Financial Accounting: Tools for
Business Decision-Making
Kimmel Weygandt Kieso Trenholm Irvine Burnley
Eighth Canadian Edition
Chapter 1
The Purpose and Use of Financial
Statements
Copyright ©2020 John Wiley & Sons, Inc.
Learning Objectives
LO 1: Identify the uses and users of accounting.
LO 2: Describe the primary forms of business
organization.
LO 3: Explain the three main types of business activity.
LO 4: Describe the purpose and content of each of the
financial statements.
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Uses and Users of Accounting
• Accounting identifies and records the economic events
of an organization and communicates to interested
users
• There are two broad categories of users
o
o
Internal users
External users
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Users of Financial Information
• Internal users
o
o
Manage companies, non-profit, & government
organizations
Company officers, managers and directors in finance,
marketing, human resources, production
• External users
o
Do not work for the company. This includes:
•
•
•
Investors, lenders, and other creditors
Customers, employees, labour unions
Taxing authorities and regulators
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Discussion Question 1
Identify the internal and external users of financial
information for a local hospital.
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Ethical Behaviour
• For accounting information to have value, preparers
must have high ethical standards
o
o
Actions are legal and responsible and
Consider organization’s interests
• Accountants, other professionals, and most companies
have rules or codes of conduct to guide ethical
behavior
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Discussion Question 2
What are some ethical issues that might exist for financial
information in a local hospital?
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Forms of Business Organizations:
1. Proprietorship
•
•
•
•
•
•
Owned by one person (proprietor)
Simple to set up
Owner has control over business
Limited life
Unlimited liability
Income tax paid by owner
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Forms of Business Organizations:
2. Partnership
• Similar to proprietorship except owned by more than
one person
• Formalized in a written agreement
• Limited life
• Each partner has unlimited liability
• Income tax paid by individual partners
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Forms of Business Organizations:
3. Corporations
•
•
•
•
•
•
Separate legal entity owned by shareholders (owners of
shares)
Indefinite life
Ease of raising capital
Shareholders enjoy limited liability
Corporation pays income tax
May be public or private:
o
o
Public if shares are publicly traded
Private if shares are not available to the general public
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Generally Accepted Accounting Principles
(GAAP)
•
•
Rules and practices for the preparation of financial
statements
Different for publicly-traded and private corporations
o
o
•
Publicly-traded corporations use International Financial
Reporting Standards (IFRS)
Private corporations may use IFRS or Accounting Standards
for Private Enterprises (ASPE)
Proprietorships and partnerships generally follow ASPE for
external reporting
o
Not required to follow any particular standards for internal
use
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Three Types of Business Activities
•
•
•
•
All companies are involved in all three activities:
Financing
Investing
Operating
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Financing Activities
• Obtaining (and repaying) funds to finance the
operations of the business
• Examples:
o
o
Selling or repurchasing shares (equity financing)
Borrowing money or repaying loans (debt financing)
• Forms of debt
o
Bank indebtedness, bank loans, long-term debt such as
mortgages, bonds, finance leases
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Investing Activities
• Purchase or sale of long-lived assets needed to operate
the company
• Examples
o
o
Purchase or sale of long-lived assets such as property,
plant and equipment and intangible assets
Purchase or sale of investments, such as shares or debt
securities of other companies
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Operating Activities
• Operating activities are the main day-to-day activities
of the business
• Examples
o
o
o
Sources of income (revenue and income)
Expenses
Related accounts such as accounts receivable and
accounts payable
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Discussion Question 3
What are the potential operating, investing, and financing
activities for a retail company? Would your answer differ
for a service company?
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Financial Statements (1 of 2)
• Statement of income
o
Reports revenues and expenses for a specific period of
time
• Statement of changes in equity
o
Reports the changes in each component of shareholders’
equity during a period of time
• Statement of financial position
o
Shows the assets, liabilities and shareholders’ equity at
a specific point in time
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Financial Statements (2 of 2)
• Statement of cash flows
o
Shows, for a specific period of time, how company
obtained cash and how that cash was used
• Order of preparation of statements
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Statement of Income
• Revenues
o
o
Arise from the sale of products or services
Result in an inflow of assets
• Expenses
o
Costs of assets consumed or services used to generate
revenues
• Net Income (loss) = Revenues − Expenses
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Statement of Income - Example
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Statement of Changes in Equity (1 of 2)
• Shows the changes in each component of shareholders’
equity for the period
• Share capital
o
o
Amounts contributed by shareholders
May include common and preferred share classes
• Retained earnings /deficit
o
Cumulative net income retained in the corporation
LESS any dividends paid to shareholders
• Other shareholders’ accounts
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Statement of Changes in Equity (2 of 2)
Changes in common shares
Changes in retained earnings
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Statement of Changes in Equity - Example
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Statement of Financial Position
• Assets
o
Resources owned or controlled by a business
• Liabilities
o
Claims of lenders and other creditors
• Shareholders’ equity
o
Claims of shareholders
• Accounting equation
o
Assets = Liabilities + Shareholders’ Equity
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Statement of Financial Position Example (1 of 2)
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Statement of Financial Position Example (2 of 2)
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Statement of Cash Flows
• Reports the effect on cash related to the company’s
o
o
o
Operating activities
Investing activities
Financing activities
• Shows net increase or decrease in cash for the period
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Statement of Cash Flows - Example
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Relationships Between Statements
•
The statements are interrelated
o
•
Results from some statements are used as data in other
statements
Examples
o
o
o
Net income from statement of income is reported in
statement of changes in equity
Ending balances of each shareholders’ equity account is
reported in both statements of financial position and changes
in equity
Statement of cash flows is related to statement of financial
position
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Annual Report
• Public corporations must produce an annual report
each year, which contains:
o
o
o
o
Financial statements
Management discussion and analysis
Auditor’s report
Notes to financial statements
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Review IFRS and ASPE
Key Standard
Differences
International Financial
Reporting Standards (IFRS)
Accounting Standards for Private
Enterprises (ASPE)
Accounting Standards
Publicly traded corporations
must use IFRS; private
corporations normally use ASPE,
but can choose to use IFRS
Private corporations normally use ASP
E, but can choose to use IFRS. Once
the choice is made, it must be applied
consistently. Proprietorships and
partnerships generally follow ASPE.
Statement of changes in
equity vs. statement of
retained earnings
A statement of changes in equity
must be presented that shows the
changes in all components of
shareholder’s equity (for
example, share capital and
retained earnings).
A statement of retained earnings is
presented that shows the change in
only one component-retained earningsof shareholder’s equity.
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Copyright
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