chapter 01 power point 2011 fall1

8/3/2019 Chapter 01 Power Point 2011 Fall1

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CHAPTER ONE

FINANCIAL REPORTING

1


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What is accounting?

What is accounting? Accounting is a system that provides information. A business language used to report the financial information

(results) of a business.

Financial information- financial statements

Financial Statements include 1. Balance sheet / Statement of Financial Position 2. Income statement / Statement of Earnings / Statement of

Comprehensive Income

3. Statement of Retained Earnings / Statement in Equity 4. Statement of cash flow 5. Notes to financial statements

Public companies must publish Annual Reports


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ANNUAL REPORT

Who prepares financial statements? Management is responsible to prepare F/S and for the info in F/S. Managers run company , often salary is bonus based on net income

Audited financial statements AuditorsChartered Accountant that works at public accounting

firm.

Price Water House

Hired by board of directors to ensure F/S are prepared fairlyfollowing GAAP and presented fairly.

Auditors report -Auditor gives opinion as to the fairness of F/S. Opinion paragraph is found on the first page of audited financial

statements. Signed by the auditor firm.


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FORMS OF BUSINESS ORGANIZATIONS:BUSINESS - ENTITY

1. proprietorship 2. partnership 3. corporation - simplest - similar -complex - proprietor - partners - shareholder - 1 owner -2 or more - 1 or more

corp. inc. ltd.

- simple -must have -easy to raiseagreement money

- unlimited -unlimited -limited

liability liability liability

- owners - partners -shareholders capital capital equity


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PRIVATE CORPORATIONS VS PUBLICCORPORATIONS

-Public company

Shares trade on stock market.

Anyone can buy/sell shares. Must abide by more rules.

-Private company Are not traded publically

Friends /family are owners


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FINANCIAL STATEMENT USERS

Who are the users and what are the uses ?

Internal users:

Managerial accounting

Managers..Determine selling prices of goodscontrol costs, select suppliers

Board of directors..Watch out for owners best interest:pay dividends,


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FINANCIAL STATEMENT USERS

External users: Financial accounting

Shareholders ....Assess management

Investorsdecide to buy or sell shares

Government.Income taxes

Bank.Decide whether or not to lend money

Creditors.Suppliers want to take minimal risk

Securities exchange..Regulators when publiccompany trades shares


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ACCOUNTING STANDARDS

How can I trust financial statements? When F/S are being prepared there are rules and guidelines that

must be followed.

How do we ensure all of the above? Follow rules and guidelines;

CICA Canadaian institute of chartered accountants- handbook GAAP- Generally accepted accounting principles IFRS- (2011) International reporting standards


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Understanding IFRS GAAP- Generally Accepting Accounting Principles

Canadian accounting practices used currently IFRS- International Financial Reporting Standards

Will replace GAAP in the year 2011.IFRS will change accounting policies and reporting

Who will use IFRS?

Over 100 countries in the world will use the international standards.the following counties have already initiated conversion:

Australia, Hong Kong, New Zealand, China, Brazil, Canada, Chile, India,Japan , Korea, Israel, Malaysia, Mexico, Singapore, Russia, Turkey, and allEuropean Countries , and USA.

PAE- Publically accountable enterprises.In Canada there are 4500 public companies that must use IFRS.Some private companies may chose to use IFRS.

Why use IFRS?

IFRS will promote a single set of high quality standards world wideIFRS will promote consistency and comparability globally


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CHARACTERISTICS OF ACCOUNTING INFO

F/S must have all of the following features to renderthem trustworthy & useful:

1- Financial statement information must beunderstandable;

Not all users are accountants, info should be easy tounderstand. 2-Financial statement information must be relevant; Info should make a difference in our opinion of the

company. It Predicts the future It Confirms our decision.


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CHARACTERISTICS OF ACCOUNTING INFO

3 - Financial statement information must be Reliable: Faithful representation. Substance over form. sometimes reality of a situation

can not follow specific rules_ exception to the rules

Neutral. Info must be unbiased. Prudence ( previously referred to as conservatism) Completeness.

3- Financial statement information must be comparable:


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CHARACTERISTICS OF ACCOUNTING INFOCONSTRAINTS

Constraints:

Exceptions to the rules

1-Timeliness-

report are published quickly can compromise reliability. 2-Cost / benefit-

restricts what we report.

3-Qualitative characteristics balance-

At times we need to use professional judgment.


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IFRSCONCEPTS

Prudence (Conservatism)- Takes first place over most rules. -Accountants do not take risk. -Do not overstate.

-When choices are available pick the one thatgives least favorable results.

Example-

Company XYZ purchased a second hand car: Listed at $15,000, Market Value $ 14,000,

company paid $13,000.

Report Automobile at $13,000, conservative.


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GAAP

CONCEPTS Cost /benefit- The value of the benefit received from F/S

should outweigh costs to produce info. Not all info is reported, too costly Weekly F/Sbeneficial , but too costly.

Entity concept-

Owner is separate from the company. A business can be called an entity. The accounting transactions must be kept

separate between owner and entity.


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GAAPCONCEPTS

Materiality-

A material transaction will effect the decision of the F/S user.

You have been approached by company xyz for a loan. Management has asked to borrow $10,000, to be repaid .

Company XYZ has $23,245.26 in the bank. Is there any difference of your opinion if you were told : Company XYZ has $23,200.00 in the bank.

Answer: If you answered no that means the 45.26 is immaterial.

Example from text book: Sun- rye products F/S are rounded to the thousands.

Net earnings $5,214 means $5,213,876.


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BUSINESS ACTIVITIES

Operating activities Results of operating the company. If XYZ company sells

boots, then operations is the buying of boots and sellingof boots and all the expenses related to selling the boots.

Investing activities Excess cash what should we do with it. Invest in:

Real estate, machinery, shares, bonds.

Finacing activities We need cash , how do we get it.

Borrow from the bank, or an owner or a director.

Sell shares in our company


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FINANCIAL STATEMENTS

Statement of Comprehensive Income (statement ofearnings )

-shows how successful the company was .

- Shows results of operating business. - Usually one year period.

Revenue - Expenses

= net income

(Net loss)


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Statement of Earnings Revenues

inflows Amounts we receive from operating the company.

Sales , revenue, income ,earned.

Expenses Outflows -Costs incurred trying to generate a revenue.

Rent exp. , Advertising exp., Salary exp., Property tax exp., Supplies exp., Insurance exp.,

Telephone exp., Cost of goods sold exp (shown 1

st

). Amortization exp, Interest exp ( Financing costs) ( shown at bottomseparately),

Income tax exp. ( Provision for income taxes) (Shown last)

Operating Expenses are divided into two categories: Selling expenses General and administrative expenses


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STATEMENT OF EARNINGSABC.CO. INC.

FOR THE YEAR ENDED JUNE 30 2008.

REVENUES SALES $XX EXPENSES COST OF GOODS SOLD EXP XX ADVERTISING EXP XX RENT EXP XX UTILITIES EXP XX INSURANCE EXP XX AMORTIZATION EXP XX INTEREST EXP XX TOTAL EXPENSES XX

EARNINGS BEFORE INCOMETAXES EXP XX INCOME TAX EXPENSE -XX NET EARNINGS OR NET INCOME XX


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STATEMENT OF EARNINGSABC.CO. INC.

FOR THE YEAR ENDED JUNE 30 2008.

REVENUES SALES $XX EXPENSES COST OF GOODS SOLD EXP. XX ADVERTISING EXP XX RENT EXP XX UTILITIES EXP XX INSURANCE EXP XX AMORTIZATION EXP XX INTEREST EXP XX TOTAL EXPENSES XX

EARNINGS BEFORE INCOMETAXES EXP 100,000 INCOME TAX EXPENSE 25% -25,000 NET EARNINGS OR NET INCOME 75,000


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BALANCE SHEET

Assets = liabilities + equity Balance sheet is a picture of a company. What it owns and owes at a particular point in time. Take the picture on the last day of the companys year.

Assets 1. Something the company owns and has rights to use. 2. That will provide a future economic benefit, 3. It has a monetary value as a result of an event that has occured .

Examples Cash , Accounts receivable , Short term investments , Supplies , Inventory , Prepaid Expenses, Computer , Truck,

Land , Building,


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Balance Sheet continued

Liabilities- Opposite of assets.

Something the company owes, as a result of atransaction having taken place. A future sacrifice to be made as a result of a transaction. Examples Bank indebtedness, Accounts payable , Note payable ,

Loan payable , Accrued liabilities payable Interest payable, Income taxes payable.


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Classified Balance Sheet

Current assets

List based on liquidity.

Liquidity means: how easy it is to turn something into cash.

Capital assets- List opposite of liquidity-permanency.

Land is more permanent than an automobile.

Land, Building, Equipment, Automobile, Computer.

Current liabilities List in order of payment


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Shareholders equity

Assets = Liabilities + Shareholders equity

S/H equity =

Share capital + Retained Earning

(Common Shares) (Net Income) (Revenue expenses)


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Classified Balance Sheet (GAAP)As at June 30 2011

ASSETS CURRENT ASSETS

CASH XX ACCOUNTS RECEIBVABLE XX INVENTORY XX SUPPLIES XX TOTAL CURRENT ASSETS XX CAPITAL ASSETS LAND XX BUILDING XX TOTAL CAPITAL ASSETS XX

TOTAL ASSETS

LIABILITIES AND SHAREHOLDERS EQUITY

LIABILITIES NOTE PAYABLE XX ACCOUNTS PAYABLE XX SALARIES PAYABLE XX INTEREST PAYABLE XX TOTAL LIABILITIES XX


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Classified Balance Sheet (GAAP)As at June 30 2011

SHAREHOLDERS EQUITY

SHARE CAPITAL XX

RETAINED EARNINGS XX TOTAL EQUITY XX

TOTAL LIAB. AND

SHAREHOLDERS EQUITY XX


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Classified Balance Sheet (IFRS)As at June 30 2011

ASSETS CAPITAL ASSETS

LAND XX BUILDING XX EQUIPMENT XX TOTAL CAPITAL ASSETS XX

CURRENT ASSETS PREPAIDS XX SUPPLIES XX INVENTORY XX ACCOUNTS RECEIVABLE XX CASH XX TOTAL CURRENT ASSETS XX

TOTAL ASSETS XX


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Classified Balance Sheet (IFRS)As at June 30 2011

LIABILITIES AND SHAREHOLDERS EQUITY

SHAREHOLDERS EQUITY

SHARE CAPITAL XX

RETAINED EARNINGS XX

TOTAL EQUITY XX

TOTAL LIABILITIES

LONG TERM LIABILITIES XX

CURRENT LIABILITIES NOTE PAYABLE XX

ACCOUNTS PAYABLE XX SALARIES PAYABLE XX ACCRUED LIAB PAYABL XX TOTAL LIABILITIES XX

LIABILITIES AND EQUITY XX


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STATEMENT OF RETAINED EARNINGS

. Link between the Balance sheet and Statement of earnings.

Lola locksmith inc. Statement of Retained Earnings

For the year ended December 31 2011. Opening retained earnings $ xx Plus, net earnings + xx xx

Less, dividends paid - xx Closing retained earnings xx


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STATEMENT OF RETAINED EARNINGS

Lola locksmith inc. Reported net income of $45,000 in 2010. The company reported a retained earnings of $30,000 for Dec.31, 2009 The company decided to pay a dividend of $10,00o to the shareholders for the year 2010.

Required: Prepare a statement of retained earnings for December 2010.

Lola locksmith inc. Statement of retained earnings For the year ended Dec. 31 2010.

Opening retained earnings $ 30,000 Plus, net earnings + 45,000 75,000 Less, dividends paid - 10,000

Closing Retained Earnings $65,000


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STATEMENT OF CASH FLOW

Summarizes the cash inflows and cash outflows for theyear.

Shown by activities: Operating activities

Investing activities

Financing activities

Notes to financial statements

Provide more details and explanations.

ANNUAL REPORT


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ANNUAL REPORT

Who prepares financial statements? Management is responsible to prepare F/S and for the info in F/S.

Managers run company , often salary is bonus based on net income

Audited financial statements AuditorsChartered Accountant that works at public accounting

firm.

Price Water House

Hired by board of directors to ensure F/S are prepared fairlyfollowing GAAP and presented fairly.

Auditors report -Auditor gives opinion as to the fairness of F/S. Opinion paragraph is found on the first page of audited financial

statements. Signed by the auditor firm.

211


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211FINANCIAL ACCOUNTING

CHAPTER ONEHAND OUT

Question #1 Willie Repair Shop had the following items in its records as at

August 31 , 2011 . Cash $8,000 Bank loan 20,000

Building 50,000 Supplies 1,100 Accts receivable 500 Common shares 18,000 Retained Earnings 20,900 Accts payable 700

Required : Prepare a classified Balance Sheet according to GAAP for the end

of August.

MGCR 211


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MGCR 211FINANCIAL ACCOUNTING

CHAPTER ONEHAND OUT

QUESTION #2

You own your and operate your private corporation. Youneed to raise money to expand your operations , andyou approach a bank for a loan. The bank loan officer

has asked you for financial statements that are audited.

A) Why would the officer ask that the financialstatements are audited?

B) What items on the financial statements would be ofthe most interest to the loan officer ?


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Chapter onehand out-solution

Question #1 Willie Repair Shop As at August 31 , 2011.

Assets

Current assets Cash 8,000 Acct receivable 500 Supplies 1,100 9,600 Capital assets Building 50,000

Total assets 59,600


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Chapter onehand out-solution

Liabilities & Shareholders Equity Liabilities Current Bank loan payable 20,000 Acct payable 700

Total liabilities 20,700

Shareholders Equity Common shares 18,000 Retained earnings 20,900

Total equity 38,900 Total liabilities & Shareholders equity 59,600


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CHAPTER ONEHAND OUT-solution

QUESTION #2 Part A The loan officer would want audited financial statements

because this will add credibility to the financialstatements.

The audited F/S will be reliable.

The financial statements are audited , that means GAAP

will be followed.

The audited F/S will be comparable and understandable.


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CHAPTER ONEHAND OUT-solution

Part B The loan officer will be interested in your companys ability to repay

the loan and to be able to meet the periodic interest payments.

The income statement shows net income and is a good indicator of

companys success.

The statement of cash flow will show cash flow problems if there areany.

The bank will also ask for collateral in case you can not pay interest

/ principle, so certain assets of company (Land or building) will bepledged as collateral .

The loan officer can see values of assets on the balance sheet.

chapter 01 power point 2011 fall1

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