Generally Accepted Accounting Principles

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Currently, the Accounting Standards Board (AcSB)is recognized as the body to formulate GAAP in Canada.

Currently, the Accounting Standards Board (AcSB)is recognized as the body to formulate GAAP in Canada.

The OSC has worked closely with theaccounting profession to

work out the detailed rules that havebecome known as GAAP.

The OSC has worked closely with theaccounting profession to

work out the detailed rules that havebecome known as GAAP.


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Companies incur the cost of preparing the financial statements and bear the

following economic consequences . . .

Effects on the selling price of shares. Effects on the amount of bonuses

received by managers and other employees. Loss of competitive information to other

companies.


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International PerspectiveInternational Financial Reporting Standards

Since 2002, there has been substantial movement toward the adoption of International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).

Examples of jurisdictions currently requiring the use of IFRS include:• All countries in the European Union• Australia and New Zealand• Hong Kong, China, India, Malaysia, and South Korea• Israel and Turkey• Argentina, Brazil and Chile• Canada and MexicoIn the United States, the Securities and Exchange Commission (SEC) now allows foreign companies whose shares are traded in the U.S. to use IFRS and is considering allowing the same for domestic companies in the future.

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To ensure the accuracy of the company’sfinancial information, management: Maintains a system of controls. Hires outside independent auditors. Forms a committee of the board of directors to

review these two safeguards.

Management Responsibility and the Demandfor Auditing

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Auditors express an opinion as to the fairness of the financial statements.

Independent auditors have responsibilities that extend to the general public.

The CPAB issues detailed auditing standards that auditors must follow.

Independent Auditors

Overall, I believethese financialstatements are

fairly stated.

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Independent Auditors

An audit involves . . . Examining the financial reports to

ensure compliance with GAAP. Examining the underlying transactions

incorporated into the financial statements.

Expressing an opinion as to the fairness of presentation of financial information.

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Chartered Professional Accountant = CPA(newly amalgamated organization of many provincial CA,

CMA, and CGA organizations effective January 1, 2013)Chartered Accountant = CA

Certified Management Accountant = CMA Certified General Accountant = CGA

Certified Public Accountant = CPA*(* in USA)

Accounting Designations

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Ethics, Reputation, and Legal Liability

The Chartered Professional Accountants of Canada (CPA) and the Canadian Institute of Chartered Accountants (CA) require that all members adhere to a professional code of

ethics. The other accounting professions have similar requirements.

Code of

Ethics

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A CPA’s reputation for honesty and competence is his/her most important asset.

Like physicians, CPAs, CAs, CMAs, and CGAs

have liability for malpractice.

Ethics, Reputation, and Legal Liability

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Appendix 1A: Types of Business Entities

Sole Proprietorship: owned by a single individual.

Partnership: owned by two or more individuals.

Corporation: ownership represented by shares of stock.

Sole Proprietorship: owned by a single individual.

Partnership: owned by two or more individuals.

Corporation: ownership represented by shares of stock.

Advantages of a Corporation

Limited liability

Continuity of life

Ease of transfer of ownership

Opportunity to raise large amounts of money

Disadvantage of a Corporation

Double taxation

Advantages of a Corporation

Limited liability

Continuity of life

Ease of transfer of ownership

Opportunity to raise large amounts of money

Disadvantage of a Corporation

Double taxation

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Appendix 1B: Employment in the Accounting Profession Today

Professional Designations

CPA

CA

CMA

Career Opportunities Public Accounting Audit and Assurance Services Management Consulting Services Tax ServicesEmployment by Organizations Internal accounting External reporting Tax planning Various other functionsEmployment in the Public and Not-for-Profit Sector

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End of Chapter 1

copyright © 2014 mcgraw-hill ryerson limited 1-1 powerpoint author: robert g. ducharme, macc, cpa,...

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