chapter 12: corporations and their financial...

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CHAPTER 12:

CORPORATIONS AND THEIR

FINANCIAL STATEMENTS

Chapter Overview

A. There are five financial statements used by investors to gauge and

compare corporate performance:

(1) The balance sheet, which shows assets, liabilities, and net worth

as of its date.

(2) The earnings statement, which shows annual revenues and

expenses.

(3) The retained-earnings statement, which shows profits accruing in

the business.

(4) The cash-flow statement, which shows how cash was earned and

spent over the course of a year.

(5) The annual report, which, in its footnotes, shows details that

reveal certain activities of the company that may not be readily

apparent through the financial statements.

Topic One: The Balance Sheet

1. Overview

A. The balance sheet is a snapshot that, in two columns, shows, as of its

date:

(1) What the company owns (assets).

(2) What the company owes (liabilities).

(3) Assets minus liabilities (the shareholders' equity or net worth).

(a) Shareholder equity is called the book value of the

company. It may be more or less than the market value

of the shareholders’ interest.

CSC Volume I Study Notes

184

(4) In order for one column to equal the other (i.e., to balance),

shareholder equity is added to liabilities, as shown in the balance-

sheet formula:

Total assets = total liabilities + shareholders’ equity

(a) A very simple “schematic” balance sheet would show:

Assets $1,000,000 Liabilities $ 700,000

_________ Shareholders’ equity 300,000

$1,000,000 $1,000,000

Note: The fictional financial statements in the following pages correspond to the

explanations after the statements, starting on page 195. We suggest you remove

the statements from this book and then use them side-by-side with the

explanations.

Chapter 12: Corporations and their Financial Statements

185

Consolidated Balance Sheet of DOA Industries

($000s)

as at December 31, 201X

ASSETS LIABILITIES

Current Assets Current Liabilities

1 Cash and balances $650

18 Bank advances $1,125

2 Temporary investments 1,500

19 Accounts payable 1,965

3 Accounts receivable 875

20 Dividends payable 55

4 Prepaid expenses 675

21 Income taxes payable 385

5 Income taxes recoverable 440

22 Bonds due in one year 875

6Inventory (merchandise) 6,450

23 Accrued liabilities 265

7 Total Current Assets 10,590

24 Total Current Liabilities 4,670

8 Miscellaneous Assets

25 Future Income Taxes 675

Investment in affiliated

company 1,875 26

Non-controlling Interest in

Subsidiaries 525

9 Capital Assets

27Long Term Debt

10 Land 2,225 8% callable debenture due

11 Buildings 3,550 Jan. 31, 2015 5,225

12 Equipment 10,750

Total 16,525 Total Liabilities 11,095

13Accumulated depreciation (6,650)

SHAREHOLDER EQUITY

Net value of capital assets 9,875 28

Capital Stock

10% Cum Red. Pfd. ($25 p.v.)

14 Deferred Charges 375 outstanding 50,000 shares 1,250

15 Intangible Assets

29Common Stock (Authorized 1,500,000;

16 Goodwill 725 outstanding 975,000 shares) 4,875

30

Retained Earnings 4,765

31

Contributed Surplus 685

32

Translation Adjustment 770

33

Total Shareholder Equity 12,345 17

TOTAL ASSETS 23,440 34

TOTAL LIABILITIES and

SHAREHOLDER EQUITY 23,440


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Consolidated Earnings Statement of DOA Industries

($000s)


OPERATING SECTION 35

Net sales $25,300

36 Cost of goods sold (18,950)

37 Operating income (or gross operating profit) 6,350

38 Depreciation (1,875)

39 General expenses (82)

40 Director’s remunerations (375)

41 Net operating profit 4,018

42

Non-Operating Section

Income from investments 465

43 Total (Earnings Before Interest and Taxes) 4,483

CREDITORS’ SECTION 44

Bank interest (1,587)

45 Bond interest (418)

46 Net Income Before Taxes (NIBT) 2,478

OWNERS’ SECTION

Income taxes

47Current (975)

48 Future (447)

49 Non-controlling (127)

50 Equity income 968

51 Total Net Income Before Extraordinary Items (NEBEI) 1,897

52 Extraordinary items (net of taxes) 221

53 Net Earnings (Deficit) after Extraordinary Items (Net Income) $2,118


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189

Consolidated Statement of Retained Earnings of DOA Industries

($000s)


54 Balance at beginning of the year $4,189

55 Net income for the year (after extraordinary items) 2,118

$6,307

56 Dividends

56a Preferred shares (10% of par value) (125)

56b Common shares ($0.56 per share) (546)

56c Special dividend on common shares (871)

57 Total Retained Earnings $4,765


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Consolidated Statement of Cash Flows of DOA Industries

($000s)


58Operating Activities

59Earnings before extraordinary items $1,897

60Add items not involving cash – depreciation 1,875

61Future Income Taxes 447

62Non-controlling interest in income of subsidiary

companies

127

63Equity income – affiliated company (968)

64Net change in operating working capital items

(1,480)

Cash Flows from Operating Activities

1,898

Financing Activities

65Proceeds from share issue 0

66Repayment of long-term debt (875)

67Borrowing of long-term debt 0

68Dividends paid (1,542)

Cash Flows from Financing Activities

(2,417)

Investing Activities

69Acquisition of capital assets (150)

70Proceeds from disposal of capital assets 221

71Dividends received from affiliated company

838

Cash Flows from Investing Activities 909

72Increase in Cash and Temporary Investments 390

73 Cash and Temporary Investments –

beginning of year

1,760

74 Cash and Temporary Investments – end of year 2,150

Supplemental Information

75Interest Paid 2,005

76Income Tax Paid 975


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2. Classification of Assets on the Balance Sheet

A. Assets are categorized as:

(1) Current assets

(a) Current assets are assets that can be converted into cash

in one year or less. They indicate the ability of the

company to pay daily operating expenses.

i. Current assets appear on the balance sheet in

descending order of liquidity, with cash, of course,

being most liquid, and followed by:

- Temporary investments

- Accounts receivable

- Prepaid expenses

- Income taxes recoverable

- Inventory

(2) Miscellaneous assets

(3) Capital assets

(4) Deferred charges

(5) Intangible assets

(6) Goodwill

B. Amortization is a portion of the value of an asset written off against

earnings each year. It is similar to depreciation. For example, as

equipment wears out, its loss in value is amortized. (Amortization of

capital assets is not shown on the DOA statements.)

C. Depletion sees a portion of the value of a depleting or reducing asset

written off against earnings during each year of the asset’s predetermined

life. Depletion recognizes how extractive industries such as mining lose

their asset base over time; accordingly the assets are called wasting

assets.

(1) The amount recorded as depreciation each year depends on the

method of depreciation used:

(a) The straight-line method: where an equal amount of

depreciation is charged to each period against the original

costs.

i. For example:

Equipment is bought for $55,000. It will have a useful

life of five years and a salvage value of $5,000.


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Under the straight-line method, the annual charge is

[$55,000 – $5,000] ÷ 5 = $10,000. Thus, $10,000 will

be deducted annually as a depreciation charge.

(b) The declining balance method where a fixed

percentage is charged against the declining balance.

i. For example:

The same equipment is bought for $55,000. It will

have a useful life of five years and a salvage value of

$5,000.

Under the declining-balance method, the depreciation

rate is 100% ÷ 5 = 20% x 2 = 40%. Thus, 40% of the

value of the equipment will be deducted annually as a

depreciation charge.

Straight-Line vs. Declining-Balance Depreciation Over a Period of 5 Years

Straight-Line Declining Balance

Fiscal Year End

Depreciation Charge Book Value

Depreciation Charge Book Value

1. $10,000 $45,000 ($55,000 – $10,000)

$22,000 ($55,000 x 0.4)

$33,000 ($55,000 – $22,000)

2. $10,000 $35,000 ($45,000 – $10,000)

$13,200 ($33,000 x 0.4)

$19,800 ($33,000 – $13,200)

3. $10,000 $25,000 ($35,000 – $10,000)

$7,920 ($19,800 x0.4)

$11,880 ($19,800 – $7,920)

4. $10,000 $15,000 ($25,000 – $10,000)

$4,752 ($11,880 x0.4)

$7,128 ($11,880 – $4,752)

5. $10,000 $5,000 ($15,000 – $10,000)

$2,851 ($7,128 x0.4)

$4,277 ($7,128 – $2,851)

(c) It is possible for a company to add substantially to its

cash and show little or no earnings if it has substantial

depreciation charges.

(d) Amortization and depletion are non-cash uses of funds.

D. The item numbers in the column on the left in the following table

correspond to the superscript numbers of assets on the DOA balance

sheet.


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Item

no.

Explanation

1 Cash available.

2 Stocks and bonds that can be easily sold for cash.

3 Accounts receivable: money due to the company for goods or services provided, less

allowance for doubtful accounts (e.g., the estimated amount that is unlikely to be

collected from customers who fail to pay their bills).

4 Prepaid expenses: claims for services that have been paid but for which the benefit has

not been fully received (e.g., car insurance, rent that has been paid in advance).

5 Income taxes recoverable: government tax refunds.

6 Inventories or goods in stock: items used to provide the product or service.

Three different calculations can be used to value inventories:

- Average cost values all inventory on an individual basis and averages the total.

- FIFO (first-in-first-out). Inventory is valued from oldest to newest. Oldest

inventory is used first, because these costs are lower (due to increasing prices).

Company profits will accordingly be higher.

- LIFO (last-in-first-out). Inventory is valued from newest to oldest and the

newest inventory is used first. The higher cost of this inventory is reflected in

lower company profits.

7 The total of all current assets.

8 Miscellaneous Assets

These assets do not fall within the other categories of assets. For example, they can

include:

- Cash surrender value of life insurance.

- Funds due from directors, officers, employees, etc.

- Long-term investments.

- Investments or advances to subsidiary and affiliated companies.

DOA Industries has invested $1,875,000 in another company. This appears as a

miscellaneous asset on the balance sheet and on the earnings statement under the

heading of Equity Income.

9 Capital Assets (property, plant, and equipment)

Capital assets are used to produce goods and services for sale; they include land,

buildings, and machinery.

Except for land, capital assets are depreciated (amortized) each year. See notes

on depreciation/amortization below.

Capital assets are shown on the balance sheet at original cost less accumulated

depreciation; this is called their net book value or net carrying amount.


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10 Land

11 Buildings

12 Machinery, tools, and equipment.

13 On the balance sheet, one figure shows the accumulated balances for all depreciation and

depletion, and it is deducted from the capital assets. The notes to the financial statements

provide the proper breakdown.

3. Capitalized Charges (Not Shown on DOA Statements)

A. Capitalized charges record expenditures such as leases or interest costs

as assets rather than expenses, in order to spread an expense over more

than one accounting period.

B. A capitalized lease is a lease that finances the acquisition of an asset is

considered an asset that is recorded at fair market value. The lessee

assumes liability for the asset as if it had been purchased outright.

(1) The liability is recorded as the present value of future lease

payments.

(2) The leased item is recorded at its net carrying amount (cost less

accumulated amortization) on the asset side of the balance sheet.

Its cost is a liability, recorded as the present value of future lease

payments.

C. Capitalized interest is recorded by some companies (particularly those

active in exploration or construction) capitalize interest costs to align

expenses, such as interest costs, with revenues.

(1) The cost of interest is either added to the cost of the asset, and

then expensed in subsequent periods once the asset commences

operation, or it is deferred (see item 14 below).

14 Deferred Charges

(2) Deferred charges represent payments a company makes for which benefits will

extend over a period of years.

(3) Example of a deferred charge: An exploration company discovers a silver mine

worth $20 million that has a life expectancy of 20 years. The cost of discovering

and putting the mine into operation (e.g., prospecting, land filing charges, etc.) are

$1 million. The $1 million is not expensed in one year but is amortized over the


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life of the asset, in this case, 20 years.

(4) The value of deferred assets appears as an asset on the balance sheet.

(5) Another example of a deferred charge: the expenses incurred when issuing a bond

that is not going to be repaid until 15 years after issue. The expenses incurred for

issuing the bond (e.g., prospectus, legal, and filing fees) are amortized over the life

of the bond. Coupons are a liability.

15 Intangible Assets

Intangible assets (also called miscellaneous assets or other assets) include patents,

copyrights, and leaseholds. They are recorded at fair value or at an amortized value.

Intangible assets contribute, or can contribute, to the earning power of a company,

but are not assets that can be easily valued.

Intangible assets with a specified lifetime (e.g., a copyright for 50 years) are

amortized over that period.

Intangible assets with perpetual value (e.g., a patent) are recorded at fair value, but

this may be reduced if it appears their value is no longer accurate.

16 Goodwill

Goodwill represents the positive relationship between a company and its customers

or the value of the management team to a buyer of the company.

Goodwill is shown on combined balance sheets as an excess of the amount paid for

shares over their net asset value.

Example of goodwill: $2 million was paid over and above the book value of a

clothing store because of its prime location. The $2 million would be listed as

goodwill and written off over a period of time.

The value of goodwill and intangible assets should be proven annually.

17 Total Assets

The total of all assets of the company.

4. Classification of Liabilities

A. Liabilities are categorized as:

(1) Current liabilities that must be repaid within one year. They

include:

(a) Bank advances.

(b) Accounts payable.

(c) Dividends owed.

(d) Income taxes owed.

(e) First mortgage bonds.

(2) Future income taxes.

(3) Non-controlling interest in subsidiaries.


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(4) Long-term debt.

B. In volume 2 of this course you will learn about the financial ratios that are

used as indicators of the financial health of a company.

(1) One of the basic financial ratios is the debt/equity ratio (total debt

total assets = the debt ratio) that shows whether debt exceeds

assets.

(2) Debt is not the same as liabilities, and this distinction is important

in order for the ratio to be completed correctly.

(3) Debt is money borrowed that must be repaid, such as a bond.

Liabilities are money owed, such as for services rendered.

C. The item numbers in the column on the left in the following table correspond

to the superscript numbers on the DOA balance sheet.

Item No.

Current Liabilities

18 Bank advances (short-term loans)

19 Accounts payable (unpaid bills)

20 Dividends declared but not paid

21 Tax liabilities can be one of the largest items on the balance sheet.

22 The principal on bonds and debentures due within one year

23 Other current accrued liabilities, which can include salaries payable, bank or bond

interest payable, pension payments, property taxes, etc.

24 Total Current Liabilities

The total of all current liabilities.

25 Future Income Taxes

This figure represents the difference between the book value of an asset or

liability and its value for tax purposes.

This difference arises because the amortization of its capital assets is

calculated according to the Canadian Institute of Chartered Accounts

guidelines and according to the rules pertaining to capital cost allowances by

income-tax regulations.

26 Non-controlling Interest in Subsidiary Companies (Minority Interest)

When a company owns more than 50% of a subsidiary company, its financial

statements will be consolidated, with 100% of the assets and liabilities for the

parent and subsidiaries combined into one statement.

The portion that is not owned by the parent is known as a non-controlling

interest.


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The non-controlling interest on the DOA Balance Sheet is $525,000. This

means that, if DOA paid 72% for another company valued at $1,875,000, the

portion it did not own would be 28% or $525,000.

D. Other Liabilities (not shown on DOA Statements) may include:

(1) Provisions for predicted future expenses (e.g., from a pending

lawsuit).

(2) Deferred revenue, when payment is received for goods and

services that have not been provided.

(a) Example: A customer pays a lump sum to a landscaper in

December for services to be provided monthly until the

following November. The lump sum is recorded as

income on the earnings statement. As services are

provided each month, the deferred revenue of the

landscaper is reduced.

(b) In theory, deferred income is reduced as the goods and

services are provided; however, in reality, the liability is

usually reduced annually.

27 Long-term Debt

Long-term debt is the debt of a company that is due, usually in

instalments, over a period of years or as a future lump-sum payment.

Whatever portion of the long-term debt that is due within one year is

classified as current debt.

Long-term debt includes:

Mortgages.

Bonds and debentures.

Details of the debt, including collateral, interest rate, maturity date and

sinking-fund provisions, must be provided.

E. Shareholders' Equity

(1) This is the amount shareholders have at risk.

(2) The following chart shows what constitutes shareholder equity.

28-29 Share Capital

Share capital (item 28) and common shares (item 29) is the amount of

money paid for shares when they were issued (i.e., the permanent

capital of the company).


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Its value is not related to the current market price of the outstanding

shares.

It does not change unless new shares are issued or shares are bought

back.

30 Retained Earnings

The retained earnings are the profits available for reinvestment after

expenses including dividends have been paid.

If the company has a loss in a given year, it is deducted from the

retained earnings.

31 Contributed Surplus

Contributed surplus comes from sources that are not earnings (e.g.,

selling stock above the par value of the shares.

If a stock is sold for $5 more than its par value, the par value goes into

the capital stock account and the $5 goes into the contributed surplus

account.

32 Foreign Currency Translation Adjustment

These are adjustments due to exchange rate fluctuations that appear on

the consolidated financial statements of a parent company that owns a

foreign subsidiary.

33 Total Shareholders’ Equity

This is the total of items 28 to 32.

34 Total Liabilities and Shareholders’ Equity

Remember: Key Equation of the Balance Sheet:

Total assets = total liabilities + shareholders’ equity

Topic Two: The Earnings Statement

1. Overview.

A. Also called the Income Statement or Profit and Loss Statement.

B. It is differentiated from the Balance Sheet because it shows revenues and

expenses over the course of a year.

C. The earnings statement shows the company’s earning power and cash

flow, and therefore, the company’s strength and stability.

D. Net earnings are earnings (profit) after taxes from which dividends may


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be paid to the shareholders.

2. Structure of the Earnings Statement.

A. There are four broad sections to the statement:

(1) Operating section: Operating income is the income a company

receives for selling its core products or services.

(2) Non-operating section: Non-operating income is income that is

not directly derived from normal operations. Examples include

interest from investments or royalties from a patent.

(3) Creditors’ section: This section outlines what a company pays as

interest owed to its creditors.

(4) Owners’ section: This section shows how a company distributes

its income to its shareholders.

B. The names of these four sections would not normally appear on the

earnings statement.


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THE EARNINGS STATEMENT

Item

no. Explanation

Operating Section

The operating section can include:

35 Operating income received: net sales (or net revenue) is gross sales less deductions

(e.g., excise tax, returns, discounts).

The net sales figure is a key indicator of a company’s financial position.

36 Expenses incurred to obtain income: cost of goods sold is manufacturing cost or

inventory cost.

37 Gross operating profit is: net sales less cost of goods sold.

This figure can be used to compare success at producing profits among

companies in the same field. Gross operating profit margin is a percentage of

net sales.

The GP of DOA Industries is $6,350,000. The margin is 25.1% ($6,350

$25,300 [net sales] x 100%).

3. Operating Expenses.

A. Once gross operating profit is known, the following operating expenses

are deducted. Many companies call these their overhead costs.

38 Depreciation, amortization, and depletion for the year. Remember, these items are

non-cash items, (i.e., no cash actually left the company to pay these expenses).

39 Selling, general, and administrative expenses (e.g., office expense, commissions)

40 Contributions to employee’s pensions, legal fees, directors’ remuneration, etc.

41 Net operating Profit (or Loss)

Gross profit – operating expenses = net operating profit..

42 Non-Operating Section

Income received that is not directly related to the main operation of company

(e.g., rent, interest, investments, etc.).

Keeping operating and non-operating income separate on the earnings statement

gives a truer picture of the earning power of a company.

For example, if DOA was in the business of selling shoes and had an office

building in which it rented out excess space, the rents received would not be part

of their normal operations but would still be considered part of their income for

the business.


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This item is excluded from sales when calculating ratios for comparison.

43 Total

Operating + non-operating income = earnings before interest and taxes or EBIT.

The EBIT for DOA Industries is $4,483,000. The net operating income margin

is 17.72% ($4,483 $25,300 [net sales] x 100%).

Creditors’ Section

Often referred to as fixed charges because the amount of interest that must be paid to

debt holders is known and is a required payment. The creditors’ section includes:

44 Interest paid to the bank (e.g., for a line of credit).

45 Interest paid to bond holders.

46 Total net income less fixed charges is the net income before taxes or NIBT.

Owners’ Section

A company’s shareholders are its owners.

47 The “current” portion of income taxes on the statement is that amount that must be

submitted to the CRA.

48 The “future” portion of income taxes is the difference between taxes owed and

submitted due to accounting rules.

49 Non-controlling

As explained earlier, the non-controlling interest appears on the financial statements

of the investing company (i.e., the parent) and represents that portion of the

consolidated assets or earnings of the subsidiary that is not owned by the parent.

50 Equity Income

Equity income (sometimes called equity earnings or earnings from subsidiaries)

calculated by the equity accounting method is shown when the parent company

owns between 20% and 50% of the subsidiary and each company produces its

own financial statements.

The cost method for calculating equity income is used when ownership is less

than 20%.

The value of the ownership (including equity income that accumulated over the

years and is retained in the subsidiary company) will be realized if and when the

subsidiary is sold.

Equity income is a non-cash source of funds and is deducted when calculating

some ratios.

An equity loss is incurred if a subsidiary reports a loss.

51 Net Income Before Extraordinary Items (Also called NIBEI)

For DOA Industries, the amount is $1,897,000 and the net profit margin is 7.5%

($1,897 $25,300 [net sales] x 100%).


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52 Extraordinary Items (Gains or Losses)

These are gains or losses that are not part of the normal business operations and

are not expected to recur with any frequency (e.g., losses because of an

earthquake).

Due to their ability to distort earnings or losses, they are stated on the earnings

statement after all other revenue and expense items have been accounted for.

53 Net Earnings (Deficit) After Extraordinary Items

The amount of income available for transfer as retained earnings and distribution

via dividends.

Topic Three: The Retained Earnings Statements

1. Overview.

A. The retained earnings sheet shows the profits that have not been paid to

shareholders as dividends but rather have been left in the business year

after year.

B. A reserve represents funds not available for distribution to shareholders.

C. The retained earnings statement is the link between the earnings

statement and balance sheet: the profit/loss for the year, as indicated on

the earnings statement is added to or subtracted from the retained

earnings from previous years. This amount (less any reserve amount) is

transferred to the shareholders’ equity section of the balance sheet.

Item

No. Explanation

54 Balance at the beginning of the fiscal year.

At beginning of the year, the retained earnings were $4,189,000. This would

have been shown on the balance sheet for the previous year in the common

shareholder’s equity section.

55 Net income for the fiscal year (after extraordinary items)

The company made $2,118,000 in net income after extraordinary items. Even

though they had an extraordinary item of $221,000, that money still belongs to

the company. If the company had not paid any dividends this year, it would

have retained earnings of $6,307,000 ($4,189,000 + $2,118,000).


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56 Dividends

The company did pay out a total of $1,542,000 in dividends to its preferred and

common shareholders, leaving it with retained earnings of $4,765,000

($6,307,000 - $1,542,000). This is the figure on the balance sheet in the

common shareholders’ section.

57 Total Retained Earnings

The amount of earnings left in the business year after year.

Topic Four: The Cash Flow Statement

1. Overview

A. The cash flow statement shows how a company produces cash and

spends cash over a year.

(1) “Cash” on a cash flow statement includes cash in bank accounts,

net of short-term borrowing, and temporary investments.

B. The cash flow statement indicates the financial position of the company:

specifically its ability to pay any debts, generate funds internally, and

distribute dividends to its shareholders.

(1) It is a good tool for investors to compare the financial situation of

a company over a number of years.

Item No. Explanation

58-64 Operating Activities

Everyday activities of the company that generate sales or expenses.

Determined as income before extraordinary items + non-cash items such as

future taxes, depreciation, and non-controlling interest) – equity income

The net change in operating working capital items (e.g., accounts receivables,

inventories, accrued liability, etc.) are added or deducted.

65-68 Financing Activities

These activities affect the capital structure of the company (i.e., the level of

debt and equity it has on its balance sheet).

The capital structure of a company shows how much debt (bonds and

debentures) and equity (common and preferred shares) the company has

outstanding.


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Cash flows in to the company when shares are issued and cash flows out of

the company when debt is repaid.

69-71 Investing Activities

These costs are investments made in the company itself (i.e., capital assets) or

in other companies (i.e., dividends received).

DOA paid out $150,000 to purchase capital assets. This was in order to

purchase fixed assets such as machinery needed to run their business. They

also received $221,000 from the sale of capital assets. This could have been

from the sale of stock it owned in other companies.

72-74 Change in Cash Flow

At the end of the cash flow statement there is a summary of the cash flows of

operating, investing, and financing activities. The summary shows the

increase (or decrease) in cash for the fiscal year.

Ideally, it shows a positive cash flow. If it does not, the reason for the

negative cash flow must be determined.

75-76 Supplemental Information

Income taxes and interest paid must be in the cash flow statement.

Topic Five: The Annual Report

1. Footnotes to the Financial Statements.

A. Notes to the financial statements explain essential information that cannot

be easily summarized in the actual statements (e.g., accounting policies,

more details about share capital, etc.)

B. The footnotes often detail company information by operation and location.

2. The Auditor’s Report.

A. Canadian corporate law requires limited companies to have an auditor

who represents shareholders and reports to them annually.

B. The auditor’s report outlines the responsibilities of management and the

auditor, and how the audit was conducted and gives the auditor’s opinion

concerning the financial statements.


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3. Accounting Standards

A. Financial statements are prepared based on the Generally Accepted

Accounting Principles (GAAP) which allows a company some flexibility in

reflecting its particular type of operation.

B. In 2011, the GAAP will be replaced with International Financial Reporting

Standards (IFRS).

C. The CSA, CICA, and OFSI have created the Canadian Public

Accountability Board (CPAB) to review and examine the audit procedures

of accounting firms to ensure the independence of auditors and the

increased transparency of the audit procedure.

chapter 12: corporations and their financial...

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