Chapter 2 The Balance Sheet!
Quiz on Friday Sep 12
Let’s go over Ex 3 (P29)
Claims against the Assets
•We learned yesterday that we list the
assets on the left side of the balance
sheet.
•Who is entitled to these assets?
•The answer is shown on the right side
of the balance sheet: Both the
creditors (lenders) and owners have a
claim on the assets.
Claims against the Assets
•Thinking about assets and claims
against them will help you understand
why the fundamental accounting
equation is written as A = L + OE
•Assets = Creditors’ claims against
the assets (L) + Owner’s claim
against the assets (OE)
Claims against the Assets
•If the business went bankrupt today,
who would take possession of the
assets?
•Both creditors (Liabilities) and
owners (Owner’s Equity) would claim
the assets.
•But the creditors (lenders) would
obtain their money first and then (if
there is any money left over,) the
owner will obtain money.
Claims against the Assets
Let’s say that the business went
bankrupt. (Page 31 example)
•If the supplies, furniture,
equipment and automobile are sold
as “used item” price, the money we
get from selling them would be
lower than what is recorded in
Balance Sheet.
=(Fair Market Value < Book value)
Claims against the Assets
•In this example, we only obtained
$37,571 (FMV) instead of
$49,121.(Book value)
• This means we lost $11,550 from
selling the furniture, equipment and
car.
•Then the $11,550 amount will not
hit the creditors’ claim but this
amount will hit only what the owner
will receive.
Claims against the Assets
•The creditors will receive 100% of
what they can claim whereas the
owner will receive only 22615 instead
of 34165.
•Only the owner takes the loss.
•On the other hand, if the assets were
sold at higher price than the book
value, then only the owner will benefit
from the selling.
Claims against the Assets
•For example, if the selling price was
$59121, then the owner will take home
$44165 (owners made $10000 profit).
The creditors take only their original
principal of 14956.
Accounting Standards
-Historically, the Canadian Institute of
Chartered Accountants (CICA) has
established the accounting standards for
Canadian accountant.
-CICA made CICA Handbook and
updated regularly.
-The most important part of the CICA
handbook contains Canadian Generally
Accepted Accounting Principles
(Canadian GAAP)
Accounting Standards
-Accounting Standards Board is governing
body in Canada. (AcSB)  like Police in
accounting
-Canadian Public Corporation (their stocks are
traded in stock exchange. Examples are Air
Canada and Bell Canada) must use IFRS
(International Financial Reporting Standards)
rule whereas non-public companies in
Canada can use the Accounting Standard
for Private Enterprises (ASPE) = Canadian
GAAP. (since Jan 1 2011)
IFRS and
Balance Sheet Formats
•Figure 2.11 (Page 36) shows the
pattern of balance sheet under Canadian
GAAP.
•Small companies in Canada still use
ASPE (or Canadian GAAP)
•However, Canadian public companies
have to use IFRS rule instead of
Canadian GAAP, so they will follow
Figure 2.12 (Page 36).
IFRS Balance Sheet Formats
•The order of both sides of the
balance sheet has turned upside
down. (e.g. Long term asset first and
then current asset)
•The name of Balance Sheet is
Statement of financial position under
IFRS.
Classwork / Homework
• P32 Review Questions (1-5)
•P32 Exercises 1 and 2
•P37 Review #1, 2, 3, 4, 5,6, 7