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FINANCIALFINANCIAL ACCOUNTINGACCOUNTING
A U s e r P e r s p e c t i v eA U s e r P e r s p e c t i v e
Third Canadian EditionThird Canadian Edition
22
Overview of Corporate Overview of Corporate Financial ReportingFinancial Reporting
11
C h a p t e r
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Accounting:Accounting: an information system an information system in which the underlying economic in which the underlying economic conditions of organizations and conditions of organizations and individuals are recorded, individuals are recorded, summarized, reported, and summarized, reported, and understoodunderstood
Overview of Corporate Overview of Corporate Financial ReportingFinancial Reporting
44
Financial statements:Financial statements: reports summarizing a reports summarizing a company’s performance company’s performance during a particular periodduring a particular period
Corporate Financial Corporate Financial ReportingReporting
Annual report:Annual report: reports reports the results of the the results of the company’s activities company’s activities during the yearduring the year
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Profit-seeking entitiesProfit-seeking entities Governing organizationsGoverning organizations Service entitiesService entities Not-for-profit entitiesNot-for-profit entities
Forms of OrganizationForms of Organization
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Sole proprietorshipsSole proprietorships PartnershipsPartnerships Limited partnershipsLimited partnerships Joint venturesJoint ventures Crown corporationsCrown corporations CorporationsCorporations
Forms of Organization Forms of Organization Conducting BusinessConducting Business
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Corporate Financial Corporate Financial ReportingReporting
Shareholders’ equity:Shareholders’ equity: initial initial investment in the business entity investment in the business entity in the form of cash or propertyin the form of cash or property
Share:Share: document that represents document that represents ownership in the corporationownership in the corporation
Shareholders:Shareholders: owners owners
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Internal users:Internal users:– Management Management
– Board of Board of DirectorsDirectors
Users of Financial Users of Financial Statement InformationStatement Information
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Users of Financial Users of Financial Statement InformationStatement Information External users:External users:
– ShareholdersShareholders– Potential Potential
investorsinvestors– CreditorsCreditors– RegulatorsRegulators– Taxing Taxing
authoritiesauthorities
– Other corporationsOther corporations– Security analystsSecurity analysts– Credit-rating Credit-rating
agenciesagencies– Labour unionsLabour unions
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Development of Development of Accounting StandardsAccounting Standards GAAPGAAP
– Generally Accepted Accounting Generally Accepted Accounting PrinciplesPrinciples
– Set by Canadian Institute of Set by Canadian Institute of Chartered AccountantsChartered Accountants
– Published in the Published in the CICA HandbookCICA Handbook
1111
UnderstandabilityUnderstandability RelevanceRelevance ReliabilityReliability ComparabilityComparability
Characteristics of Characteristics of Accounting Accounting InformationInformation
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Financing ActivitiesFinancing Activities Investing ActivitiesInvesting Activities Operating ActivitiesOperating Activities
Business ActivitiesBusiness Activities
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Borrowing moneyBorrowing money Repaying loansRepaying loans Issuing sharesIssuing shares Repurchasing sharesRepurchasing shares Paying dividends on Paying dividends on
sharesshares
Financing ActivitiesFinancing Activities
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Purchase or sale of Purchase or sale of property, plant, and property, plant, and equipmentequipment
Investments or sale of Investments or sale of investments in the shares investments in the shares of other companiesof other companies
Investing ActivitiesInvesting Activities
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Sales to Sales to customerscustomers
Collection of Collection of amounts owed amounts owed by customersby customers
Purchase of Purchase of inventoryinventory
Payment of Payment of amounts owed to amounts owed to supplierssuppliers
Payment of Payment of expensesexpenses
Payment of taxesPayment of taxes
Operating ActivitiesOperating Activities
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Corporate profileCorporate profile Report to the shareholdersReport to the shareholders Management’s discussionManagement’s discussion Board of directors and Board of directors and
managementmanagement Financial sectionFinancial section
Annual ReportAnnual Report
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Financial Section Financial Section ComponentsComponents
Statement of Management Statement of Management ResponsibilityResponsibility
Auditor’s reportAuditor’s report Financial statementsFinancial statements Statement on Corporate Statement on Corporate
GovernanceGovernance
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Income StatementIncome Statement Balance SheetBalance Sheet Statement of Retained EarningsStatement of Retained Earnings Statement of Cash FlowsStatement of Cash Flows Notes to the financial statementsNotes to the financial statements
Financial StatementsFinancial Statements
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Also known as the Also known as the Statement of Statement of EarningsEarnings
Describes the results of the Describes the results of the operating activities of the current operating activities of the current periodperiod
Income StatementIncome Statement
2020
Common itemsCommon items– Sales revenuesSales revenues– Other incomeOther income– Cost of goods soldCost of goods sold– Selling, general, and administrative Selling, general, and administrative
expensesexpenses– Amortization, interest, and income Amortization, interest, and income
tax expensestax expenses
Income StatementIncome Statement
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Also known as the Also known as the Statement of Statement of Financial PositionFinancial Position
Financial status of the company Financial status of the company at a particular point in timeat a particular point in time
Lists what is owned (assets) and Lists what is owned (assets) and what is owed (liabilities), what is owed (liabilities), measuring net worth measuring net worth (shareholders’ equity)(shareholders’ equity)
Balance SheetBalance Sheet
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Basic Accounting Basic Accounting EquationEquation
Assets = Liabilities + Assets = Liabilities +
Shareholders’ Shareholders’ EquityEquity
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CharacteristicsCharacteristics– Something that has probable future Something that has probable future
value that can be measuredvalue that can be measured– The company owns or has the right The company owns or has the right
to use the probable future valueto use the probable future value– The event that gave the company The event that gave the company
the ownership or right has already the ownership or right has already occurredoccurred
AssetsAssets
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ExamplesExamples– CashCash– Short-term (temporary) investmentsShort-term (temporary) investments– Accounts receivableAccounts receivable– InventoryInventory– Prepaid expensesPrepaid expenses– Capital assetsCapital assets
AssetsAssets
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Assets and liabilities are listed on Assets and liabilities are listed on the balance sheet in liquidity the balance sheet in liquidity orderorder
LiquidityLiquidity:: how quickly the how quickly the company can turn the asset into company can turn the asset into cashcash
LiquidityLiquidity
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Amounts that the company owes Amounts that the company owes to othersto others
Probable future sacrifice of Probable future sacrifice of resources: cash, services, or resources: cash, services, or goodsgoods
LiabilitiesLiabilities
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ExamplesExamples– Bank Bank
indebtednessindebtedness– Accounts Accounts
payablepayable– Notes payableNotes payable– Dividends Dividends
payablepayable
– Accrued Accrued liabilitiesliabilities
– Taxes payableTaxes payable– Long-term debtLong-term debt
LiabilitiesLiabilities
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Value of the shareholders’ Value of the shareholders’ interest in the company as interest in the company as measured by the accounting measured by the accounting guidelinesguidelines
ExamplesExamples– Share capitalShare capital– Retained earningsRetained earnings
Shareholders’ EquityShareholders’ Equity
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Represents the shares that have Represents the shares that have been issued by the companybeen issued by the company
Usually stated at an amount Usually stated at an amount equal to what was originally paid equal to what was originally paid by investors for the sharesby investors for the shares
Share CapitalShare Capital
3030
The earnings of the company (as The earnings of the company (as measured on the Income measured on the Income Statement) that have been kept Statement) that have been kept (retained) and not paid out in the (retained) and not paid out in the form of dividendsform of dividends
Change in Retained Earnings Change in Retained Earnings = Net Income - Dividends = Net Income - Dividends
Retained EarningsRetained Earnings
3131
Measures inflows and outflows of Measures inflows and outflows of cash during a specific period of cash during a specific period of timetime
SectionsSections– Cash from operating activitiesCash from operating activities– Cash from financing activities Cash from financing activities – Cash from investing activitiesCash from investing activities
Statement of Cash Statement of Cash FlowsFlows
3232
Notes to the Notes to the Financial StatementsFinancial Statements
More detail about specific More detail about specific referenced itemsreferenced items
Includes the Summary of Includes the Summary of Accounting PoliciesAccounting Policies
Includes information about Includes information about various segments of the companyvarious segments of the company
3333
Statement ofStatement of Management Management ResponsibilityResponsibility Contains a statement by Contains a statement by
management that it is responsible management that it is responsible for the contents of the annual for the contents of the annual reportreport
Discusses steps taken to ensure Discusses steps taken to ensure safekeeping of assets and the safekeeping of assets and the practise of ethical and responsible practise of ethical and responsible managementmanagement