1 1 Copyright © 2013 McGraw-Hill Ryerson Limited After studying the material in this chapter, you will be able to do the following: LO1 Understand the

11Copyright © 2013 McGraw-Hill Ryerson Limited

After studying the material in this chapter, you will be able to do the following:

LO1 Understand the objectives of general purpose financial reporting and the qualitative characteristics of useful financial information as described in the IFRS conceptual framework

LO2 Recognize the basic accounting assumptions that are fundamental to contemporary accounting

LO3 Identify components that make up a set of general purpose financial statements, understand the information each

statement provides, and prepare simple examples of them

Learning Objectives

Copyright © 2013 McGraw-Hill Ryerson Limited

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• Public companies• Private companies• Government entities – federal, provincial,

municipal• Not-for-profit organizations

Who Prepares Financial Statements?

LO3


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• Shareholders• Creditors• Canada Revenue Agency• Competitors

• Other possible users:▫Potential investors▫Franchise owners▫Employees▫Regulators

Users of Financial Statements

LO3


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Financial statements include:

•Balance Sheet or Statement of Financial Position•Income Statement and Statement of Comprehensive Income•Statement of Changes in Equity or Statement of Retained Earnings•Statement of Cash Flows•Notes to the Financial Statements

Financial StatementsLO3


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General Purpose Financial Statements (GPFS)

•Intended for all users•Prepared in accordance with GAAP:

▫ Canadian GAAP, IFRS, Public Sector GAAP, etc.•Prepared at least once per year•Must be interpreted by user

•GPFS are intended for no one in particular and for everyone in general

General Purpose Financial Statements

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Materiality is the significance of financial information to stakeholders.

▫ Information is material if its omission or misstatement affects the judgment of the users of the financial statements

▫ Financial statements should be free of material misstatements or errors, and all material information should be reported in the financial statements or notes because its absence may affect decision making

▫ What information should be considered material?

MaterialityLO3


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Balance Sheet - Summary of an entity’s financial position at a point in time

•Also known as “Statement of Financial Position”

•Elements:▫Assets (A)▫Liabilities (L)▫Owners’ Equity (OE)

The Balance SheetLO3


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Preliminary definition of the elements:

▫Assets (A) are economic resources that provide future benefits to an entity

▫Liabilities (L) are an entity’s obligations

▫Owners’ equity (OE) is the investment the owners have made in the entity



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Information about an entity’s financial position can help stakeholders:

▫evaluate its financial health▫assess its risk▫predict its future cash flows



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The Income StatementLO3

Income Statement - measures an entity’s economic activity over a period of time, such as a year

•A “How did we do?” statement •Shows results for an accounting period (usually 1 yr)

▫Unlike balance sheet (entity’s life)


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• Revenues - Expenses = Net Income (aka “Bottom line”).

• Uses for an income statement are:▫ Evaluating the performance of an entity and its

management▫ Predicting future earnings and cash flows▫ Estimating the value of an entity▫ Determining the amount of tax that must be paid



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Economic Consequences •The income statement can have significant economic consequences for entities and their stakeholders including:

▫ Stock prices often change when a company announces its net income

▫ Managers’ bonuses are often based on net income

▫ Net income is used to determine income taxes▫ The selling price of a business can be based on

net income



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ABC Company Ltd.Income Statement

For Year End Dec. 31, 20xx

Revenue xxx- Cost of Goods Sold (xxx)= Gross Margin xxx- Operating Expenses (xxx)= NI Before Income Taxes xxx- Income Taxes (xxx)= Net Income xxx

Income Statement - FormatLO3


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Statement of Comprehensive Income

•In the past, certain types of economic events were excluded from the calculation of net income

• •Many of these items went directly to

owners’ equity or were not recorded

•Comprehensive income is an extension of

• net incomeCopyright © 2013 McGraw-Hill Ryerson Limited

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LO3



•Current GAAP attempts to capture all transactions and economic events that involve non-owners and that affect equity

•This measure is called comprehensive income and is calculated as follows:

▫Comprehensive Income = ▫Net income + Other Comprehensive

Income (OCI)


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LO3


Other Comprehensive Income – includes transactions and economic events that involve non-owners and affect equity but are excluded from the calculation of net income

Examples include:•Foreign Currency Gains/Losses•Unrealized Gains/Losses from Available for Sale Investments •Pension Plan Gains/Losses


LO3


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Comprehensive Income and the Balance Sheet

•Comprehensive income also affects the equity section of the balance sheet

•Other comprehensive income is treated the same way that retained earnings is handled

•In the equity section of the balance sheet, there is an account called Accumulated Other Comprehensive Income (AOCI)

(Note: ASPE does not include OCI or AOCI)


LO3


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• Companies that follow IFRS must provide a statement of changes in equity

• This presents the changes in each account in the equity section of the balance sheet during a period

Statement of Changes in Equity

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• Accounting for Private Enterprises (ASPE) only requires a statement of retained earnings, not a statement of changes in equity

• Summarizes changes during the period:Opening retained earnings (+) Plus net income for period (-) Less dividends declared (=) Equals ending retained earnings

Statement of Retained Earnings

LO3


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Statement of Cash Flows

•Statement of Cash Flows – shows how an entity obtained and used cash during a period

▫Cash is crucial to survival and success of any entity

▫Entities need cash to meet obligations as they come due

▫Cash and Net Income aren’t the same thing because of accrual accounting


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LO3


Statement of Cash Flows includes three types of cash flows:

1) Cash from/used in operations▫ Stated on an accrual basis

2) Cash from/used in financing activities▫ From long-term liabilities and directly from

investors

3) Cash from/used in investing activities▫ Used to buy capital assets

Statement of Cash FlowsLO3


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• The individual financial statements are closely related

• Many transactions and economic events involve both the Income Statement and the Balance Sheet, and any transaction that involves cash is included in the Statement of Cash Flows

Relationship Among Financial Statements

LO3


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Relationship Among Financial Statements

• The “flow statements” capture the changes between two balance sheets:

▫The statement of cash flows shows how the balance in the cash account on the balance sheet changed from one year to the next

▫2) The statements of income and shareholders’

▫ equity provide information on changes in the

▫ equity section of the balance sheet from one ▫ year to the next


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Notes to Financial Statements

•Notes to the financial statements:▫Expand and explain the information in

the statements▫Explain the accounting policies▫Provide additional information that may

help stakeholders assess an entity


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• Format of general purpose financial statements:▫ No single way to format financial statements▫ Different formats are allowable under IFRS

Format of Financial Statements

LO3

An example of the balance sheet format suggested by IFRS is seen in Exhibit 2.3

•Non-current assets are at the top and current assets at the bottom of the asset side and for liabilities

•Note: presentation is different when compared to Leon’s balance sheet found in Chapter 2


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• Most financial statements follow accounting equation:

Assets = Liabilities + Owners’ equity

• However, accountants can prepare any type of report to satisfy the needs of stakeholders

Special Purpose Reports Accounting reports that are prepared to meet the

needs of specific stakeholders• Normally aren’t publically available• Don’t have to be prepared in accordance with any

set of standards

Format of Financial Statements

LO3


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Documents

1 1 Copyright © 2013 McGraw-Hill Ryerson Limited After studying the material in this chapter, you will be able to do the following: LO1 Understand the