MFS
Model Financial Statements
2011 Printing
Authored by George Fisher
17th Edition
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About CGA-Canada _________________________________________
CGA-Canada today
CGA is the fastest-growing accounting designation in Canada. The CGA designation focuses
on integrity, ethics and the highest education requirements. Recognized as the country’s
accounting business leaders, CGAs provide strategic counsel, financial leadership, and
overall direction to all sectors of the Canadian economy.
The Certified General Accountants Association of Canada — CGA-Canada — sets
standards, develops education programs, publishes professional materials, advocates on
public policy issues, and represents CGAs nationally and internationally. The Association
represents 75,000 CGAs and students in Canada, Bermuda, the Caribbean, Hong Kong and
China.
Mission
CGA-Canada advances the interests of its members and the public through national and
international representation and the establishment of professional standards, practices, and
services.
A proud history
CGA-Canada was founded in Montréal in 1908 under the leadership of John Leslie, vicepresident of the Canadian Pacific Railway. From the beginning, its objective was to
encourage improvement in skills and job performance — a goal the Association holds to this
day.
On April 14, 1913, Canada’s Parliament passed the Act that incorporated CGA-Canada as a
self-regulating professional Association. Over the decades that followed, branches became
associations in their own right, affiliated with the national body.
A revised Act of Incorporation, passed in 1999, updated CGA-Canada’s powers and
reflected the Association’s objectives and initiatives for the next millennium. The Act also
established a French name for CGA-Canada — Association des comptables généraux
accrédités du Canada.
Structure and roles
CGA-Canada is governed by a Board of Directors that includes regional representation as
well as a public representative. An Affiliation Council, comprised of representatives of each
CGA affiliate, sets the strategic plan of CGA-Canada and approves national policy.
Individual CGAs are represented nationally through CGA-Canada, and regionally through
their provincial/territorial/regional associations and local chapters.
The Association:
 ensures national recognition for the profession and advocates on policy issues of concern
to the profession
 raises the profile of the CGA designation and represents members internationally
iii
 sets national educational standards, and develops and maintains an internationally
competitive program of professional studies and examinations to certify CGAs in Canada
and overseas
 provides a range of services to affiliates and members
 contributes to the profession’s body of knowledge through research and participation in
international accounting organizations, particularly the International Federation of
Accountants (IFAC).
Nationally and internationally, CGA-Canada contributes to accounting standard-setting by
sharing its research findings and views. The Association also contributes to public policy
discussions, advocating for the interests of its members and the public.
As a self-regulating organization, CGA-Canada also sets high standards of professionalism
through its own Code of Ethical Principles and Rules of Conduct for members. This
comprehensive set of rules and guidelines protects the public interest and ensures that CGAs
maintain the highest ethical standards.
Education and professional development
CGA-Canada's competency-based education program has long been acknowledged as a
leader among distance learning education programs. Innovative technology is used not only
in the delivery of the program, but is incorporated into the curriculum content as well.
Similarly, ethical principles are also integrated throughout the curriculum. Education
partnerships with Laurentian University offer students options for meeting the mandatory
degree requirement.
Mandatory continuing professional education ensures that CGAs maintain their professional
competence. CGA-Canada provides professional development opportunities in public
practice, ethics, accounting and auditing standards, business valuation, taxation, and other
topics. The Professional Development Network — PD Network — developed
collaboratively with CGA affiliates, is an extensive and powerful online information
resource for members.
For more information
More information about CGA-Canada is available on its Web site at www.cga.org/canada.
iv
Contents: Model Financial Statements
About CGA-Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Introduction to Model Financial Statements . . . . . . . . . . . . . . . . . . . . . .
vii
CGA-Canada Financial Statements Guideline — Format and presentation . . . . . . . . . . . . . . . . . .
1
Guideline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Appendix A: Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Appendix B: Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Appendix C: Statement of Retained Earnings . . . . . . . . . . . . . . . . . . . . . . .
Appendix D: Cash Flow Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Appendix E: Sample Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
7
15
19
21
25
Sample Proprietorship (Compilation, transportation business) . . . . . . . . . . . . . . . . . . . . . . . . . . .
35
Notice to Reader . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statement of Owner’s Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37
38
39
40
41
Sample Partnership (Compilation, professional services) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43
Notice to Reader . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statement of Partners’ Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45
46
47
48
49
Sample Compilation Ltd. (Compilation, small wholesale company) . . . . . . . . . . . . . . . . . . . . . . . .
51
Notice to Reader . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Statement and Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53
54
55
56
Sample Review Ltd. (Review, small wholesale company) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57
Review Engagement Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statement of Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Flow Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59
60
61
62
63
64
Sample Manufacturing Review Ltd. (Review, mid-sized manufacturing company) . . . . . . . . . . . .
69
Review Engagement Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statement of Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Flow Statement (Indirect method) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Flow Statement (Direct method) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule of Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule of Cost of Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
71
72
73
74
75
76
77
80
80
v
iii
Sample Audit Inc. (Audit, large corporation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
81
Independent Auditor’s Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Retained Earnings . . . . . . . . . . . . . . . . . . . . . .
Consolidated Cash Flow Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . .
83
84
86
87
88
89
vi
Introduction to Model Financial Statements
The Accounting Standards Board (AcSB) adopted International Financial Reporting
Standards (IFRS) for publicly reportable enterprises for fiscal years beginning on or after
January 1, 2011. This adoption precipitated the subdivision of the CICA Handbook —
Accounting into five parts:
Part I — International Financial Reporting Standards (IFRS)
Part II — Accounting Standards for Private Enterprises (ASPE)
Part III — Accounting Standards for Not-for-Profit Organizations
Part IV — Accounting Standards for Pension Plans
Part V — Pre-changeover Accounting Standards
Part V is the “old” CICA Handbook — Accounting as it existed at December 31, 2010.
This has been retained as an interim measure for two reasons: i) to help facilitate the
transition to the new standards; and ii) as continuing guidance for the not-for-profit
sector until the mandatory adoption date of Part III of the Handbook. The Applicability
section of the Preface to the CICA Handbook — Accounting establishes the types of entities
entitled to use the component parts. It reads:
APPLICABILITY
4
Publicly accountable enterprises, other than pension plans and other entities within
the scope of Part IV of the Handbook (see paragraph 7), apply the International
Financial Reporting Standards in Part I of the Handbook.
5
Private enterprises apply either the accounting standards for private enterprises in
Part II of the Handbook or the International Financial Reporting Standards in Part
I of the Handbook.
6
Not-for-profit organizations apply either the accounting standards for not-for-profit
organizations in Part III of the Handbook or the International Financial Reporting
Standards in Part I of the Handbook.
7
Pension plans, and benefit plans that have characteristics similar to pension plans
and provide benefits other than pensions, apply the accounting standards for
pension plans in Part IV of the Handbook. They do not apply IAS 26 Accounting and
Reporting by Retirement Benefit Plans, included in Part I of the Handbook.
8
When an entity can choose the standards in more than one Part of the Handbook as
its basis of accounting, the entity applies only the standards in the Part it has
selected unless that Part specifies otherwise.
In Canada, there are about 1,500 entities that are required to present their financial
statements in accordance with IFRS and about 1.5 million entities that can elect to present
their financial statements with Part II of the Handbook. As the vast majority of financial
statements prepared by CGA firms are for private entities, these Model Financial Statements
focus on the presentation of financial statements in accordance with Part II — Accounting
Standards for Private Enterprises. Model Financial Statements for not-for-profits, prepared
in accordance with Part III of the Handbook, has been included in the online “Resource
Guide” section. IFRS-based statements have not been presented; rather we have provided
vii
you with links to various sites that feature examples of model financial statements prepared
in accordance with IFRS.
The objectives of these model financial statements, accompanied by the Financial
Statements Guideline from the CGA-Canada Public Practice Manual, are to



show the preferred method of presentation of financial information
indicate the disclosure requirements for the presentation of financial information
indicate acceptable alternatives in financial statement style
The result is six sets of financial statements. All financial statements, except the consolidated
ones, provide account balances to show the relationships between the different statements.
The consolidated financial statements are intended simply as a format guide. Therefore, the
consolidated balance sheet and statements of income, retained earnings and changes in
shareholders’ equity and cash flow, as well as the notes to the financial statements, do not
provide account balances.
The consolidated financial statements are more complex than many actual company
statements; accounts are many and diverse. An attempt has been made to include the most
commonly used and most important types of accounts reported in financial statements.
However, the model statements do not contain examples of every type of account that may
be presented in financial statements.
The models have been prepared using various formats, orders of presentation, and types of
entities to provide a broad view of the possible presentation alternatives. Because of the
complexities, not all issues can be covered. These models cannot replace professional
judgment and should be used as guidelines, keeping in mind current practices and
CICA Handbook updates. Although statement style is a matter of preference, financial
disclosure is dictated by the Handbook. These model financial statements are updated to
CICA Handbook —Accounting, Part II, Release II.3 (private enterprises).
Disclosure
Financial statement disclosure refers to the content of the statements and the specific items
of information that are to be separately reported. Financial disclosure in the model financial
statements is based on the accounting recommendations in the applicable part of the
CICA Accounting Handbook —Part II—Accounting Standards for Private Enterprises.
References to the applicable sections of the Handbook are given in the appendices to the
CGA-Canada Financial Statements Guideline.
Statement style
Statement style refers to the format or arrangement of the information. While the CICA
Handbook — Accounting (section 1400) sets out the general standards for financial
statement presentation, the accountant still has considerable discretion in this area. The
model financial statements display the most prevalent style used by Canadian corporations.
Depending on the magnitude of the account balances, they can be disclosed to the nearest
dollar, the nearest thousand dollars, or even the nearest million dollars.
Note:
Although the model financial statements display the current style of underlining used by a number of Canadian
corporations, you are not required to follow this style when completing assignments or writing examinations. Simple
underlining (single or double) or boldfacing of column totals, as used in the Module Notes, is satisfactory.
viii
Notes to financial statements
Canadian financial statements make extensive use of “notes” to disclose detailed information
that otherwise could be reported in the body of the financial statements. The main statements
are thus kept to a concise format, while the notes are considered an integral part of the
financial statements. The model financial statements provide some specific notes as
examples, while indications of other typical notes are shown in Appendix E. The notes
provided are examples only; they are not the only notes that might be issued by the type of
organization illustrated. In some cases, only indications are given for notes because there is
no standard; you are encouraged to carefully match the words to the particular
circumstances. Furthermore, it can be a matter of judgment as to whether or not a note is
necessary.
Order of presentation
The order provided in most of the model financial statements is that which auditors and
accountants normally use when providing financial statements to their clients and when the
financial statements are published as part of an annual report:






Auditors’ Report
Balance Sheet
Income statement
Statement of Retained Earnings
Cash Flow Statement
Notes to Financial Statements
Although the order of presentation is largely governed by convention, in practice, a certain
amount of variation is found in the order in which the components of the financial statements
are presented.
The MFS Resource Guide on Blackboard under the Study Resources “Model Financial
Statements” link provides supplemental information.
ix
CGA-Canada
Financial Statements Guideline
Format and presentation
1.
Purpose and application
1.1
This Financial Statements Guideline provides format and presentation recommendations for
financial statements in audit, review, and compilation engagements. Audit and review
engagement financial statements are presented in accordance with generally accepted
accounting principles (GAAP), with all required disclosures. As established in the Basis of
Accounting section in the CICA Handbook — Accounting, Parts I-IV of the Handbook require
an entity to state in the notes to its financial statements which set of standards it has applied. An
entity has the option of including an additional statement that its financial statements are in
accordance with Canadian GAAP. Compilation engagement financial statements are not
required to be presented in accordance with Canadian GAAP. The standard for compiled
financial statements is that they not be false or misleading.
1.2
The preparation of financial statements is both an art and a science. Financial statements should
be presented using a format that is professional, understandable, and that provides the user with
meaningful financial information. The preparation of financial statements also requires an
understanding of complex standards and practices for measurement, presentation, and
disclosure.
1.3
As described in paragraph 1400.03, financial statements shall present fairly in accordance with
GAAP the financial position, results of operations, and cash flows of an entity that represent
faithfully the substance of transactions and other events in accordance with the elements of
financial statements, and the recognition and measurement criteria set out in the Financial
Statement Concepts section 1000.
1.4
The following main components of the financial statements will be explained and illustrated:






title page
table of contents
practitioner’s communication (Auditor’s Report, Review Engagement Report, or Notice to
Reader)
basic financial statements
notes to financial statements
supplementary or other information
1.5
These model financial statements portray the requirements of Part II (ASPE) of the CICA
Handbook — Accounting. Links to sample statements prepared in accordance with Part I
(IFRS) are provided on the Model Financial Statements page under Study Resources.
2.
Title page
2.1
The title page should contain the name of the entity, the title of the financial statement, and the
date or period covered. In the case of a review engagement, the word “Unaudited” is inserted in
parentheses below “Financial Statements” or the date, to indicate the level of service provided:
Model Financial Statements  1
SAMPLE CORPORATION
Financial Statements
(Unaudited)
Month, Day, Year
In the case of a compilation engagement, the words “Unaudited — See Notice to Reader”
should be inserted in parentheses below “Financial Statements” or the date.
2.2
The name of the entity should be disclosed exactly as it appears within the articles of
incorporation, partnership registration, or other legal document. Where appropriate, presentation
of the name of the entity may be amended to reflect the entity’s trading name, as illustrated next:
SAMPLE CORPORATION
(Operating as: Sample Distributors)
Financial Statements
Month, Day, Year
2.3
The title should communicate to the reader what is included in the presentation. The following
examples indicate the circumstances when they should be used.

Financial Statements
Used when more than one type of financial statement is presented (balance sheet, income
statement, retained earnings, and cash flow statement).

Consolidated Financial Statements
Used when the financial statements of two or more entities are merged into one set of
statements for presentation.

Balance Sheet
The exact title of the financial statement is used when only one statement is presented.

Financial Information
Used in the context of reporting on financial information other than financial statements;
examples of such financial information include:




specific financial statement items, such as sales at a particular location
grant application data
information about the effects of changing prices
amounts calculated for insurance or trust deed purposes
2.4
The date should be the last date of the current year; in the case of a period covered, its end date
should be the last date of the current period.
3.
Table of contents
3.1
Within the table of contents, the title of each statement or schedule should be disclosed as it
appears on the statement or schedule itself, i.e.:
Report identification: Auditor’s Report, Review Engagement Report, or Notice to Reader
Balance Sheet
Income statement
Statement 1
Statement 2
Statement of Retained Earnings
Cash Flow Statement
Statement 3
Statement 4
Notes to Financial Statements
Supporting schedules to which the financial statements are cross-referenced
2  Model Financial Statements
4.
Practitioner’s communication
4.1
The heading used should be “Auditor’s Report,” “Review Engagement Report,” or “Notice to
Reader” and should be presented on the CGA firm’s letterhead.
4.2
The Auditor’s Report and Review Engagement Report should be addressed to the person(s)
engaging the practitioner. The inclusion of the city and province with the addressee is optional.
The following are some examples of addressing:
Corporations
To the Board of Directors
Sample Corporation Ltd.
To the shareholders
Sample Corporation Ltd.
Anywhere, Anyplace
Closely held companies
Mr. John Small, President
Small Corporation Ltd.
Personal financial statements
Mrs. Jane Doe
Montreal, Quebec
Partnerships
To the Partners
Sample Partnership
Vancouver, British Columbia
Proprietorship
Mr. John Smith
Smith Services
Trust financial statements
Mr. John Doe
Trustee
Jane Doe Testamentary Trust
Ottawa, Ontario
Estate financial statements
Ms. Alice Stewart
Executor
Estate of John Smith
No address is required for the Notice to Reader report.
4.3
The practitioner’s communication is closed or signed off using the firm’s name rather than an
individual signature, unless it is a sole practitioner.
The following is an example of the firm’s signature and title:
[Signed]
Certified General Accountants
4.4
The date of the report is the date when work has been substantially completed. The location of
the practitioner’s office is included with the report date, at the bottom-left corner of the report as
per example.
[City, date]
Model Financial Statements  3
5.
Basic financial statements
5.1
Financial statements typically consist of:




Balance Sheet
Income statement
Statement of Retained Earnings
Cash Flow Statement
5.2
Financial statements for an audit or review engagement are presented in accordance with
Canadian GAAP and require note disclosure relating to accounting policies and significant
information.
5.3
Compilation engagement financial statements may range in format and presentation from those
that are prepared in accordance with Canadian GAAP to financial statements that do not meet
Canadian GAAP. Statements which are missing one or more of the required elements (i.e., the
lack of comparative figures or a cash flow statement, or sparse or non-existent financial
statement notes) are considered not prepared in accordance with Canadian GAAP.
5.4
Comparative figures are normally presented with current year figures, per CICA Handbook —
Accounting paragraph 1400.12:
“Financial statements shall be prepared on a comparative basis, unless the comparative
information is not meaningful or the standards set out in Part II of the Handbook permit
otherwise.”
For an audit or review engagement, note disclosure is required to provide the reason for not
reporting comparative figures in the financial statements. Furthermore, if the level of service of
the accountant for the preceding year is less than that of the current year, note disclosure is
required to inform the reader that the prior year’s comparative figures were prepared on a
review or compilation basis. Comparative figures note disclosure is included with the note
summarizing significant accounting policies. The following are examples of comparative figures
note disclosure:
5.5

Certain balances of the preceding period have been reclassified to conform to the current
year’s financial statement presentation.

Comparative financial statements showing the figures for the corresponding preceding year
were compiled without audit or review.

The comparative figures shown on the financial statements have been prepared by another
accounting firm.
Each financial statement should have a heading that consists of the name of the entity, the
statement title, and the date or period covered. Additionally, the Handbook recommends that
“Each page of the information … be conspicuously marked as being unaudited” for review
engagement reports or “Unaudited — See Notice to Reader” for compilation engagement
reports (CICA Handbook — Assurance paragraphs 8100.27 and 9200.14f).
Examples of the two types of headings follow:
Review engagement:
SAMPLE CORPORATION
Balance Sheet
(Unaudited)
As At Month, Day, Year
4  Model Financial Statements
Compilation engagement:
SAMPLE CORPORATION
Balance Sheet
(Unaudited — See Notice to Reader)
As At Month, Day, Year
5.6
If the audit or review engagement has been qualified, the header should refer the reader to the
appropriate report:
Audit engagement:
SAMPLE CORPORATION
Balance Sheet
(See Audit Report)
As At Month, Day, Year
Review engagement:
SAMPLE CORPORATION
Balance Sheet
(Unaudited — See Review Engagement Report)
As At Month, Day, Year
6.
Balance sheet
6.1
See Appendix A for acceptable terminology and a list of items that appear in this statement.
7.
Income statement
7.1
See Appendix B for acceptable terminology and a list of items that appear in this statement.
8.
Statement of retained earnings
8.1
See Appendix C for acceptable terminology and a list of items that appear in this statement.
9.
Cash flow statement
9.1
See Appendix D for acceptable terminology and a list of items that appear in this statement.
10. Notes to financial statements
10.1 Notes are presented on a separate page or pages after the basic financial statements. Individual
notes to the financial statements are arranged in the same order as the specific items referred to in
the financial statements, and the heading should match the wording in the financial statements.
The referencing is usually limited to balance sheet items, retained earnings changes, and large and
unusual items in the statement of income. The order of the notes is generally as follows:

general (notes about the nature of the entity’s operations or other important matters affecting
the basis of presentation)

summary of significant accounting policies

other notes to the financial statements
10.2 Each page of the notes to the financial statements should have a heading that consists of the
name of the entity, the title, and the date or period covered. In the case of review or compilation
engagements, the term “Unaudited” or “Unaudited — See Notice to Reader” is inserted in
parentheses after the heading of each page of the notes to the financial statements.
Model Financial Statements  5
10.3 Paragraph 1505.06 of the CICA Handbook — Accounting requires that all significant
accounting policies followed by an entity be stated as an integral part of its financial statements.
The disclosure of accounting policies should describe accounting principles and methods that
involve:

a selection from existing alternatives, or

accounting principles and methods used which are peculiar to an industry in which an enterprise
operates
10.4 The notes to the financial statements are designed to present disclosures required by Canadian
GAAP regarding information not included in the financial statements. Notes usually pertain to
current-year figures unless prior-year disclosure continues to be significant. Reference to “we,”
“us,” “client,” and “our” should be avoided in the notes. Instead, reference should be made to
“the company,” “the corporation,” and “management” to reflect that the notes belong to the
client.
10.5 Policy notes should not be included in a compilation engagement.
10.6 The notes should be cross-referenced to the financial statement item to which they relate. Also,
it may be desirable to add a footer to the bottom of the balance sheet and statements of income,
retained earnings, and cash flow, such as



The accompanying notes are an integral part of these financial statements.
See the accompanying notes to the financial statements.
The attached notes are an integral part of these financial statements.
10.7 Some common sample notes are provided in Appendix E, in addition to those included in the
model financial statements.
11.
Supplementary or other information
11.1 Supplementary or other information may be included to provide detailed schedules of revenues,
expenses, or other information that is not part of the basic financial statements. This information
can be useful to the owner or management. Schedules should not present information required
by Canadian GAAP, which is part of the financial statements.
11.2 The information contained in supplementary schedules should be meaningful to the user. The
following are examples of items that may require a supplementary schedule:






cost of goods sold
department earnings statements
details of consolidation
comparative financial statements expressed in percentages
details of sales by product line
rental schedule
11.3 Schedule headings should not use the term “statements.” They are separate from the basic
financial statements; therefore, the term “schedule” is more appropriate. For example:
SAMPLE CORPORATION
Schedule of Cost of Goods Sold
(Unaudited)
For The Year Ended Month, Day, Year
11.4 The reference to the practitioner’s report provides the degree of responsibility taken in regard to
the supplementary schedules.
6  Model Financial Statements
Appendix A1
BALANCE SHEET
Term
Handbook
BALANCE SHEET
1521
Acceptable alternative:
Statement of financial position
CURRENT ASSETS
1510
Cash
Acceptable alternative:
Cash and cash equivalents
Includes:
Cash
Petty cash
Cash in transit
Cash in current bank accounts
Accounts receivable
3856
Acceptable alternatives:
Receivables
Trade accounts receivable
Income tax receivable
3465
Related party receivables
3840, 3856
Acceptable alternatives:
Due from shareholders
Officer notes receivable
Other receivables
Acceptable alternative:
Receivables
Includes:
Advances
Allowance for doubtful debts
Allowance for cash discounts
Current portion of long-term receivables
Debit balances in suppliers’ accounts
Note(s) receivable
Receivables from employees
Trade receivables
1
Some of the material found in these appendices is taken directly from sections of the Handbook.
Model Financial Statements  7
Term
Handbook
Disclosure of receivables:
3840.51-.58, 3856.37-.42
Inventories
3031
Acceptable alternatives:
Inventory
Work in progress (for example, in the case of professional service
firms)
Includes:
Inventories on hand
Merchandise
Production supplies
Materials (including supplies to be consumed in the
production process or in the rendering of services)
Work in process
Finished goods
Inventories in transit
Inventories on consignment
Allowance to reduce inventory from cost to net realizable value
Note:
A common practice is to show the inventory as one figure called
“Inventories” on the balance sheet and to disclose the carrying
amounts by classification (such as production supplies, materials,
work in process, and finished goods) in the notes.
Disclosure:
3031.35-.38
Prepaid expenses
1510
Includes:
Prepaid expenses
Prepayments
Payments in advance such as rent and property taxes
Supplies not included in inventory (such as office and selling supplies)
Future income taxes
3465
Note:
Future income tax assets may be classified as current or long-term
depending on their nature.
Presentation and disclosure:
Other current assets
Includes:
Lease residual values
Net investment in direct finance leases
8  Model Financial Statements
3465.80-.85, .88-.91
Term
Handbook
Note:
Other current assets are usually explained in the form of a note to the
financial statements if the amounts are material.
LONG-TERM ASSETS
3856
Financial instruments
Includes:
Financial assets at fair value (Investments in equity instruments
quoted in an active market. The entity may also elect to measure any
financial asset at fair value.)
Financial assets at amortized cost (investments in any financial asset
that are not measured at fair value or cost less any reduction for
impairment)
Financial assets at cost less any reduction for impairment (investments
in equity instruments for which a quoted price in an active market is
no longer available)
Note:
Financial instruments may be classified as current or long-term
depending on their nature.
Disclosure:
3856.37-.42, .48-.54
Investments
3051
Presentation and disclosure:
3051.26-.33
Property, plant and equipment
Includes:
Land
Buildings
Computer equipment
Computer software
Equipment
Leasehold improvements
Machinery and equipment
Mining properties
Oil and gas properties
Vehicles
Landfill sites and improvements
Timberlands and logging roads
Assets under capital lease
Assets held for sale
Accumulated amortization
Disclosure:
3061
3065
3475
3061.24-.28, 3065.73-.76,
3475.36-.38
Model Financial Statements  9
Term
Goodwill and intangible assets
Handbook
3064
Intangible assets include:
Broadcast licences
Copyrights
Customer lists
Franchises
Patents
Trademarks
Presentation and disclosure:
3064.88-.94
CURRENT LIABILITIES
1510
Bank indebtedness
Acceptable alternative:
Bank loans
Includes:
Bank loans
Overdrafts
Short-term borrowings
Demand loans
Line of credit
Note(s) payable, secured
Includes:
Note(s) payable other than to banks or related parties
Accounts payable and accrued liabilities
Acceptable alternative:
Accounts payable
Includes:
Accrued trade liabilities
Coupons and premiums
Credit balances in customers’ accounts
Estimated liability for product warranties
Trade creditors
Due to government agencies (if not significant)
Wages payable (if not significant)
Due to government agencies
Includes:
Goods and services tax
Harmonized sales tax
Provincial sales tax
10  Model Financial Statements
Term
Handbook
Workers’ compensation levies
Payroll taxes (including employer contributions)
Note:
Amounts due to government agencies may be included with accounts
payable and accrued liabilities, if not significant.
Accrued wages payable
Acceptable alternative:
Wages payable
Includes:
Wages payable
Salaries payable
Vacation pay provision
Employee bonuses payable
Amounts owing to related parties
Acceptable alternative:
Due to related parties
Income and other taxes payable
Includes:
Income taxes payable
Resource taxes payable
Excise taxes payable
Foreign taxes payable
Corporation capital tax payable
3465
Excludes:
Payroll-related taxes
Dividends payable
Deferred revenue
Acceptable alternative:
Revenue received in advance
Includes:
Unearned income
Unearned instalment sales
Unearned deposits on royalties
Unearned revenue
Current portion of long-term debt
Acceptable alternatives:
Long-term debt due within one year
Current maturities of long-term debt
Model Financial Statements  11
Term
Handbook
Includes:
Current portion of loans payable
Current portion of mortgages payable
Current obligations under capital lease
3065
Disclosure of current liabilities
1510.15-.16
LONG-TERM LIABILITIES
Financial instruments
3856
Includes:
Financial liabilities at fair value (The entity may elect to measure any
financial liability at fair value.)
Financial liabilities at amortized cost (financial liabilities that are not
measured at fair value)
Note:
Financial instruments may be classified as current or long-term
depending on their nature.
Presentation and disclosure:
3856.20-.23, .43-.47
Obligations under capital lease
3065
Disclosure:
3065.73-.76
Accrued employee future benefits
3461
Acceptable alternatives:
Employee future benefit obligation
Pension obligations
Disclosure:
3461.152-.156
Future income taxes
3465
Note:
Future income tax liabilities may be classified as current or long-term
depending on their nature
Presentation and disclosure:
3465.80-.85, .88-.91
Other liabilities
Includes:
Asset retirement obligations
3110
Disclosure:
3110.23-.24
12  Model Financial Statements
Term
Handbook
3251
SHAREHOLDERS’ EQUITY
Acceptable alternatives:
Owners’ equity
Shareholders’ deficit (if current year’s total is a debit)
Owners’ deficit
Note:
Owners’ equity is a generic term and encompasses shareholders’ equity
(for a limited company), partners’ capital (for a partnership), and
owner’s capital (for an unincorporated business).
1601, 3251
Non-controlling interest
Acceptable alternatives:
Non-controlling interest in subsidiaries
Equity of non-controlling shareholders
Disclosure:
1601.39-.40
Share capital
3240
Presentation and disclosure:
3240.19-.22
Retained earnings
3251
Presentation and disclosure:
3251.04-.12
Contributed surplus
3251
Presentation and disclosure:
3251.04-.12
Reserves
3260
Presentation and disclosure:
3260.05-.06
Owner's equity
1800
Note:
In the case of proprietorships or partnerships, the heading would
become owner’s or partners’ capital, and share capital becomes simply
capital.
Model Financial Statements  13
Appendix B
INCOME STATEMENT
Term
Handbook
INCOME STATEMENT
1520
Acceptable alternative:
Statement of income
Note:
When the company incurs a loss, the statement may be titled
“Statement of Loss” (optional).
Presentation:
1520.02-.04
Revenue*1
3400
Acceptable alternatives:
Sales
Net sales
Professional fees
Commissions
Rental income
Contract payments
Includes:
Cash sales
Credit sales
Discount on note(s) receivable (sales related)
Fees and commissions
Instalment sales
Royalties
Sales of products or services
Sales returns
Presentation and disclosure:
3400.29-.35
Government assistance*
3800
Cost of sales
1520
Acceptable alternative:
Cost of goods sold
Includes:
Purchases
Freight in
Duty on purchases
1
If applicable, the income and expense items marked with an * must be separately disclosed on the income
statement or in the notes.
Model Financial Statements  15
Term
Handbook
Taxes on purchases
Brokerage on purchases
Direct labour
Manufacturing overhead
Provision to reduce inventories from cost to net realizable value
Purchase returns
Purchase discounts
Sales of scrap
Warranty expense
The amount of inventories recognized as an expense during the
period in accordance with Section 3031 — Inventories.*
Disclosure:
3031.35-.38
Gross profit
Acceptable alternative:
Gross margin (This term is often used to refer to the percentage of
gross profit to sales.)
Note:
It is acceptable to report the subtotal for gross profit or margin and
leave the line unnamed.
Expenses
1520
Acceptable alternatives:
Selling, general, and administrative expenses
General and administrative expenses
Administrative expenses
Selling expenses
Note:
Expenses other than those applicable to cost of sales may be
grouped under selling (marketing) expenses and/or general and
administrative expenses. Expenses are usually listed by category in
alphabetical order (or in descending order by dollar value) on the
income statement, unless there is insufficient space, in which case
a separate schedule of expenses is required for management and
income tax purposes. Immaterial and insignificant items can be
grouped together.
Categories:
Advertising and promotion (includes donations, meals, and
entertainment)
Amortization of intangible assets subject to amortization*
Amortization of property, plant and equipment*
Bad debts
Bank charges
Cash over and short (if amount significant)
Dues and subscriptions
Equipment rental (lease)
16  Model Financial Statements
3064
3061
Term
Handbook
Foreign exchange gains and losses*
Freight (courier)
Insurance
Interest on long-term debt*
Licences and fees
Office (includes miscellaneous if amount insignificant)
Other interest*
Professional fees (includes accounting and legal fees)
Property taxes
Rent
Repairs and maintenance
Shop supplies
Stock based compensation awards included in income*
Telephone (may be combined with utilities, depending on amount)
Utilities
Vehicle operating (automotive)
Wages and benefits
1651
3856
3856
3870
Note:
Interest expense related to capital lease obligations may be
disclosed separately or as part of interest on long-term debt.
Income from operations
Note:
The practice of labelling this line is optional. If it will make clearer
disclosure, a title may be applied to this subtotal. Current practice
seems to be divided on the need for a title.
Investment income*
1590, 3051, 3055, 3856
Includes:
Income from non-consolidated subsidiaries, non-proportionally
consolidated joint ventures, and interests in joint ventures,
measured using the equity method*
Income from all other investments in non-consolidated subsidiaries
and non-proportionately consolidated joint ventures*
Income from investments measured using the cost method*
Income from investments measured using the equity method*
Income from investments measured at fair value*
Other income
Note:
Income derived from sources other than the main line(s) of
business should be shown under other income.
Term
Handbook
Goodwill impairment loss*
3064
Intangible asset impairment losses*
3064
Loss on impairment of long-lived assets*
3063
Model Financial Statements  17
Unusual items*
1400
Includes:
Revenue, expenses, gains, and losses resulting from transactions or
events not expected to occur frequently or atypical of the business
activities of the entity.
Income before taxes and discontinued operations
Note:
The practice of labelling this line is optional. If it will make clearer
disclosure, a title may be applied to this subtotal. Current practice
seems to be divided on the need for a title.
Income taxes — current*
3465
Note:
An enterprise may elect to account for income taxes on the taxes
payable basis and thereby not report future income taxes otherwise
recognized in accordance with Section 3465.
Income taxes — future*
Income before discontinued operations*
- Attributable to the parent—(consolidated income statement only)*
- Attributable to the non-controlling interest—(consolidated income
statement only)*
Income before discontinued operations
Discontinued operations*
3465
1602
1602
3475
Note:
The results of discontinued operations are presented net of income
taxes.
Presentation and disclosure
3475.27-.32, .36-.38
Net income*
- Attributable to the parent—(consolidated income statement only)*
- Attributable to the non-controlling interest—(consolidated income
statement only)*
1602
1602
18  Model Financial Statements
Appendix C
STATEMENT OF RETAINED EARNINGS
Term
Handbook
Notes:
3251
Retained earnings is comprised of the accumulated balance of
income less losses arising from the operations of the enterprise, after
taking into account dividends, refundable taxes, and other amounts
that may be properly charged or credited to retained earnings. When
the accumulation is a negative figure, the single word “deficit” is a
suitable designation.
Current practice is divided between preparing a separate statement of
retained earnings and combining the statement of retained earnings
with the income statement. In all cases, the statement should show,
by major category, the progression from opening balance through to
the closing balance at the end of the period.
3251.04-.12
Presentation and disclosure:
RETAINED EARNINGS
Retrospective restatement of prior period results (net of applicable taxes)
1506
Includes:
Changes in accounting policies
Corrections of prior period errors
Disclosure:
1506.34-.37
Dividends
3610
Presentation
3610.03
Model Financial Statements  19
Appendix D
CASH FLOW STATEMENT
Term
Handbook
CASH FLOW STATEMENT
1540
Acceptable alternative:
Statement of cash flows
Notes:
The cash flow statement shall report cash flows during the period
classified by operating, investing and financing activities.
Two methods may be used to report cash flows from operating
activities — the indirect or direct method. Although the “preferred”
method is the direct method, many companies continue to use the
indirect. The model financial statements therefore demonstrate both.
An enterprise shall present separately, major classes of gross cash
receipts and gross cash payments arising from investing and
financing activities, except to the extent that cash flows described in
paragraphs 1540.25 and 1540.26 are presented on a net basis.
Cash flows arising from each of the following operating, investing
or financing activities may be reported on a net basis:
a) cash receipts and payments on behalf of customers when the
cash flows reflect the activities of the customer rather than those
of the enterprise; and
b) cash receipts and payments for items in which the turnover is
quick, the amounts are large and the maturities are short.
Cash flows arising from transactions in a foreign currency shall be
recorded in an enterprise's reporting currency by applying to the
foreign currency amount the exchange rate between the reporting
currency and the foreign currency at the date of the cash flow.
The cash flows of integrated foreign operations as well as those
arising from the investing and financing activities of self-sustaining
foreign operations shall be translated at the exchange rates between
the reporting currency and the foreign currency at the dates of the
cash flows. Cash flows from the operating activities of selfsustaining foreign operations shall be translated at the exchange
rates at which the respective items are translated for income
statement purposes.
Model Financial Statements  21
Term
Handbook
Cash flows from interest and dividends received and paid and
included in the determination of net income shall be classified as
cash flows from operating activities. Interest and dividends not
included in the determination of net income shall be classified
according to their nature. Dividends and interest paid and charged to
retained earnings shall be presented separately as cash flows used in
financing activities. Cash flows from dividends paid by subsidiaries
to non-controlling interests shall be presented separately as cash
flows used in financing activities.
Cash flows arising from income taxes shall be classified as cash
flows from operating activities unless they can be specifically
identified with financing and investing activities, in which case they
may be classified accordingly.
The aggregate cash flows arising from each business combination
accounted for using the purchase method and disposals of business
units shall be presented separately and classified as cash flows from
investing activities.
Investing and financing transactions that do not require the use of
cash or cash equivalents shall be excluded from a cash flow
statement. Investing and financing transactions that do not require
the use of cash or cash equivalents shall be disclosed in the notes to
the financial statements in a way that provides all the relevant
information about these investing and financing activities.
An enterprise shall disclose the policy that it adopts in determining
the composition of cash and cash equivalents and present a
reconciliation of the amounts presented in its cash flow statement
with the equivalent items presented in the balance sheet. An
enterprise shall disclose the amount of cash and cash equivalents for
which use is restricted.
Disclosure:
Operating activities
Examples of cash flows from operating activities are:
a) cash receipts from the sale of goods and the rendering of
services;
b) cash receipts from royalties, fees, commissions and other
revenue;
c) cash payments to suppliers for goods and services;
d) cash payments to and on behalf of employees;
e) cash receipts and payments of interest and dividends included in
the determination of net income;
f) cash receipts and payments of an insurance enterprise for
premiums and claims, annuities and other policy benefits;
g) cash payments and refunds of income and other taxes; and
22  Model Financial Statements
1540.43-.48
Term
Handbook
h) cash receipts and payments from contracts held for trading
purposes.
Investing activities
Examples of cash flows arising from investing activities are:
a) cash payments to acquire property, plant and equipment and
other long-term assets. These payments include those relating to
capitalized development costs and self-constructed property,
plant and equipment including interest paid and capitalized
before the assets are substantially complete and ready for
productive use;
b) cash receipts from sales of property, plant and equipment and
other long-term assets;
c) cash payments to acquire equity or debt instruments of other
enterprises and interests in joint ventures (other than payments
for those instruments considered to be cash equivalents or those
held for trading purposes);
d) cash receipts from sales of equity or debt instruments of other
enterprises and interests in joint ventures (other than receipts for
those instruments considered to be cash equivalents and those
held for trading purposes);
e) cash advances and loans made to other parties;
f) cash receipts from the repayment of advances and loans made to
other parties;
g) cash payments for futures contracts, forward contracts, option
contracts and swap contracts except when the contracts are held
for trading purposes, or the payments are classified as financing
activities; and
h) cash receipts from futures contracts, forward contracts, option
contracts and swap contracts except when the contracts are held
for trading purposes, or the receipts are classified as financing
activities.
Financing activities
Examples of cash flows arising from financing activities are:
a) cash proceeds from issuing equity instruments;
b) cash payments to owners to acquire or redeem the enterprise's
shares;
c) cash proceeds from issuing debentures, loans, notes, bonds,
mortgages and other short or long-term borrowings including
deposits accepted by a financial institution;
d) cash repayments of amounts borrowed;
e) cash payments by a lessee for the reduction of the outstanding
liability relating to a capital lease; and
f) cash payments of dividends and interest charged to retained
earnings.
Model Financial Statements  23
Term
Increase in cash and cash equivalents
Acceptable alternative:
Change in cash during the year
24  Model Financial Statements
Handbook
Appendix E
SAMPLE NOTES
SUMMARY OF ACCOUNTING POLICIES
Basis of presentation
These financial statements have been prepared in accordance with Part II — Accounting Standards for Private
Enterprises of the CICA Handbook — Accounting issued by the Accounting Standards Board (AcSB).
Going-concern
The financial statements of the company have been prepared in accordance with Canadian generally accepted
accounting principles for private enterprises on a going-concern basis which assumes that the company will be able
to realize its assets and discharge its liabilities in the normal course of business.
If the going-concern assumption were not appropriate for these financial statements, then adjustments may be
necessary in the carrying value of assets and liabilities, the reported revenues and expenses, and the balance sheet
classifications used.
(Provide an explanation of any material uncertainties related to events or conditions that may cast significant doubt
on the entity’s ability to continue as a going concern. If the statements are not prepared on a going concern basis,
disclose that fact and the reason why the entity is not regarded as a going concern.)
Going-concern (when going-concern problems exist)
These financial statements have been prepared in accordance with Canadian generally accepted accounting
principles for private enterprises that are applicable to a company that will continue in operation for the foreseeable
future and will be able to realize its assets and discharge its liabilities in the normal course of operations (a “going
concern”). However, the use of generally accepted accounting principles that are applicable to a going concern is
potentially inappropriate as there is significant doubt concerning the company’s ability to continue as a going
concern. Considering the operating losses accumulated in the last five years and the deficiency of working capital,
the company’s ability to realize its assets and discharge its liabilities depends on the continued support of the
shareholders and the refinancing of long-term debt which amounts to $ XXX, maturing on [insert month, day, and
year]. Management has adopted a plan to rationalize its expenses to face these circumstances and is confident that
the necessary financing can be obtained from shareholders and a lending institution. The financial statements do not
reflect adjustments that would be necessary if the going-concern assumption were not appropriate, as management
believes that the measures described above will mitigate the effect of the conditions that raise doubt about the
appropriateness of this assumption.
Use of estimates
When preparing financial statements according to Canadian generally accepted accounting principles, we make
estimates and assumptions relating to:
 Reported amounts of revenue and expenses
 Reported amounts of assets and liabilities
 Disclosure of contingent assets and liabilities
We base our assumptions on a number of factors including historical experience, current events, actions that the
company may undertake in the future, and other assumptions that we believe are reasonable under the
circumstances. Actual results could differ from those estimates under different conditions and assumptions. We use
estimates when accounting for certain items such as useful lives of capital assets, impairment of long-lived assets,
goodwill, employee future benefits allowance for doubtful accounts, and provision for slow-moving inventories and
income taxes.
Model Financial Statements  25
Employee future benefits
The Company maintains a defined benefit plan that provides pension benefits for almost all of its employees.
Benefits are based on length of service and average rate of pay during the last five years of service. Employees are
not required to contribute to the plan. The plan provides increasing pension benefits to protect against inflation. The
Company is responsible for adequately funding the pension plan. There have not been any significant changes in the
contractual elements of the pension plan in the year under review. Contributions are made based on various actuarial
cost methods that are permitted by pension regulatory bodies. Contributions reflect actuarial assumptions about
future investment returns, salary projections, and future service benefits.
The fair value of the plan assets as at December 31, 20XY was $x,xxx.
The accrued benefit obligation at December 31, 20XY was $x,xxx.
The plan surplus at year end, December 31 was $x,xxx.
December 31, 20XX was the effective date of the most recent actuarial valuation for funding purposes.
Actuarial gains and losses are recognized immediately in income.
Foreign currency
Foreign currency denominated monetary assets and liabilities are translated to Canadian dollars at the exchange rate
in effect at the balance sheet date. Foreign currency denominated non-monetary assets and liabilities are translated to
Canadian dollars at the exchange rate in effect on the transaction date. Revenue and expense items are translated at
the exchange rate in effect at the time of the transaction. Amortization and property write-downs are translated at the
same exchange rate as the assets to which they relate. Foreign exchange gains or losses are included in the
determination of net earnings for the year.
Revenue recognition
We recognize revenue when earned, specifically when all the following conditions are met:






Services are provided or products are delivered to customers.
There is clear evidence that an arrangement exists.
Amounts are fixed or can be determined.
Our ability to collect is reasonably assured.
There is no significant obligation for future performance.
The amount of future returns can be reasonably estimated.
We record payments received in advance including upfront non-refundable payments as deferred revenues until we
provide the service or deliver the product to customers.
Cash and cash equivalents
We classify highly liquid investments with maturity of three months or less from the date of purchase as cash and
cash equivalents.
INVESTMENTS
Investments resulting in significant influence
We use the equity method to record investments in entities subject to significant influence. The investment is
initially recorded at cost and adjustments are made to include our share of the investee’s net earnings or losses.
These adjustments are included in our net earnings. The amount of our investment is reduced by any dividends
received or receivable from the investment.
Financial assets measured at fair value
We value these investments at market value. The resulting gain and loss is taken to the income statement.
26  Model Financial Statements
Financial assets measured at amortized cost
We value non-derivative financial assets with fixed or determinable payments and a fixed maturity at amortized cost
using the effective interest rate method less any impairment loss. Gains or losses are recognized in net income when
the financial asset is derecognized or impaired, and through the amortization process.
Inventory
Raw materials and supplies are valued at the lower of weighted average cost and replacement cost. Work in process
and finished goods are valued at the lower of weighted average variable costs and net realizable value. The company
uses the first-in, first-out (FIFO) cost formula based on standard costs.
Property, plant and equipment
We have recorded property, plant and equipment at cost. Amortization is provided annually at rates and methods
over their estimated useful lives as follows, except in the year of acquisition when one half of the rate is used. We
review the estimates of useful lives of the assets every year and adjust them on prospective basis, if needed.
Building
Machinery and equipment
Machinery under capital lease
5%
20%
20%
straight line
declining balance
declining balance
We record machinery under capital leases and related obligation of future lease payments initially at an amount
equal to the lesser of fair value of the machinery and the present value of those lease payments.
We classify major spare parts and standby equipment as property, plant and equipment when we expect to use them
during more than one period. Similarly, if the spare parts and servicing equipment can be used only in connection
with an item of property, plant and equipment, they are accounted for as property, plant and equipment.
We review for impairment of property, plant and equipment whenever events or changes in the circumstances
indicate that the carrying value may not be recoverable. If the total of the estimated undiscounted future cash flows
is less than the carrying value of the asset, an impairment loss is recognized for the excess of the carrying value over
the fair value of the asset during the year no impairment occurred.
Intangible assets
We record intangible assets at cost. Amortization is provided annually at rates calculated to write off the assets over
their estimated useful lives as follows:
Patents
Copyrights
17 years
15 years
straight line
straight line
Finite life intangibles noted as above are tested for impairment when the events or changes in the circumstances
indicate the carrying values will not be recoverable. Indefinite life intangibles are not amortized and tested for
impairment whenever events or changes in circumstances indicate that its carrying amount may exceed its fair value.
Goodwill
Goodwill is reported at cost. There have not been any events or changes in circumstances that cause us to believe
that the value of this asset is impaired.
Model Financial Statements  27
INVENTORY
Year
Finished goods
Work in process
Raw materials
(Restated)
Prior
$ xxxx
xxxx
xxxx
$ xxxx
xxxx
xxxx
$ xxxx
$ xxxx
Year
Prior
PROPERTY, PLANT AND EQUIPMENT
Cost
Land
Buildings
Machinery and equipment
Machinery under capital lease
Accumulated
Amortization
Net Book Value
$ xxxx
xxxx
xxxx
$ xxxx
xxxx
xxxx
$ xxxx
xxxx
xxxx
$ xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
$ xxxx
$ xxxx
$ xxxx
$ xxxx
Year
Prior
INTANGIBLE ASSETS
Cost
Patents
Franchise 1
Accumulated
Amortization
Net Book Value
$ xxxx
xxxx
$ xxxx
xxxx
$ xxxx
xxxx
$ xxxx
xxxx
$ xxxx
$ xxxx
$ xxxx
$ xxxx
BANK INDEBTEDNESS
The Company has a revolving line of credit of $xxx, secured by a charge under the Personal Property Security Act
granting a security interest in its accounts receivable and inventories. As at December 31, 20XY the net book value
of the pledged receivables was $xxx and the pledged inventory was $xxx. Interest is payable each month at the
bank’s prime plus x%. The amount is payable on demand.
NOTE PAYABLE
The note is payable on demand and is secured by a charge under the Personal Property Security Act granting a
security interest in a new machine that cost $xxx and has a net book value of $xxx. Interest is payable each month at
prime plus x%.
28  Model Financial Statements
LONG-TERM DEBT
Year
Prior
$ xxxx
$ xxxx
xxxx
xxxx
xxxx
xxxx
Current portion — accrued interest
xxxx
xxxx
Current portion — principal
xxxx
xxxx
$ xxxx
$ xxxx
Bank term loan due in Year 6
Debt component of $xxx. Series X 4% convertible debentures
Long-term — principal
These are secured by way of a first floating charge on the undertaking and on all the assets of the Company. In the
event of default of either the payment of annual interest or payment of principal, the convertible debentures become
due on demand. Interest is payable on the bank term loan at the bank’s prime plus x% per annum.
Each $1,000 debenture can be exchanged for five common shares in the Company at any time until maturity.
The aggregate amount of payments required in each of the next five years on the above indebtedness is as follows:
Year
1
2
3
4
5
Term loan
Debt component of convertible debentures
$ xxxx
xxxx
xxxx
xxxx
xxxx
$ xxxx
xxxx
xxxx
xxxx
xxxx
$ xxxx
$ xxxx
OBLIGATIONS UNDER CAPITAL LEASE
Machinery lease contracts, repayable in monthly instalments totalling $xxx,
including interest calculated at x%, and maturing on Month, Day, Year and
Month, Day, Year.
Less current portion
Year
Prior
$ xxxx
xxxx
$ xxxx
xxxx
$ xxxx
$ xxxx
Minimum payments under capital leases for machinery are:
Year 1
Year 2
Year 3
Year 4
Year 5
$ xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
Less imputed interest
xxxx
$ xxxx
The leases are secured by a lien on the equipment being leased.
Model Financial Statements  29
FUTURE INCOME TAXES (When the entity elects to adopt the taxes payable method)
Property, plant and equipment
Deferred revenue
Other temporary differences
Future income tax liabilities (net)
Year 2
$xx
xx
xx
$xx
Year 1
$xx
xx
xx
$xx
INCOME TAXES
The provision for income taxes recorded on the financial statements differs from the amounts that would be obtained
by applying the statutory rate to income before taxes as follows:
Earnings (loss) before income taxes
Applicable corporate tax rate
Expected income tax provision (recovery)
(Decrease) Increase in taxes resulting from:
Losses for which no tax benefit recognized
Income taxes per financial statements
$ xxx
x%
xxx
$ xxx
x%
xxx
xxx
xxx
$ xxx
$ xxx
The Company has non-capital losses carried forward from prior years that can be used to offset future taxable
income. The losses expire as follows:
20XX
20XX
20XX
20XX
20XX
$ xxxx
xxxx
xxxx
xxxx
xxxx
$ xxxx
The tax benefits of these losses are not recognized in these financial statements.
The Company has allowable capital losses of $xxxx carried forward from prior years, with no expiry date, that can
be used to offset future capital gains.
The Company has approximately $xxx in unused tax pools, with no expiry date, that are available to offset future
taxable income subject to certain provisions of the Income Tax Act.
RELATED PARTIES
Related parties consist of commonly controlled corporations as follows:
Year
Prior
$ xxxx
$ xxxx
Sales to ABC
xxxx
xxxx
Purchases from XYZ
xxxx
xxxx
Due from ABC Ltd. Amount is non-interest-bearing and repayable on demand.
These transactions occurred in the normal course of operations and are measured at an exchange amount, which is
the amount of consideration established and agreed to by the related parties.
DUE TO SHAREHOLDERS
Due to shareholders is non-interest bearing and payable on demand.
30  Model Financial Statements
BUSINESS COMBINATION
On January 31, 20XX, the Company acquired the existing law practice of Smith and Smith. At the date of
acquisition, the Company acquired the following assets:
Cash
Loan receivable
Prepaid expenses
Accounts receivable
Furniture and equipment
Computer equipment
Leasehold improvements
Goodwill
Work in progress
$
65,000
122,452
10,000
570,475
67,509
10,952
50,000
1
1
$ 896,390
Consideration given by the Company for the acquired assets was as follows:
$
1,000 common shares
Loans payable
Assumption of accounts payable
1,000
425,000
470,390
$ 896,390
DISCONTINUED OPERATIONS
On July 31, 20XX, management adopted a formal plan to dispose of the Company’s manufacturing division.
Management is currently negotiating the sale and expects to complete the transaction by May 15, 20XX.
The results of operations for this division for the period August 1, 20XX to July 31, 20XX are included in
discontinued operations — operating net income (loss). Comparative figures have been restated to conform to this
basis of presentation. The 20XX operating income is net of a tax recovery of $ X,XXX (20XX tax provision —
$X,XXX).
Revenue for the year amounted to $XX,XXX (20XX — $ XX,XXX).
The net loss from discontinued operations includes a tax recovery in the amount $ X,XXX.
Net loss from discontinued operations is comprised of:
Loss from operations for the period August 1, 20XX to December 31, 20XX
(net of income taxes of $ X,XXX)
Write-down of assets held for sale to net realizable value
(gross proceeds of $ XXX net of income taxes of $ XXX)
$ X,XXX
X,XXX
$ X,XXX
The carrying value of the manufacturing division’s underlying assets
As At December 31, 20XX are:
Accounts receivable
Inventories
Property, plant and equipment
Accounts payable and accrued liabilities
$ XXX
XXX
XXX
(XXX)
$ XXX
Model Financial Statements  31
CORRECTION OF PRIOR YEAR FINANCIAL STATEMENTS
The investment in SubCo Ltd., a 100% owned subsidiary, is reported by the equity method. The net income of
SubCo Ltd. using the equity method has been overstated in prior years. The result of this correction to the prior
years is as follows;
Investment in SubCo Ltd.
Income of subsidiary
Net income
Retained earnings, opening balance
Retained earnings, ending balance
20XY
20XX
($xxxx)
($xxxx)
($xxxx)
($xxxx)
($xxxx)
($xxxx)
($xxxx)
($xxxx)
($xxxx)
($xxxx)
FINANCIAL INSTRUMENTS
The Company’s financial instruments consist of marketable securities, receivables, short-term indebtedness,
payables, long-term debt, and related-party loans. Unless otherwise noted, it is our opinion that the Company is not
exposed to significant credit, currency, interest, liquidity, or other price risks arising from these financial
instruments. Moreover, our exposure to these risks has not materially changed from those evident in the previous
period. The fair value of the instruments approximates their carrying values, unless otherwise noted.
The Company is exposed to financial risk that arises from the fluctuation in interest rates and in the credit quality of
its customers.
Credit risk
Our credit risk consists principally of cash and cash equivalents, short-term and other investments, and accounts
receivable. We maintained cash and cash equivalents with reputable and major financial institutions. The
investments include commercial papers and investments issued by high-credit quality corporations and financial
institutions. We consider the risk of non-performance of these instruments to be remote.
There is no customer comprising more than xx% of the total trade account receivable. There is no particular
concentration of credit risk. We perform an ongoing credit review of all our customers and establish allowance for
doubtful debts when the amounts are not collectible. In addition, we have entered into an agreement with Export
Development Corporation where it has assumed the risk credit loss in case of bankruptcy for up to xx% of the
accounts receivable from certain foreign and domestic customers to a maximum of $xxx in a given year. As of
month, day, year accounts receivable (before allowance) include accounts totalling $xxxx, that were pre-approved
for coverage subject to above-noted maximum, under the agreement.
We have also entered into derivative contracts to mitigate the credit risk, described in detail in note xx.
Currency risk
We are exposed to currency risk as a certain portion of our sales and expenses are incurred in U.S. dollars resulting
in U.S.-denominated accounts receivable and accounts payable. In addition, certain cash and cash equivalents are
denominated in U.S. dollars. These balances are therefore subject to gain or losses due to fluctuations in that
currency.
We have entered into foreign exchange derivative contracts, described in note xx, to mitigate these risks.
Interest rate risk
We are exposed to interest risk with respect to the following financial instruments:
Cash and cash equivalents
Investments in debt securities
Bank indebtedness
Obligations under capital lease
32  Model Financial Statements
We have entered into interest rate derivative contracts to mitigate this risk.
Liquidity risk
We consider the risk the Company faces of encountering difficulty in meeting our financial obligations to be
minimal. The company has a long history of profitability and historically generates strong cash flows from
operations. Our liquidity and solvency ratios are in the top quartile of our peer group.
Other price risk
Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of
changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are
caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial
instruments traded in the market. The Company does face some other price risk with respect to our investment in a
portfolio of equity securities. We mitigate this risk to some degree by maintaining a diversified portfolio and only
investing in well-established companies with a dominant position in the marketplace.
Concentration of risk
The Company sells primarily to the retail sector. As such our accounts receivables are subject to concentration risk
in that most of our customers are affected similarly by the state of the economy. We manage this risk by thoroughly
investigating the credit history of clients requesting credit; establishing credit limits tied to their ability to pay; and
on an ongoing basis evaluating the financial status of our obligors by obtaining credit reports from mercantile
agencies and reviewing their financial statements.
CONTINGENT LIABILITIES
The Company has been named as defendant in a number of lawsuits. Claims in excess of $x and with an unfavorable
outcome in one or more of these actions could have a material effect on these financial statements and impact the
Company’s ability to continue as a going concern. Legal counsel to the Company is unable to assess its potential
liability, if any, resulting from the lawsuits. No provision for possible loss has been included in these financial
statements.
COMMITMENTS
As at December 29, 20XX, the Company had commitments of $XXX,XXX (20XX — $ XXX,XXX) for the
acquisition of property, plant and equipment, and the expansion of retail store facilities. Also, the Company has spent
$XXX,XXX and expects to spend an additional amount of approximately $XXX,XXX with respect to the completion
of a new warehouse.
COMPARATIVE FIGURES
Some of the prior year’s figures have been restated for comparative purposes and to conform to current year
presentation.
Model Financial Statements  33
Sample Proprietorship
Financial Statements
(Unaudited — See Notice to Reader)
Month, Day, Year
Model Financial Statements  35
Table of Contents
Notice to Reader
Balance Sheet
Statement 1
Income Statement
Statement 2
Statement of Owner’s Capital
Statement 3
Notes to Financial Statements
36  Model Financial Statements
Notice to Reader
On the basis of information provided by the proprietor, we have compiled the balance sheet of
Sample Proprietorship as at [Month, Day, Year] and the statements of income and owner’s
capital for the (period) then ended.
We have not performed an audit or a review engagement in respect of these financial
statements and, accordingly, we express no assurance thereon.
Readers are cautioned that these statements may not be appropriate for their purposes.
[Signed]
Certified General Accountants
[City, date]
Model Financial Statements  37
Sample Proprietorship
BALANCE SHEET
(Unaudited — See Notice to Reader)
As At Month, Day, Year
STATEMENT 1
Year
ASSETS
Current assets
Accounts receivable
Due from government agencies
$
9,867
104
9,971
Property, plant and equipment (Note 1)
222,724
$ 232,695
LIABILITIES AND OWNER’S CAPITAL
Current liabilities
Bank indebtedness
Accounts payable and accrued liabilities
Current portion of long-term debt
$ 13,106
1,002
13,500
27,608
Long-term debt
53,424
81,032
Owner’s capital
151,663
$ 232,695
38  Model Financial Statements
Sample Proprietorship
INCOME STATEMENT
(Unaudited — See Notice to Reader)
For The Year Ended Month, Day, Year
STATEMENT 2
Year
Revenue
Expenses
Advertising and promotion
Amortization
Bad debts
Bank charges
Fuel
Insurance
Licences and fees
Materials
Office
Professional fees
Property taxes
Rent
Repairs and maintenance
Subcontracts
Supplies
Telecommunications
Utilities
Vehicle
$ 213,471
4,099
33,818
1,151
6,272
18,178
15,468
183
3,442
3,131
3,000
2,674
8,950
38,069
23,747
12,477
1,833
2,543
1,781
180,816
Net income from operations
Loss on disposal of property, plant and equipment
Net income (Note 2)
32,655
1,471
$ 31,184
Model Financial Statements  39
Sample Proprietorship
STATEMENT OF OWNER’S CAPITAL
(Unaudited — See Notice to Reader)
For The Year Ended Month, Day, Year
STATEMENT 3
Year
Owner’s capital, beginning of year
$ 114,072
Net earnings for year
31,184
Owner’s contributions
9,977
155,233
Owner’s drawings
Owner’s capital, end of year
40  Model Financial Statements
3,570
$ 151,663
Sample Proprietorship
NOTES TO FINANCIAL STATEMENTS
(Unaudited — See Notice to Reader)
Month, Day, Year
These financial statements reflect the assets, liabilities, revenues, and expenses of the Proprietorship. They do
not include any other assets, liabilities, revenues, or expenses of the owner or the liability of the owner for
taxes on earnings of the Proprietorship, nor do they include any provisions for owner’s salary or interest on
invested capital. Sample Proprietorship operates a transportation business.
1. PROPERTY, PLANT AND EQUIPMENT
Cost
Buildings
Tools
Vehicles
$ 129,715
40,872
281,717
$ 452,304
Accumulated
Amortization
$ 7,679
39,989
181,912
$ 229,580
Net Book Value
$ 122,036
883
99,805
$ 222,724
2. INCOME TAXES
The enterprise is not subject to income taxes as the owner is taxed directly.
Model Financial Statements  41
Sample Partnership
Financial Statements
(Unaudited — See Notice to Reader)
Month, Day, Year
Model Financial Statements  43
Table of Contents
Notice to Reader
Balance Sheet
Statement 1
Income Statement
Statement 2
Statement of Partners’ Capital
Statement 3
Notes to Financial Statements
44  Model Financial Statements
Notice to Reader
On the basis of information provided by the partners, we have compiled the balance sheet of
Sample Partnership as at [Month, Day, Year] and the statements of income and partners’
capital for the (period) then ended.
We have not performed an audit or a review engagement in respect of these financial
statements and, accordingly, we express no assurance thereon.
Readers are cautioned that these statements may not be appropriate for their purposes.
[Signed]
Certified General Accountants
[City, date]
Model Financial Statements  45
Sample Partnership
BALANCE SHEET
(Unaudited — See Notice to Reader)
As At Month, Day, Year
STATEMENT 1
Year
ASSETS
Current assets
Cash
Accounts receivable
Work in progress
$
8,151
132,774
130,550
271,475
Financial assets carried at amortized cost
Property, plant and equipment (Note 1)
5,094
143,991
$ 420,560
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities
Operating loan
Accounts payable and accrued liabilities
$ 145,000
20,090
165,090
Partners’ capital
255,470
$ 420,560
46  Model Financial Statements
Sample Partnership
INCOME STATEMENT
(Unaudited — See Notice to Reader)
For The Year Ended Month, Day, Year
STATEMENT 2
Year
Revenue
Expenses
Amortization
Bank charges
Insurance
Library
Office
Professional fees
Property taxes
Repairs and maintenance
Salaries
$ 278,771
6,838
1,724
2,800
2,395
3,171
2,400
2,983
7,900
164,442
194,653
Net income (Note 2)
$ 84,118
Model Financial Statements  47
Sample Partnership
STATEMENT OF PARTNERS’ CAPITAL
(Unaudited — See Notice to Reader)
For The Year Ended Month, Day, Year
Partners’ capital, beginning of year
Net earnings for year
STATEMENT 3
Partner 1
Partner 2
Total
$ 182,700
$ 59,852
$ 242,552
42,059
42,059
84,118
10,000
10,000
224,759
111,911
336,670
35,600
45,600
81,200
$ 189,159
$ 66,311
$ 255,470
Partners’ contributions
Partners’ drawings
Partners’ capital, end of year
48  Model Financial Statements
Sample Partnership
NOTES TO FINANCIAL STATEMENTS
(Unaudited — See Notice to Reader)
Month, Day, Year
These financial statements reflect the assets, liabilities, revenues, and expenses of the Partnership and do not
include any other assets, liabilities, revenues, or expenses of the Partners or the liability of the Partners for
taxes on earnings of the Partnership, nor do they include any provision for the Partners’ salaries or interest on
invested capital. Sample Partnership’s main business activity is management consulting.
1. PROPERTY, PLANT AND EQUIPMENT
Cost
Land
Building
Office equipment
$ 25,000
130,000
21,723
$ 176,723
Accumulated
Amortization
24,002
8,730
$ 32,732
Net Book Value
$ 25,000
105,998
12,993
$ 143,991
2. INCOME TAXES
The enterprise is not subject to income taxes as the owners are taxed directly.
Model Financial Statements  49
Sample Compilation Ltd.
Financial Statements
(Unaudited — See Notice to Reader)
Month, Day, Year
Model Financial Statements  51
Table of Contents
Notice to Reader
Balance Sheet
Statement 1
Income Statement and Retained Earnings
Statement 2
Notes to Financial Statements
52  Model Financial Statements
Notice to Reader
On the basis of information provided by management, we have compiled the balance sheet of
Sample Compilation Ltd. as at [Month, Day, Year] and the statements of income and retained
earnings for the (period) then ended.
We have not performed an audit or a review engagement in respect of these financial
statements and, accordingly, we express no assurance thereon.
Readers are cautioned that these statements may not be appropriate for their purposes.
[Signed]
Certified General Accountants
[City, date]
Model Financial Statements  53
Sample Compilation Ltd.
BALANCE SHEET
(Unaudited — See Notice to Reader)
As At Month, Day, Year
STATEMENT 1
Year
Prior
ASSETS
Current assets
Cash
Accounts receivable
Loan receivable
Inventory
Prepaid expenses
$ 35,484
32,121
1,000
23,220
5,021
$ 22,525
22,060
1,000
11,568
4,251
96,846
61,404
Due from related parties
15,400
15,400
Property, plant, and equipment (Note 1)
52,961
65,604
$ 165,207
$ 142,408
$ 20,500
22,424
44,000
3,003
11,578
$ 30,000
2,061
101,505
49,047
Long-term debt
27,768
39,346
Due to related parties
13,500
25,000
6,505
22,000
149,278
135,393
100
15,829
100
6,915
$ 165,207
$ 142,408
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Bank indebtedness
Accounts payable and accrued liabilities
Dividends payable
Income taxes payable
Current portion of long-term debt
Due to shareholders
Shareholders’ equity
Share capital (Note 2)
Retained earnings
On behalf of the Board
Director
54  Model Financial Statements
6,332
10,654
Sample Compilation Ltd.
INCOME STATEMENT AND RETAINED EARNINGS
(Unaudited — See Notice to Reader)
For The Year Ended Month, Day, Year
STATEMENT 2
Year
Revenue
Prior
$ 227,291
$ 187,182
60,936
50,186
166,355
136,996
3,381
12,643
6,200
1,300
1,542
4,125
3,731
44,000
2,773
5,000
4,500
29,730
5,364
2,114
1,400
3,181
16,599
5,100
1,905
1,245
3,750
3,655
36,000
2,288
5,000
4,500
24,486
4,422
1,037
1,275
127,803
114,443
38,552
22,553
Income taxes
9,638
5,638
Net income
28,914
16,915
Cost of goods sold
Gross margin
Expenses
Advertising
Amortization
Automotive
Bad debts
Bank charges
Insurance
Interest on long-term debt
Management bonus
Office
Professional fees
Rent and maintenance
Salaries
Telecommunications
Travel
Utilities
Income before income taxes
Retained earnings, beginning of year
Less dividends
Retained earnings, end of year
6,915
(20,000)
$ 15,829
(10,000)
$
6,915
Model Financial Statements  55
Sample Compilation Ltd.
NOTES TO FINANCIAL STATEMENTS
(Unaudited — See Notice to Reader)
Month, Day, Year
The Company was incorporated under the laws of the Province of [province] on [Month, Day, Year].
Its main business activity is selling widgets.
1. PROPERTY, PLANT AND EQUIPMENT
Automotive
Computer equipment
Office equipment
Leasehold improvements
Year
Prior
Net Book Value
Cost
Accumulated
Amortization
$ 41,789
19,813
5,323
15,278
$ 11,112
10,104
1,916
6,110
$ 30,677
9,709
3,407
9,168
$ 35,252
13,870
4,259
12,223
$ 82,203
$ 29,242
$ 52,961
$ 65,604
Year
Prior
2. SHARE CAPITAL
Authorized:
100,000 class “A” voting shares without par value
Issued:
100 class “A” shares
56  Model Financial Statements
$
100
$
100
Sample Review Ltd.
Financial Statements
(Unaudited)
Month, Day, Year
Model Financial Statements  57
Table of Contents
Review Engagement Report
Balance Sheet
Statement 1
Income Statement
Statement 2
Statement of Retained Earnings
Statement 3
Cash Flow Statement
Statement 4
Notes to Financial Statements
58  Model Financial Statements
Review Engagement Report
To the Board of Directors
Sample Review Ltd.
We have reviewed the balance sheet of Sample Review Ltd. as at [Month, Day, Year] and the statements of
income, retained earnings equity, and cash flow for the year then ended. Our review was made in accordance
with Canadian generally accepted standards for review engagements and, accordingly, consisted primarily of
enquiry, analytical procedures, and discussion related to information supplied to us by the Company.
A review does not constitute an audit, and consequently, we do not express an audit opinion on these financial
statements.
Based on our review, nothing has come to our attention that causes us to believe that these financial statements
are not, in all material respects, in accordance with Canadian accounting standards for private enterprises.
[Signed]
Certified General Accountants
[City, date]
Model Financial Statements  59
Sample Review Ltd.
BALANCE SHEET
(Unaudited)
As At Month, Day, Year
STATEMENT 1
Year
Prior
ASSETS
Current assets
Cash
Investments—at fair value (Notes 1 and 2)
Accounts receivable
Loan receivable
Inventory (Note 1)
Prepaid expenses
Investments—at cost (Notes 1 and 2)
Due from related parties (Note 6)
Property, plant and equipment (Notes 1 and 3)
$ 31,984
15,000
32,121
1,000
23,220
5,021
$ 27,525
10,000
22,060
1,000
11,568
4,251
108,346
76,404
19,500
15,000
5,400
5,400
32,961
45,604
$ 166,207
$ 142,408
$ 20,500
22,424
44,000
3,003
11,578
$ 30,000
5,061
0
3,332
10,654
101,505
49,047
27,768
250
13,500
6,505
149,528
39,346
0
25,000
22,000
135,393
100
16,579
$ 166,207
100
6,915
$ 142,408
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Bank indebtedness (Note 4)
Accounts payable and accrued liabilities
Management bonus payable
Income taxes payable
Current portion of long-term debt
Long-term debt (Note 5)
Future incomes taxes payable (Note 1)
Due to related parties (Note 6)
Due to shareholders (Note 7)
Shareholders’ equity
Share capital (Note 8)
Retained earnings
On behalf of the Board
Director
The attached notes are an integral part of these financial statements.
60  Model Financial Statements
Sample Review Ltd.
INCOME STATEMENT
(Unaudited)
For The Year Ended Month, Day, Year
STATEMENT 2
Year
Revenue
Cost of goods sold
Gross margin
Expenses
Advertising
Amortization
Automotive
Bad debts
Bank charges and interest
Insurance
Interest on long-term debt
Management bonus
Office
Professional fees
Rent and maintenance
Salaries
Telecommunications
Travel
Utilities
Income from operations
Investment income
Holding gain on investments at fair value (Note 9)
Income before income taxes
Income taxes—current
Income taxes—future
Net income
Prior
$ 227,291
$ 187,182
60,936
50,186
166,355
136,996
3,381
12,643
6,200
1,300
1,542
4,125
3,731
44,000
2,773
5,000
4,500
29,730
5,364
2,114
1,400
3,181
16,599
5,100
1,905
1,245
3,750
3,655
36,000
2,288
5,000
4,500
24,486
4,422
1,037
1,275
127,803
38,552
114,443
22,553
1,000
39,552
9,638
250
29,664
0
22,553
5,638
0
16,915
The attached notes are an integral part of these financial statements.
Model Financial Statements  61
Sample Review Ltd.
STATEMENT OF RETAINED EARNINGS
(Unaudited)
For The Year Ended Month, Day, Year
STATEMENT 3
Year
Prior
Retained earnings, beginning of year
$ 6,915
$
Net income for year
29,664
16,915
Dividends declared
(20,000)
(10,000)
Retained earnings, end of year
$16,579
$ 6,915
The attached notes are an integral part of these financial statements.
62  Model Financial Statements
0
Sample Review Ltd.
CASH FLOW STATEMENT
(Unaudited)
For The Year Ended Month, Day, Year
STATEMENT 4
Year
Operating activities
Net income
Sale of held for investments at fair value
Purchase of investments at fair value
Items not requiring an outlay of funds
Amortization
Changes in non-cash working capital
Investments—at fair value
Accounts receivable
Loan receivable
Inventory
Prepaid expenses
Accounts payable and accrued liabilities
Bonus payable
Income taxes payable
Future income taxes payable
Investing activities
Acquisition of property, plant and equipment
Purchase of available for sale investments
Loans to (from) related companies
Financing activities
Dividends paid
Proceeds from (repayment of) long-term debt
Proceeds from (repayment of) related-party loans
Proceeds from (repayment of) shareholder loans
Proceeds from issuing share capital
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Cash and cash equivalents consist of
Cash
Bank indebtedness
Prior
$ 29,664
10,000
(14,000)
$ 16,915
12,643
16,599
(1,000)
(10,061)
0
(11,652)
(770)
17,363
44,000
(329)
250
76,108
0
(22,060)
(1,000)
(11,568)
(4,251)
5,061
0
3,332
0
(6,972)
0
(4,500)
0
(4,500)
(62,203)
(15,000)
(5,400)
(82,603)
(20,000)
(10,654)
(11,500)
(15,495)
0
(57,649)
13,959
(2,475)
$ 11,484
(10,000)
50,000
25,000
22,000
100
87,100
(2,475)
0
$ (2,475)
$ 31,984
(20,500)
$ 11,484
$ 27,525
(30,000)
$ (2,475)
(10,000)
The attached notes are an integral part of these financial statements.
Model Financial Statements  63
Sample Review Ltd.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Month, Day, Year
The Company was incorporated under the laws of the Province of [province] on [Month, Day, Year].
Its main business activity is selling widgets.
1. SUMMARY OF ACCOUNTING POLICIES
Basis of preparation
These financial statements have been prepared in accordance with Part II — Accounting Standards for
Private Enterprises of the CICA Handbook — Accounting issued by the Accounting Standards Board (AcSB).
Income tax
The Company follows the future income taxes method of accounting for income taxes. Under this method,
temporary differences arising from the difference between the tax basis of an asset or liability and its
carrying amount are used to calculate future income tax assets or liabilities, and are measured using
substantively enacted income tax rates expected to apply to taxable income in the years in which such
temporary differences are expected to be recovered or settled.
Inventory
Inventory is recorded at the lower of cost and net realizable value using FIFO.
Investments in financial instruments
Investments in equity securities quoted in an active market are reported at fair value. Investments in debt
securities are reported at amortized cost less impairment, if any. Transaction costs on financial assets are
reported in two ways: i) if they are measured at fair value, they are expensed when incurred; ii) if they are
measured at amortized cost, they are capitalized.
Income from financial assets measured at fair value and gains and losses whether realized or unrealized
are reported in net income.
Income from financial assets measured at amortized cost and realized gains and losses are reported in net
income. Impairment losses are reported in net income.
Financial liabilities
Financial liabilities are measured at amortized cost.
Property, plant and equipment
Property, plant and equipment are recorded at cost. Amortization is provided annually at rates calculated to
write off the assets over their estimated useful lives as follows, except in the year of acquisition when one
half of the rate is used.
Automotive
Computer equipment
Office equipment
Leasehold improvements
64  Model Financial Statements
30%
30%
20%
20%
declining balance
declining balance
declining balance
straight line
Sample Review Ltd.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Month, Day, Year
2. INVESTMENTS IN FINANCIAL INSTRUMENTS
Year
Fair value
At fair value
Shares in XYZ Ltd.
$15,000
Shares in PQR Ltd.
0
$15,000
At cost
Shares in ABC Life
$20,000
Year
Cost
Prior
Fair value
Prior
Cost
$14,000
0
$14,000
$
0
10,000
$10,000
$
0
10,000
$10,000
$19,500
$15,000
$15,000
3. PROPERTY, PLANT AND EQUIPMENT
Cost
Automotive
Computer equipment
Office equipment
Leasehold improvements
Accumulated
Amortization
Year
Prior
Net Book Value
$ 21,789
19,813
5,323
15,278
$ 11,112
10,104
1,916
6,110
$ 10,677
9,709
3,407
9,168
$ 15,252
13,870
4,259
12,223
$ 62,203
$ 29,242
$ 32,961
$ 45,604
4. BANK INDEBTEDNESS
Bank indebtedness is secured by a by a charge under the Personal Property Security Act granting a security
interest in its accounts receivable, a postponement of claim from all shareholders, and is due on demand
bearing interest at 1% over the bank prime rate. As at Month, Day, Year, the net book value of the pledged
security totalled $32,121. (Month, Day, Prior $22,060).
5. LONG-TERM DEBT
Bank loan, repayable in blended monthly instalments of
$1,197, including interest at 8.5%, maturing Month, Year,
secured by a lien on automotive and computer equipment.
Less current portion—accrued interest
Less current portion—principal
Year
Prior
$ 39,346
$ 50,000
0
11,578
0
10,654
$ 27,768
$ 39,346
Model Financial Statements  65
Sample Review Ltd.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Month, Day, Year
5. LONG-TERM DEBT (cont’d)
The aggregate amount of payments required in each of the next four years on the above
long-term debt is as follows:
Year 1
Year 2
Year 3
Year 4
Year 5
$ 11,578
$ 12,602
$ 12,820
$ 2,346
$
0
$ 39,346
As at Month, Day, Year, the net book value of the pledged security totalled $20,368. (Month, Day, Prior
$29,122).
6. DUE FROM/TO RELATED PARTIES
Amounts due from/to related parties represent intercompany advances from and to companies
related through common shareholders and directors. These amounts are non-interest-bearing
and have no fixed terms of repayment and all parties have waived the right to demand payment
for more than one year.
Year
Prior
Due from XXX Inc.
$ 5,400
$ 5,400
Due to YYY Co.
$ 13,500
$ 25,000
7. DUE TO SHAREHOLDERS
Amounts due to shareholders are non interest-bearing with no fixed terms of repayment.
The balance is not expected to be reduced materially over the next year. The shareholders have postponed
their claim on these funds in favour of the Bank.
8. SHARE CAPITAL
Year
Issued:
100 class “A” voting shares without par value
66  Model Financial Statements
$
100
Prior
$
100
Sample Review Ltd.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Month, Day, Year
9. FINANCIAL INSTRUMENTS
Year
Supplemental Disclosure for Financial Instruments:
Net gain (loss) on financial assets at fair value
Total interest income
$ 1,000
Nil
Prior
Nil
Nil
Nature and extent of risks arising from financial instruments
Our maximum credit risk for Year was $80,105 (Prior $60,585), which is the total of our cash on deposit,
investments, loan receivable, and accounts receivable at the respective year ends. This is a very unlikely,
worst case scenario that assumes that all creditors default on their obligations and that we are unable to
recover any funds through legal action or other collection activity.
Company’s management has determined that, in light of the straight-forward nature of our operations, and
the policies to manage risk that are in place, our exposure to these various risks is not significant.
Accordingly, we have not provided the supplemental disclosure that would otherwise be required by virtue
of CICA Part II 3856.53-.54.
10. COMMITMENTS
The company leases its premises at 111 – 49th St. for $ 4,500 per annum. The lease expires in
Year 3. Future minimum lease payments are as follows:
Year 1
Year 2
Year 3
$
4,500
4,500
4,500
$ 13,500
Model Financial Statements  67
Sample Manufacturing Review Ltd.
Financial Statements
(Unaudited)
Month, Day, Year
Model Financial Statements  69
Table of Contents
Review Engagement Report
Balance Sheet
Statement 1
Income Statement
Statement 2
Statement of Retained Earnings
Statement 3
Cash Flow Statement (Indirect method)
Statement 4a
Cash Flow Statement (Direct method)
Statement 4b
Notes to Financial Statements
Schedule of Sales
Schedule 1
Schedule of Cost of Sales
Schedule 2
70  Model Financial Statements
Review Engagement Report
To the Board of Directors
Sample Manufacturing Review Ltd.
We have reviewed the balance sheet of Sample Manufacturing Review Ltd. as at [Month, Day, Year] and the
statements of income, retained earnings, and cash flow for the year then ended. Our review was made in
accordance with Canadian generally accepted standards for review engagements and, accordingly, consisted
primarily of enquiry, analytical procedures, and discussion related to information supplied to us by the
company.
A review does not constitute an audit, and consequently, we do not express an audit opinion on these financial
statements.
Based on our review, nothing has come to our attention that causes us to believe that these financial statements
are not, in all material respects, in accordance with Canadian accounting standards for private enterprises.
[Signed]
Certified General Accountants
[City, date]
Model Financial Statements  71
Sample Manufacturing Review Ltd.
BALANCE SHEET
(Unaudited)
As At Month, Day, Year
STATEMENT 1
Year
($ 000s)
Prior
($ 000s)
$
$
ASSETS
Current assets
Cash
Accounts receivable
Refundable tax credits
Inventory (Note 1)
Prepaid expenses
Property, plant and equipment (Notes 1 and 2)
82
1,385
357
1,829
7
83
1,326
175
1,765
1
3,660
3,350
1,585
716
$ 5,245
$ 4,066
$ 1,056
676
426
24
27
50
231
$
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities
Bank indebtedness (Note 3)
Accounts payable and accrued liabilities
Salaries and bonus payable
Directors’ fees payable
Deferred revenue
Future income tax (Note 1)
Current portion of long-term debt (Note 4)
812
636
68
24
27
41
139
2,490
1,747
1,330
155
Due to shareholder (Note 5)
326
504
Future income tax (Note 1)
58
37
4,204
2,443
1
33
1,007
1
33
1,589
1,041
1,623
$ 5,245
$ 4,066
Long-term debt (Note 4)
Shareholder’s equity
Share capital (Note 6)
Contributed surplus
Retained earnings
On behalf of the Board
Director
The attached notes are an integral part of these financial statements.
72  Model Financial Statements
Sample Manufacturing Review Ltd.
INCOME STATEMENT
(Unaudited)
For The Year Ended Month, Day, Year
STATEMENT 2
Year
($ 000s)
Prior
($ 000s)
Sales
(Schedule 1)
$ 8,273
$ 6,043
Cost of sales
(Schedule 2)
5,149
3,937
Gross margin
3,124
2,106
Expenses
Administrative and marketing
Amortization
Bad debts
Current research and development
Interest on long-term debt
Management bonuses
1,369
184
350
540
75
426
1,264
118
50
355
22
68
2,944
1,877
180
229
39
45
43
9
Income before income taxes
Income taxes
Current
Future
Net income
$
96
$
177
The attached notes are an integral part of these financial statements.
Model Financial Statements  73
Sample Manufacturing Review Ltd.
STATEMENT OF RETAINED EARNINGS
(Unaudited)
For The Year Ended Month, Day, Year
STATEMENT 3
Year
($ 000s)
Prior
($ 000s)
$ 1,589
$ 1,538
Net income for year
96
177
Dividends declared
(678)
(126)
Retained earnings, beginning of year
Retained earnings, end of year
The attached notes are an integral part of these financial statements.
74  Model Financial Statements
$ 1,007
$ 1,589
Sample Manufacturing Review Ltd.
(Indirect method)
STATEMENT 4a
CASH FLOW STATEMENT
(Unaudited)
For The Year Ended Month, Day, Year
Operating activities
Net income
Items not requiring an outlay of funds
Amortization
Year
($ 000s)
Prior
($ 000s)
$
$
Changes in non-cash working capital
Accounts receivable
Refundable investment tax credit
Inventory
Prepaid expenses
Accounts payable and accrued liabilities
Salaries and bonuses payable
Deferred revenue
Future income tax payable
Investing activities
Acquisition of property, plant and equipment
Financing activities
Dividends paid
Proceeds from (repayment of) long-term debt
Proceeds from (repayment of) shareholder loans
96
177
184
118
280
295
(59)
(182)
(64)
(6)
40
358
—
30
(313)
(9)
(55)
(1)
79
(43)
(28)
7
397
(68)
(1,053)
(134)
(678)
1,267
(126)
41
(178)
(32)
411
(117)
Decrease in cash and cash equivalents
(245)
(319)
Cash and cash equivalents, beginning of year
(729)
(410)
Cash and cash equivalents, end of year
$
(974)
$
(729)
Cash and cash equivalents consist of
Cash
Bank indebtedness
$
82
(1,056)
$
83
(812)
$
(974)
$
(729)
The attached notes are an integral part of these financial statements.
Model Financial Statements  75
Sample Manufacturing Review Ltd.
(Direct method)
STATEMENT 4b
CASH FLOW STATEMENT
(Unaudited)
For The Year Ended Month, Day, Year
Operating activities
Cash receipts from customers
Cash paid to suppliers, employees, and directors
Interest paid
Income taxes paid
Year
($ 000s)
Prior
($ 000s)
$ 8,214
(7,688)
(75)
(54)
$ 5,816
(5,819)
(22)
(43)
397
Investing activities
Acquisition of property, plant and equipment
(68)
(1,053)
(134)
(678)
1,267
(178)
(126)
41
(32)
411
(117)
Decrease in cash and cash equivalents
(245)
(319)
Cash and cash equivalents, beginning of year
(729)
(410)
Financing activities
Dividends paid
Proceeds from (repayment of) long-term debt
Proceeds from (repayment of) shareholder loans
Cash and cash equivalents, end of year
$
(974)
$
(729)
Cash and cash equivalents consist of
Cash
Bank indebtedness
$
82
(1,056)
$
83
(812)
$
(974)
$
(729)
The attached notes are an integral part of these financial statements.
76  Model Financial Statements
Sample Manufacturing Review Ltd.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Month, Day, Year
($ 000s)
The Company was incorporated under the laws of Canada on [Month, Day, Year]. Its main business activity is
the manufacture and sale of travel accessories.
1. SUMMARY OF ACCOUNTING POLICIES
Basis of preparation
These financial statements have been prepared in accordance with Part II — Accounting Standards for
Private Enterprises of the CICA Handbook — Accounting issued by the Accounting Standards Board
(AcSB).
Inventory
Inventory is recorded at the lower of cost and net realizable value using FIFO.
Property, plant and equipment
Property, plant and equipment are recorded at cost. Amortization is provided annually at rates calculated to
write off the assets over their estimated useful lives as follows, except in the year of acquisition when one
half of the rate is used.
Automotive
Building
Office equipment
30%
5%
20%
declining balance
declining balance
declining balance
Financial Liabilities
Financial liabilities are measured at amortized cost.
Income tax
Future income tax reflects the tax consequences of temporary differences between the balance sheet
carrying amounts and the tax assets and liabilities. These temporary differences are determined in
accordance with Part II of the CICA Handbook — Accounting section 3465.
Research and development
Research costs are expensed as incurred and are reduced by related tax incentives when earned.
Development costs are expensed as incurred.
Model Financial Statements  77
Sample Manufacturing Review Ltd.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Month, Day, Year
($ 000s)
2. PROPERTY, PLANT AND EQUIPMENT
Cost
Land
Automotive
Building
Office equipment
$
Year
Prior
Net Book Value
Accumulated
Amortization
700
448
700
300
$ —
120
236
207
$
700
328
464
93
$ 700
85
482
49
$ 2,148
$ 563
$ 1,585
$ 716
3. BANK INDEBTEDNESS
Bank indebtedness is secured by a general security agreement under the Personal Property Security Act
granting a security interest in accounts receivable, a personal guarantee in the amount of $100,000 from
the sole shareholder, and is due on demand bearing interest at 2% over the bank prime rate. As at Month,
Day, Year, the net book value of the pledged security totalled $1,385. (Month, Day, Prior $1,326).
4. LONG-TERM DEBT
Year
Prior
Mortgage, repayable in monthly instalments of $8,500,
including interest at 8.5%, maturing Month, Year 5,
secured by land and building included on the balance sheet.
$ 1,200
Chattel repayable in monthly instalments of $6,000,
plus interest at prime plus 3%, maturing Month, Year 6,
secured by rolling equipment included on the balance sheet.
361
294
1,561
294
0
231
0
139
Less current portion — accrued interest
Less current portion — principal
$ 1,330
$
$
—
155
The aggregate amount of payments required in each of the next five years on the above indebtedness is as
follows:
Year 1
Year 2
Year 3
Year 4
Year 5
thereafter
231
253
296
328
349
104
$ 1,561
As at Month, Day, Year, the net book value of the pledged security totalled $1,492. (Month, Day, Prior
$1,267).
78  Model Financial Statements
$
Sample Manufacturing Review Ltd.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Month, Day, Year
($ 000s)
5. DUE TO SHAREHOLDER
Amounts due to the shareholder are non interest-bearing and have no fixed terms of repayment. The
balance is not expected to be reduced materially over the next year. The shareholder has postponed his
claim on these funds in favour of the Bank.
6. SHARE CAPITAL
Year
Issued:
100 class “A” voting shares without par value
$
Prior
1
$
1
7. FINANCIAL INSTRUMENTS
Nature and extent of risks arising from financial instruments
The Company is exposed to financial risk that arises from the fluctuation in interest rates and in the credit
quality of its customers.
Interest rate risk is minimized through management’s constant review of demand and maturing debt. The
Company structures its finances so as to stagger the maturities of debt, thereby minimizing exposure to
interest rate fluctuations.
Credit risk exists in that a significant majority of the Company’s receivables is held by one department
franchise and is concentrated in the retail industry. The Company mitigates this risk through
diversification of its customer base, limiting its exposure to any one customer and maintaining strict
collection procedures.
The Company’s maximum credit risk for Year was $1,467 (Prior $1,409) which is the total of the
Company’s cash on deposit and accounts receivable at the respective year ends.
The Company’s management has determined that, in light of the straightforward nature of its operations,
and the policies to manage risk that are in place, the Company’s exposure to these various risks is not
significant. Accordingly, the supplemental disclosure that would otherwise be required by virtue of CICA
Part II 3856.53-.54 has not been provided.
Model Financial Statements  79
Sample Manufacturing Review Ltd.
SCHEDULE OF SALES
(Unaudited)
For The Year Ended Month, Day, Year
Sales
Suitcases
Duffel bags
Accessories
Schedule 1
Year
($ 000s)
Prior
($ 000s)
$ 4,500
2,495
1,278
$ 2,750
2,225
1,068
$ 8,273
$ 6,043
SCHEDULE OF COST OF SALES
Cost of sales
Opening inventory
Raw material
Salaries and benefits
Overhead
Freight
Less ending inventory
80  Model Financial Statements
Schedule 2
Year
($ 000s)
Prior
($ 000s)
$ 1,765
1,957
1,978
1,200
78
$ 1,710
1,329
1,450
1,150
63
6,978
5,702
1,829
1,765
$ 5,149
$ 3,937
Sample Audit Inc.
Consolidated Financial Statements
Month, Day, Year
Model Financial Statements  81
Table of Contents
Independent Auditor’s Report
Consolidated Balance Sheet
Statement 1
Consolidated Income Statement
Statement 2
Consolidated Statement of Retained Earnings
Statement 3
Consolidated Cash Flow Statement
Statement 4
Notes to Consolidated Financial Statements
82  Model Financial Statements
INDEPENDENT AUDITOR’S REPORT
To the Shareholders of Sample Audit Inc.
We have audited the accompanying consolidated financial statements of Sample Audit Inc. and its subsidiaries,
which comprise the consolidated balance sheet as at [Month, Day, Year], and the statements of consolidated
income, retained earnings, and cash flows for the year then ended, and a summary of significant accounting
policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements
in accordance with Part II of the CICA Handbook — Accounting, and for such internal control as management
determines is necessary to enable the preparation of consolidated financial statements that are free from
material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We
conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud
or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies
used and the reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of Sample Audit Inc. and its subsidiaries as at [Month, Day, Year], and their financial performance
and cash flows for the year then ended in accordance with Canadian accounting standards for private
enterprise.
[Signed]
Certified General Accountants
[City, date]
Model Financial Statements  83
Sample Audit Inc.
CONSOLIDATED BALANCE SHEET
As At Month, Day, Year
STATEMENT 1
Year
(Restated)
Prior
$ xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
$ xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
Long-lived assets held for sale (Note 5)
xxxx
xxxx
Investments (Notes 1, 6, and 25)
xxxx
xxxx
Property, plant and equipment (Notes 1 and 7)
xxxx
xxxx
Derivative instruments (Notes 1 and 25)
xxxx
xxxx
Future income taxes (Note 1 or 26)
xxxx
xxxx
Intangible assets (Notes 1 and 8)
xxxx
xxxx
xxxx
$ xxxx
xxxx
$ xxxx
ASSETS
Current assets
Cash
Investments (Notes 1, 6, and 25)
Accounts receivable (Note 2)
Due from related party (Note 3)
Inventory (Notes 1 and 4)
Income taxes recoverable
Derivative instruments (Notes 1 and 25)
Prepaid expenses
Future income taxes (Note 1 or 26)
Goodwill (Note 9)
The accompanying notes are an integral part of these financial statements.
84  Model Financial Statements
Sample Audit Inc.
CONSOLIDATED BALANCE SHEET
As At Month, Day, Year
STATEMENT 1
Year
(Restated)
Prior
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Bank indebtedness (Note 10)
Note payable (Note 11)
Accounts payable and accrued liabilities
Due to related party (Note 3)
Income tax payable
Dividends payable
Derivative instruments (Notes 1 and 25)
Deferred revenue
Current portion of long-term debt (Note 12)
Current portion of sinking fund requirement (Note 12)
Current obligations under capital lease (Note 13)
Long-term liabilities
Long-term debt (Note 12)
Obligations under capital lease (Note 13)
Derivative instruments (Notes 1 and 25)
Asset retirement obligation (Note 14)
Accrued pension obligation (Note 15)
Future income taxes (Note 1 or 26)
$ xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
$ xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
$ xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
$ xxxx
Contingent liability (Note 24)
Shareholders’ equity
Share capital (Note 16)
Contributed Surplus — Debenture conversion feature (Note 18)
Contributed Surplus — Stock Options
Contributed Surplus — Expired Stock Options
Retained earnings
Reserves
Non-controlling interest (Note 17)
Total equity
On behalf of the Board
Director
The accompanying notes are an integral part of these financial statements.
Model Financial Statements  85
Sample Audit Inc.
CONSOLIDATED INCOME STATEMENT
For The Year Ended Month, Day, Year
Sales
Cost of sales
Expenses
Selling, general and administrative (Note 19)
Amortization of property, plant and equipment
Amortization of intangible assets
Asset retirement obligations (Note 14)
Research and development
Interest on long-term debt
Interest on capital leases
Other interest (Note 22)
Taxes other than income
Loss on foreign currency translation (Note 1)
Income from operations
Other income (expenses)
Investment income (Notes 1 and 25)
Equity income (Notes 1 and 25)
Goodwill impairment loss (Note 9)
Loss on impairment of long-lived asset (Note 5)
STATEMENT 2
Year
(Restated)
Prior
$ xxxx
$ xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
(xxxx)
(xxxx)
xxxx
xxxx
(xxxx)
(xxxx)
Income before taxes and discontinued operations
xxxx
xxxx
Income taxes (Note 1 or 26, and 21)
Current
Future
xxxx
xxxx
xxxx
xxxx
Income before discontinued operations
xxxx
xxxx
Attributable to:
Equity holders of Sample Audit Inc.
Non-controlling interests
Income before discontinued operations
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
Discontinued operations (Note 20)
xxxx
xxxx
$ xxxx
$ xxxx
$ xxxx
xxxx
$ xxxx
$ xxxx
xxxx
$ xxxx
Net income
Attributable to:
Equity holders of Sample Audit Inc.
Non-controlling interests
Net income
86  Model Financial Statements
Sample Audit Inc.
STATEMENT 3
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
For The Year Ended Month, Day, Year
Retained earnings, beginning of year
Correction of error (Note 21)
Change in accounting policy (Note 22)
As restated
Net Income
Dividends Declared
Retained earnings, end of year
Year
(Restated)
Prior
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
The accompanying notes are an integral part of these financial statements.
Model Financial Statements  87
Sample Audit Inc.
CONSOLIDATED CASH FLOW STATEMENT
For The Year Ended Month, Day, Year
STATEMENT 4
Year
Operating activities
Cash receipts from customers
Cash receipts from sale of investments measured at fair value
Cash payments for merchandise
Cash payments for other operating expense
Interest paid
Income taxes paid
$ xxxx
xxxx
(xxxx)
(xxxx)
(xxxx)
(xxxx)
(Restated)
Prior
$ xxxx
xxxx
(xxxx)
(xxxx)
(xxxx)
(xxxx)
xxxx
xxxx
(xxxx)
(xxxx)
xxxx
(xxxx)
xxxx
(xxxx)
(xxxx)
xxxx
(xxxx)
xxxx
(xxxx)
(xxxx)
xxxx
(xxxx)
xxxx
(xxxx)
xxxx
(xxxx)
xxxx
(xxxx)
xxxx
xxxx
Increase (decrease) in cash and cash equivalents
xxxx
xxxx
Cash and cash equivalents, beginning of year
xxxx
xxxx
Cash and cash equivalents, end of year
$ xxxx
$ xxxx
Cash and cash equivalents consist of
Cash
Cash equivalents
Bank indebtedness
$ xxxx
xxxx
(xxxx)
$ xxxx
xxxx
(xxxx)
$ xxxx
$ xxxx
Investing activities
Purchase of government bonds
Acquisition of property, plant, and equipment
Proceeds from disposition of property, plant, and equipment
Payments for franchises
Proceeds from notes receivable
Financing activities
Proceeds from issuing long-term debt
Payments on capital lease
Proceeds for issuing common shares
Cash dividends paid
The accompanying notes are an integral part of these financial statements.
88  Model Financial Statements
Sample Audit Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Month, Day, Year
The Company was incorporated under the laws of Canada on [Month, Day, Year]. Its main business activities
are the development of software and the processing of non-marketable lumber into woodchips.
1. SUMMARY OF ACCOUNTING POLICIES
Basis of preparation
These financial statements have been prepared in accordance with Part II — Accounting Standards for
Private Enterprises of the CICA Handbook — Accounting issued by the Accounting Standards Board
(AcSB).
Principles of consolidation
The consolidated financial statements include the financial statements of the company and all its
subsidiaries. On consolidation, all intercompany transactions and balances have been eliminated.
Investments in entities subject to significant influence are accounted for using the equity method.
Cash and cash equivalents
Cash equivalents include demand deposits with banks and highly liquid investments with original
maturities of three months or less.
Foreign currency translation of foreign operations
Foreign monetary assets and liabilities are translated into Canadian dollars at the rates of exchange in
effect at the balance sheet date. Non-monetary items are translated at historical rates unless they are
carried at “market” in which case the rates at the balance sheet date are used. Revenue and expense items
are translated using the rate in effect on the date of the transaction, except for amortization, which is
translated at the same rate as the asset to which it applies.
Hedging instruments
When hedge accounting is not used, derivative financial instruments are recorded at fair value on the
consolidated balance sheet. Fair value is determined by referencing quoted market prices. The change in
the value of derivatives and hedged items is recorded in the consolidated income statement in the period in
which they arise.
When hedge accounting is used for hedges of anticipated transactions, the anticipated transaction is
initially recognized at fair value; however, the forward contract is not recognized until maturity. The gain
or loss on the maturing contract is recorded as an adjustment to the carrying amount of the hedged item.
When hedge accounting is used for hedges of interest bearing assets or liabilities, interest on the hedged
item is recognized using the effective rate method; gains or losses on the interest rate swap are recognized
as an adjustment to interest on the hedged item in the period in which they arise.
Inventory
Raw materials, supplies, work in process and finished goods are valued at the lower of average cost and
net realizable value.
Model Financial Statements  89
Sample Audit Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Month, Day, Year
1. SUMMARY OF ACCOUNTING POLICIES (cont’d)
Investments
Investments in equity securities quoted in an active market are reported at fair value.
Investment in equity securities for which a quoted price in an active market is no longer available are
reported at cost less impairment, if any.
Investments in debt securities are reported at amortized cost less impairment, if any.
Transaction costs on financial assets are reported in two ways: i) if they are measured at fair value, they
are expensed when incurred; ii) if they are measured at amortized cost, they are capitalized.
Income from financial assets measured at fair value and gains and losses, whether realized or unrealized,
are reported in net income.
Income from financial assets measured at amortized cost and realized gains and losses are reported in net
income. Impairment losses are reported in net income.
Investments in companies subject to significant influence are accounted for using the equity method. A
proportionate share of their income or loss is reported in net income.
Financial Liabilities
Financial liabilities are measured at amortized cost.
Property, plant and equipment
Property, plant and equipment are recorded at cost. Amortization is provided annually at rates calculated to
write off the assets over their estimated useful lives as follows:
Natural resource
Building
Machinery and equipment
Machinery under capital lease
5%
20%
20%
basis of resources used per year
straight line
declining balance
declining balance
Intangible assets
Intangible assets are recorded at cost. Amortization is provided annually at rates calculated to write off the
assets over their estimated useful lives as follows:
Patents
Franchise 1
Franchise 2
17 years
15 years
20 years
straight line
straight line
straight line
Income taxes: The note that follows is based on the company electing to use the future income taxes
method of reporting income taxes. See Note 26 for an example of the supplemental disclosure required if
the company elects to use the taxes payable method.
The future income tax method of tax allocation is used in accounting for income taxes. Under this method,
temporary differences arising from the difference between the tax basis of an asset and a liability and its
90  Model Financial Statements
Sample Audit Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Month, Day, Year
1. SUMMARY OF ACCOUNTING POLICIES (cont’d)
carrying amount on the balance sheet are used to calculate future income tax assets or liabilities. Future
income tax assets or liabilities are calculated using tax rates anticipated to be in effect in the periods that
the temporary differences are expected to reverse. The effect of a change in income tax rates on future
income tax assets and liabilities is recognized in income in the period that the change occurs.
As at YEAR Company had non-capital loss carryforwards available to reduce future years’
taxable income, which expire as follows:
YEAR plus two
YEAR plus three
YEAR plus four
YEAR plus five and beyond
Totals
xx
xx
xx
xx
xx
Impairment of long-lived assets
Long-lived assets are reviewed for impairment when events and circumstances indicate that cost may not
be recoverable. Impairment exists when the carrying value of an asset is greater than the undiscounted
future cash flows expected to be provided by the asset. The amount of impairment loss, if any, is the
excess of the carrying value over its fair value.
Use of estimates
The preparation of consolidated financial statements in conformity with Canadian generally accepted
accounting principles for private enterprises requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements and the amounts of revenues and expenses for the reporting period.
Significant areas requiring the use of management estimates are: useful lives of plant and equipment,
impairment of long-lived assets and goodwill, employee future benefits, and income taxes. Actual results
could differ from those estimated.
2. ACCOUNTS RECEIVABLE
Year
Trade
Other
$ xxxx
xxxx
Prior
$
xxxx
xxxx
3. RELATED PARTIES
Related parties consist of commonly controlled corporations as follows:
Year
Prior
Due from XXX Ltd. Amount is non-interest-bearing and repayable
on demand.
$ xxxx
$
Due to YYY Ltd. Amount is unsecured, bears interest at 6%, and is repayable
within six months.
$ (xxxx)
$ (xxxx)
xxxx
Model Financial Statements  91
Sample Audit Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Month, Day, Year
4. INVENTORY
Year
Finished goods
Work in process
Raw materials and supplies
$ xxxx
xxxx
xxxx
$ xxxx
(Restated)
Prior
$ xxxx
xxxx
xxxx
$ xxxx
5. LONG-LIVED ASSETS HELD FOR SALE
Long-lived assets held for sale or disposal is shown at Future value less selling cost $xxxxx. The company
has a building that is used for software development, and it is no longer needed as development has been
consolidated in the Eastern premises. A buyer has already been located for the building. This is part of the
operating segment software programs.
Year
$ xxxx
Prior
$ xxxx
6. INVESTMENTS
CURRENT
Category
Valuation basis
Cost (Year)
Fair Value
(Year)
Cost (Prior)
Fair Value
(Prior)
Fair value
Fair value
Fair value
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Amortized cost
xxx
xxx
xxx
xxx
nil
nil
nil
nil
Valuation
basis
Cost (Year)
Fair Value
(Year)
Cost (Prior)
Fair Value
(Prior)
Cost
Fair value
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Debt securities
Bond 1
Bond 2
Total
Amortized Cost
Amortized Cost
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Investments
Investment 1
Total
Equity method
Equity securities
Shares in ZLT. Co
Shares in ARF. Ltd.
Shares in ZNT. Inc.
Total
Debt securities
Treasury bill 1
Total
LONG-TERM
Category
Equity securities
Shares in ADB Ltd.
Shares in TRD. Inc.
Total
92  Model Financial Statements
Year
xxx
xxx
Prior
xxx
xxx
Sample Audit Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Month, Day, Year
6. INVESTMENTS (cont’d)
Treasury bill 1 — Government of Canada treasury bill with a face value of $xx, maturing on [Month, Day,
Year].
Bond 1 — Government of Canada Bonds series 6, with a face value of $xx. The coupon interest rate is
x%. The bonds mature in Year 10.
Bond 2 — Province of BC Bonds, series 8A, with a face value of $xx. The coupon interest is x%. The
bonds mature in year 8.
Investment 1 — investment in ZDE Corp. is subject to significant influence
(xx% of voting shares).
7. PROPERTY, PLANT AND EQUIPMENT
Cost
Land
Natural resources (Note 14)
Buildings
Machinery and equipment
Machinery under capital lease
Accumulated
Amortization
Year
Prior
Net Book Value
$ xxxx
xxxx
xxxx
xxxx
$ xxxx
xxxx
xxxx
xxxx
$ xxxx
xxxx
xxxx
xxxx
$ xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
$ xxxx
$ xxxx
$ xxxx
$ xxxx
8. INTANGIBLE ASSETS
Cost
Patents
Franchise 1
Franchise 2
Accumulated
Amortization
Year
Prior
Net Book Value
$ xxxx
xxxx
xxxx
$ xxxx
xxxx
xxxx
$ xxxx
xxxx
xxxx
$ xxxx
xxxx
xxxx
$ xxxx
$ xxxx
$ xxxx
$ xxxx
9. GOODWILL
Goodwill representing the excess of the cost of net identifiable assets of subsidiaries over their fair value
as of the date of acquisition. Impairment tests are conducted when there has been an event or change in
circumstances that cause us to believe that the value of this asset is impaired. On Month, Day, Year, a test
for impairment was conducted. The increasing availability of satellite technology in rural service areas,
Sample Audit Inc.’s market, and restrictions on mineral extraction, have led to reduced demand and
increasing production costs for after-market software. Quarterly profits in this segment declined
throughout the year; this trend is expected to continue. The impairment test confirmed that an impairment
loss of $xx had occurred.
Model Financial Statements  93
Sample Audit Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Month, Day, Year
9. GOODWILL (cont’d)
Changes in the carrying amount of goodwill for the year ended Month, Day, Year, are as follows:
Total
$ xxxx
(xx)
$ xxxx
Balance as of Month, Day, Year (beginning of year)
Impairment loss
Balance as of Month, Day, Year (end of year)
10. BANK INDEBTEDNESS
The Company has a revolving line of credit of $xxx, secured by a charge under the Personal Property
Security Act granting a security interest in the Company’s accounts receivable and inventories. Interest is
payable each month at prime plus x%. As at Month, Day, Year, the net book value of the pledged security
totalled $xxx. (Month, Day, Prior $xxx).
11. NOTE PAYABLE
The note is payable on demand and is secured by a charge under the Personal Property Security Act
granting a security interest in a new machine that cost $x. Interest is payable each month at prime plus x%.
As at Month, Day, Year, the net book value of the pledged security totalled $xxx. (Month, Day, Prior
$xxx).
12. LONG-TERM DEBT
Series 1 bonds, x%, due in Year 4
X% sinking fund bonds due in Year 10
Debt component of $xxxx Series 2 convertible debentures due in year 5.
Interest is payable annually at x%. The lender may elect to convert each
$1,000 of bonds into 20 common shares. (Note 18)
Current portion — interest
Current portion — principal
Year
Prior
$ xxxx
xxxx
$ xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
$ xxxx
$ xxxx
The aggregate amount of payments required in each of the next five years on the above indebtedness is as
follows:
Debt component of
Year
Series 1 bonds
Sinking fund bonds
convertible debentures
1
$
nil
$ xxxx
$
nil
2
nil
xxxx
nil
3
nil
xxxx
nil
4
xxxx
xxxx
nil
5
nil
xxxx
xxxx
$ xxxx
$ xxxx
$ xxxx
94  Model Financial Statements
Sample Audit Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Month, Day, Year
13. OBLIGATIONS UNDER CAPITAL LEASE
Machinery lease contracts, repayable in monthly
instalments totaling $xxx, including interest
calculated at x%, and maturing on Month, Day
Year and Month, Day, Year. Each lease is secured
by the related equipment.
Less current portion — interest
Less current portion — principal
Minimum payments under capital leases for machinery are:
Year 1
Year 2
Year 3
Year 4
Year 5
Year
Prior
$ xxxx
xxxx
xxxx
$ xxxx
$ xxxx
xxxx
xxxx
$ xxxx
$ xxxx
xxxx
xxxx
xxxx
xxxx
$ xxxx
As at Month, Day, Year, the net book value of the pledged security totalled $xxx. (Month, Day, Prior $xxx).
14. ASSET RETIREMENT OBLIGATIONS
The Company is required by statute to remove all structures on its resource property at xxxx when
production is complete.
The fair value of the assets that are legally restricted for this purpose is $xxxx.
No payments were made with respect to this obligation during the year under review.
The carrying amount of the asset retirement obligation is based on an undiscounted amount of $xxxx being
due in xxxx years’ time and the use of a credit-adjusted risk-free rate of x.x% to discount the cash flows.
15. ACCRUED PENSION OBLIGATION
Employee future benefits
The Company maintains a defined benefit plan that provides pension benefits for almost all of its employees.
Benefits are based on length of service and average rate of pay during the last five years of service. Employees are
not required to contribute to the plan. The plan provides increasing pension benefits to protect against inflation. The
Company is responsible for adequately funding the pension plan. There have not been any significant changes in the
contractual elements of the pension plan in the year under review. Contributions are made based on various actuarial
cost methods that are permitted by pension regulatory bodies. Contributions reflect actuarial assumptions about
future investment returns, salary projections, and future service benefits.
The fair value of the plan assets as at December 31, 20XY was $x,xxx,xxx.
The accrued benefit obligation at December 31, 20XY was $x,xxx,xxx.
The plan surplus at year end, December 31 was $xxx,xxx.
December 31, 20XX was the effective date of the most recent actuarial valuation for funding purposes.
Actuarial gains and losses are recognized immediately in income.
Model Financial Statements  95
Sample Audit Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Month, Day, Year
16. SHARE CAPITAL
(a) Issued:
50,000 6% cumulative, redeemable preferred shares
40,000 common shares without par value (prior 30,000)
Year
Prior
$ xxxx
$ xxxx
$ xxxx
$ xxxx
(b) The redemption price of the 6% cumulative, redeemable preferred shares is $xx per share.
(c) During the year, the company issued 10,000 common shares for total cash consideration of $xxx.
(d) Stock Option Plan:1
The Company has reserved xxxx Common Shares for issuance under its Stock Option Plan. The granting
of options and the related vesting periods are at the discretion of the Board of Directors and have a
maximum term of 10 years.
The fair value of each option is estimated on the date of the grant using the Black-Scholes option pricing
model with the following weighted average assumptions used for grants in YEAR: xxxx dividend yield;
expected volatility of xx%; risk-free rate of x.x%; and expected life of xxxx years. The weighted average
fair value of stock options granted during the year was $x.xx per option.
A summary of the status of the Company’s Stock Option Plan as of Year and Prior and changes during the
year ending on those dates is presented below:
Year
Stock Options
Shares
Prior
Weighted-average
exercise price
Shares
Weighted-average
exercise price
Outstanding at beginning of year
xxxx
$xxxx
xxxx
$xxxx
Granted
xxxx
$xxxx
xxxx
$xxxx
Exercised
(xxxx)
$xxxx
(xxxx)
$xxxx
Forfeited
(xxxx)
$xxxx
(xxxx)
$xxxx
Cancelled/expired
(xxxx)
$xxxx
(xxxx)
$xxxx
xxxx
$xxxx
xxxx
$xxxx
xxxx
$xxxx
xxxx
$xxxx
Outstanding at end of year
Options exercisable at end of
year
1
Information in this section is supplemented by excerpts adapted from page 85 of the CIBC Annual Report, 2003.
Adapted and used with permission from CIBC.
96  Model Financial Statements
Sample Audit Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Month, Day, Year
16. SHARE CAPITAL (cont’d)
The following table summarizes information about stock options outstanding as at Year:
Options Outstanding
Range of
exercise
prices
$xx - $xx
#
Outstanding
Options Exercisable
xxxx
Weighted Average
Remaining
Contractual Life
x.x years
Weighted
Average
Exercise Price
$xxxx
$xx - $xx
xxxx
x.x years
$xx - $xx
$xx - $xx
xxxx
xxxx
$xx - $xx
# of Shares
Exercisable
xxxx
Weighted
Average
Exercise Price
$xxxx
$xxxx
xxxx
$xxxx
x.x years
x.x years
$xxxx
$xxxx
xxxx
xxxx
$xxxx
$xxxx
xxxx
x.x years
$xxxx
xxxx
$xxxx
xxxx
x.x years
$xxxx
xxxx
$xxxx
17. NON-CONTROLLING INTEREST
Preferred shareholders
Common shareholders
Year
Prior
$ xxxx
xxxx
$ xxxx
xxxx
$ xxxx
$ xxxx
18. CONVERTIBLE DEBENTURES
The sales proceeds of the convertible debentures was allocated first to the debt component based on the
market values of similar bonds without a conversion feature. The residual amount was allocated to the
equity component.
Each $1,000 debentures may be converted into 20 common shares between Month, Day, Year and Month,
Day, Year upon surrendering the debenture to the Company (Note 12).
19. STOCK BASED COMPENSATION COSTS
The cost of stock based compensation plans expensed in Year totaled $xxx (Previous $xxx).
Model Financial Statements  97
Sample Audit Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Month, Day, Year
20. DISCONTINUED OPERATIONS
The Company sold its operation in Westville on Month, Day, Year. The Westville plant processed
non-marketable lumber into woodchips for sale to pulp producers.
Operating loss to the date of disposal (net of income tax recoveries of $xxxx)
Gain from disposal of assets (net of applicable taxes of $xxxx)
$ (xxxx)
xxxx
Net gain/ (loss)
$ xxxx
21. CORRECTION OF ERROR
Income tax expense was incorrectly calculated in Prior. The financial statements of Prior have been
restated to correct this error. The effect of the restatement is that the balance of retained earnings at the
beginning of Year has been reduced by $xxxx, which is the amount by which income taxes as at that date
have been increased. There is no effect on this year’s income.
22. CHANGE IN ACCOUNTING POLICY
Effective the beginning of Year, the Company changed its accounting policy for the treatment of
borrowing costs related to a plant under construction for use by the Company. Previously, the Company
capitalized such costs. They are now written off as expenses as incurred. Management judges that this
policy provides reliable and more relevant information because it results in a more transparent treatment of
finance costs and is consistent with local industry practice, making the Company’s financial statements
more comparable. This change in accounting policy has been accounted for retrospectively, and the
comparative statements for Prior have been restated. The effect of the change on Prior is tabulated below.
Opening retained earnings for Prior have been reduced by $xxx, which is the amount of the adjustment
relating to periods before Prior.
($)
Effect on Prior
(Increase) in interest expense
(xxx)
Decrease in income tax expense
xxx
(Decrease) in net income
(xxx)
Effect on periods before Prior
(Decrease) in net income ($xxx interest
Expense less tax of $xxx)
(xxx)
(Decrease) in assets in the course of construction
And in retained earnings at 31 December Prior
(xxx)
98  Model Financial Statements
Sample Audit Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Month, Day, Year
23. SUBSEQUENT EVENTS
On Month, Day, Year, the Company made an offer to purchase a new production machine valued at
$xxxx.
24. CONTINGENT LIABILITY
A contingent liability exists because of a pending lawsuit relating to product performance. The potential
amount of the damages cannot be estimated at this time due to the complexities of the case.
25. FINANCIAL INSTRUMENTS
Supplemental disclosure for financial instruments
Year
Prior
Income from non-consolidated subsidiaries, non-proportionally consolidated
joint ventures, and interests in joint ventures, measured using the equity
method
$xxxx
$xxxx
Income from all other investments in non-consolidated subsidiaries and
non-proportionately consolidated joint ventures
$xxxx
$xxxx
Income from investments measured using the cost method
$xxxx
$xxxx
Income from investments measured using the equity method
$xxxx
$xxxx
Income from investments measured at fair value
$xxxx
$xxxx
Total interest income
$xxxx
$xxxx
Net gain (loss) on financial instruments
$xxxx
$xxxx
Nature and extent of risks arising from financial instruments
The Company is exposed to a variety of financial risks that arise from owning financial instruments. These
risks include credit risk; currency risk; interest rate risk; liquidity risk; market risk; and other price risks as
described below. Unless otherwise noted, it is management’s opinion that the Company is not exposed to
material credit, currency, interest, liquidity, market, or other price risks arising from these financial
instruments.
The Company’s objectives towards managing risk arising from financial instruments is to minimize it to
the greatest extent possible giving due consideration for cost benefit considerations. A general description
of the processes used follows. The Company’s objectives, policies, and processes, for managing and
measuring the various risks arising from the financial instruments have not changed from the previous
period.
Model Financial Statements  99
Sample Audit Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Month, Day, Year
25. FINANCIAL INSTRUMENTS (cont’d)
Credit risk (default risk) is the risk that one party to a financial instrument will cause a financial loss for
the other party by failing to discharge an obligation. The Company mitigates credit risk on its receivables
through diversification of its customer base and limiting its exposure to any one customer. The Company
minimizes its credit exposure on derivative contracts by entering into transactions only with counterparties
that are major investment-grade international financial institutions.
Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate
because of changes in foreign exchange rates. The company manages this risk through the use of
derivative financial instruments.
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate
because of changes in market interest rates. For liabilities, interest rate risk is minimized through
management’s constant review of demand and maturing debt. The Company structures its finances so as to
stagger the maturities of debt, thereby minimizing exposure to interest rate fluctuations. For assets, this
risk is reduced by diversifying the durations of the fixed-income investments that are held at a given time.
Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with
financial liabilities. The Company obviates liquidity risk by closely monitoring its working capital
position, ensuring sufficient cash, cash equivalents, or readily marketable securities, are available to meet
all liabilities when due.
Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate
because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate
risk, and other price risk. The Company manages these individual risks as described elsewhere in this
section.
Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate
because of changes in market prices (other than those arising from interest rate risk or currency risk),
whether those changes are caused by factors specific to the individual financial instrument or its issuer, or
factors affecting all similar financial instruments traded in the market. The Company manages other price
risk through asset allocation and maintaining a portfolio that is well diversified on both a geographic and
industry sector basis.
Derivative financial instruments
Derivative financial instruments are financial contracts that derive their value from underlying changes in
interest rates, foreign exchange rates, commodity prices, or other financial measures. Such instruments
include interest rate, foreign exchange, and commodity contracts. The Company uses these instruments to
manage the risks associated with its funding and investing strategies or for trading purposes. The notional
and carrying amount of derivatives held by the Company are as follows:
Derivative assets
Derivative liabilities
Notional amount
$xxx
$xxx
100  Model Financial Statements
Year
Carrying amount
$xxx
$xxx
Notional amount
$xxx
$xxx
Prior
Carrying amount
$xxx
$xxx
Sample Audit Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Month
25. FINANCIAL INSTRUMENTS (cont’d)
Hedge accounting
The Company has entered into a forward contract to purchase US$xxx,xxx on Month, Day, Year at a rate
of C$x.xx per US$x.xx. This forward contract was entered into to hedge the payment of a payable related
to the purchase of inventory due on the same date. This transaction has been designated as a hedge of an
anticipated transaction to which hedge accounting will be applied. The net effect will be that the cost of
the inventory will be recorded at C$xxx,xxx.
Quantitative disclosures of risks arising from financial instruments
Credit Risk
The maximum of our credit risk is as described below:
Category
(By type)
Carrying value
Year $
Carrying value
Prior $
Credit risk
Year $
Credit Risk
Prior $
Financial assets
measured at fair
value
xxxx
xxxx
xxxx
xxxx
Financial assets
measured at
amortized cost
xxxx
xxxx
xxxx
xxxx
Total
xxxx
xxxx
xxxx
xxxx
The maximum credit risk assumes an extremely unlikely worst case scenario where all customers
defaulted on their contractual obligations and the Company was unable to recover any monies through
legal action or other collection methods.
The credit quality of our financial assets is considered to be excellent. As previously discussed, the
Company mitigates credit risk on its receivables through diversification of its customer base and limiting
its exposure to any one customer. The Company minimizes its credit exposure on derivative contracts by
entering into transactions only with counterparties that are major investment-grade international financial
institutions. The Company restricts investments in debt instruments to those whose credit are
independently rated to be of Investment Grade.
Liquidity risk
Maturity analysis of financial liabilities
$
Financial liabilities that mature within 30 days from balance sheet date
Financial liabilities that mature between 31-90 days from balance sheet date
Financial liabilities that mature between 91 days and one year from balance sheet date
Financial liabilities that mature in more than one year, but not later than five years from
balance sheet date
xxxx
xxxx
xxxx
xxxx
Total
xxxx
Model Financial Statements  101
Sample Audit Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Month
25. FINANCIAL INSTRUMENTS (cont’d)
Market risk
Value at risk
At fair value
Other financial instruments
Year $
Net Income
xxxx to xxxx
xxxx to xxxx
Potential Impact
Prior $
Net Income
xxxx to xxxx
xxxx to xxxx
Value at risk is a technique that uses the statistical analysis of historical market trends and volatilities to
estimate the likelihood that losses to the Company’s portfolio will exceed a certain amount. This
measurement captures the interdependency of the three components of market risk: currency risk, interest
rate risk, and other price risk.
The use of this method assumes that historical results can be used to forecast future outcomes within a
range of possibilities. The primary limitation of this method is that catastrophic events that cannot be
reasonably predicted, such as 9/11, may result in an actual drop in value greater than the forecast
maximum.
26. INCOME TAXES
The note that follows is based on the company electing to use the taxes payable method of reporting
income taxes. See Note 1 for an example of the supplemental disclosure required if the company elects to
use the future income taxes method.
A reconciliation of the statutory income tax rate to the effective income tax rate is as follows:
Combined basic federal and provincial statutory income tax rate
Other items
YYY gain and equity losses subject to capital gains rates
Change in substantially enacted tax rates
Effective tax rate
YEAR
xx
xx
—
xx
xx
PRIOR
xx
xx
(xx)
—
xx
As at YEAR Company had non-capital loss carryforwards available to reduce future years’ taxable
income which expire as follows:
YEAR plus two
YEAR plus three
YEAR plus four
YEAR plus five and beyond
Totals
102  Model Financial Statements
xx
xx
xx
xx
xx