FINANCIAL ACCOUNTING
a user perspective
Sixth Canadian Edition
CHAPTER ONE
Overview of Corporate Financial Accounting
John Wiley & Sons Canada, Ltd. ©2011
Prepared by L. de Grace C.A.
Overview of Corporate Financial
Reporting

Accounting: an information system in which the
underlying economic conditions of
organizations and individuals are recorded,
summarized, reported, and understood
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Corporate Financial Reporting


Financial statements: reports summarizing a
company’s performance during a particular
period.
Annual report: reports the results of the
company’s activities during the year
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Forms of Organization
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Profit-seeking entities
Governing organizations
Service entities
Not-for-profit entities
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Forms of Organization
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Sole proprietorships
Partnerships
Limited partnerships
Joint ventures
Crown corporations
Corporations
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Corporate Financial Reporting


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Shareholders’ equity: initial investment in the
business entity in the form of cash or property
Share: document that represents ownership in
the corporation
Shareholders: owners
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Users of Financial
Statement Information

Internal users:
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Management
Board of Directors
External users:
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Shareholders
Potential investors
Creditors
Regulators
Taxing authorities
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Other corporations, including
competitors
Security analysts
Credit-rating agencies
Labour unions
Journalists
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Development of Accounting Standards

IFRS
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International Financial Reporting Standards
Set by International Accounting Standards Board (IASB)
in junction with International Organization of Securities
Commissions (IOSCO)
Canadian public companies must adopt IFRS by
January 1, 2011.
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Characteristics of Accounting Information
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Understandability
Comparability
Relevance
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Predictive value
Confirmatory value
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Reliability
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Faithful Representation
Substance over form
Neutrality
Prudence
Completeness
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Constraints of Accounting Information
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Timeliness
Balance between benefits and cost
Balance between qualitative characteristics
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Business Activities
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Financing Activities
Investing Activities
Operating Activities
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Financing Activities
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Borrowing money
Repaying loans
Issuing shares
Repurchasing shares
Paying dividends on shares
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Investing Activities
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Purchase or sale of property,
plant, and equipment
Investments or sale of
investments in the shares of other
companies
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Operating Activities
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Sales to customers
Collections of
amounts owed by
customers
Purchases of
inventory
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Payments of amounts
owed to suppliers
Payments of expenses
Payments of taxes
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Annual Report
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Corporate profile
Message to shareholders
Management’s Discussion and Analysis
Board of directors and management
Financial section
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Financial Section Components
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Statement of Management’s Responsibility
Auditor’s report
Financial statements
Statement on corporate governance
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Statement of
Management’s Responsibility
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
Contains a statement by management that it is
responsible for the contents of the annual report
Outlines steps taken to ensure safekeeping of
assets and the practice of ethical and
responsible management
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Independent Auditors’ Report

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Independent professional accountants’ opinion
about the fairness of the presentation and
conformity to accounting guidelines
Ethical considerations
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Financial Statements
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Statement of Comprehensive Income
•
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Statement of Financial Position
•
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Income Statement; Statement of Earnings
Balance Sheet
Statement of Cash Flows
Statement of Changes in Shareholders’ Equity
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Statement of Comprehensive Income
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Describes the revenues and expenses of the
current period
Expenses may also be recognized in a future
period
•
ie. Depreciation expense allocates the cost of
equipment over several years of benefits
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Statement of Comprehensive Income

Common items
 Sales
revenues
 Other income
 Cost of goods sold
 Selling, general, and administrative expenses
 Amortization, interest, and income tax expenses
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Statement of Financial Position
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Financial status of the company at a particular
point in time
Lists what is owned (assets) and what is owed
(liabilities), measuring net worth (shareholders’
equity)
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Assets

Characteristics
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Something that has probable future value that can
be measured
The company can control the benefit from the future
value through ownership or rights to use the assets
The event that gave the company the ownership or
right has already occurred
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Assets
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Examples
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Cash
Short-term (temporary) investments
Accounts receivable
Inventory
Prepaid expenses
Capital assets
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Liabilities
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Amounts that the company owes to others
Probable future sacrifice of resources: cash,
services, or goods
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Liabilities
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Examples
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Bank indebtedness
Accounts payable
Notes payable
Dividends payable
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Accrued liabilities
Taxes payable
Long-term debt
Future income tax
liabilities
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Liquidity
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Assets and liabilities are listed on the balance
sheet in liquidity order
Liquidity: how quickly the company can turn the
asset into cash
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Basic Accounting Equation
Assets = Liabilities + Shareholders’ Equity
OR
Shareholders’ Equity = Assets - Liabilities
(Net Assets)
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Shareholders’ Equity


Value of the shareholders’ interest in the
company as measured by the accounting
guidelines
Usually composed of at least two accounts:
•
•
Share capital
Retained earnings
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Share Capital
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Represents the shares that have been issued by
the company
Usually stated at an amount equal to what was
originally paid by investors for the shares
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Retained Earnings

The earnings of the company (as measured on the
Income Statement) that have been kept (retained)
and not paid out in the form of dividends
Change in Retained Earnings = Net Income - Dividends
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Statement of Cash Flows
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Measures inflows and outflows of cash during a specific
period of time
Sections
• Operating Activities
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Financing Activities
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All inflows & outflows related to the company’s sale of goods or
services
Transactions that either generate new funds from investors or
return funds to investor
Investing Activities
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Inflows and outflows related to long-term assets
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Notes to the Financial Statements
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More detail about specific referenced items
Includes the Summary of Accounting Policies
Includes information about various segments of
the company
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Professional Accounting Organizations
in Canada
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Canadian Institute of Chartered Accountants (CAs)
CMA Canada: Certified Management Accountants
(CMAs)
Certified General Accountants’ Association of
Canada (CGAs)
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Professional Accounting Organizations
in Canada
Click on one of the links below to find out more on
accounting as a profession:
CICA
CMA Canada
CGA Canada
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contained herein.
John Wiley & Sons Canada, Ltd. ©2011