Copyright 2014 McGraw-Hill Ryerson Limited

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PowerPoint Author:
Robert G. Ducharme, MAcc, CPA, CA
University of Waterloo, School of Accounting and Finance
FINANCIAL
ACCOUNTING

Fifth Canadian Edition

LIBBY, LIBBY, SHORT, KANAAN, GOWING

Financial Statements
and Business Decisions
Chapter 1
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Copyright 2014 McGraw-Hill Ryerson Limited
Understanding the Business
The Players
Investors Creditors
Managers
The
Business
Operations
1. Purchase materials
and labour
2. Manufacture
product
3. Sell products
to customers
4. Collect cash from
customers and pay
creditors
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Business owners (called investors or shareholders) look
for two sources of possible gain:
Sell
ownership
interest in the
future for more
than they
paid.
Receive a
portion of the
companys
earnings in cash
(dividends).
Understanding the Business
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Creditors lend money to a company for a specific length
of time and gain by charging interest on the money
loaned.
Mels
Diner
Loan
Interest
Business Background
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Manufacturers either make the parts needed to
produce its products or buy the parts from
suppliers.
Manufacturer Product Customer
Understanding Business Operations
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The Accounting System
Collects and processes
financial information

Reports
information
to decision
makers
Managers
(internal
decision
makers)
Investors
and
Creditors
(external
decision
makers)
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External Decision Makers
Investors, creditors,
suppliers, customers, etc.
Internal Decision Makers
Managers throughout the
organization
The Accounting System
Accounting System
Financial Accounting Reports
Periodic financial statements and
related disclosures
Managerial Accounting Reports
Detailed plans and continuous
performance reports
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The Accounting System and Decision Makers
Cash
Equipment
Inventory
Notes
Payable
An organized format used by companies
to accumulate the dollar effects of
transactions.
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Information Conveyed in Financial Statements
When studying the financial statements you
should focus on these questions:
1. What categories of items (often called elements) are reported
on each of the four statements? (What type of information
does a statement convey, and where can you find it?)

2. What time period (monthly, quarterly, annual) is covered by
the financial statements?

3. How are the elements within a statement related? These
relationships are usually described by an equation that tells
you how the elements fit together.

4. Why is each element important to managers, owners or
creditors decisions? (How important is the information to
decision makers?)

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The Four Basic Financial Statements
1. STATEMENT OF FINANCIAL POSITION reports the amount of
assets (resources owned), liabilities (amounts owed), and
shareholders equity of an accounting entity at a point in time.

2. STATEMENT OF COMPREHENSIVE INCOME reports the
revenues less the expenses of the accounting period.

3. STATEMENT OF CHANGES IN EQUITY reports the way that
profit, distribution of profit (dividends), and other changes to
shareholders equity affected the financial position of the company
during the accounting period.

4. STATEMENT OF CASH FLOWS reports inflows (receipts) and
outflows (payments) of cash during the accounting period in the
categories of operating, investing, and financing.
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The Statement of Financial Position
Assets
Cash
Short-Term Investment
Trade Receivables
Notes Receivable
Inventory (to be sold)
Supplies
Prepaid Expenses
Long-Term Investments
Land
Equipment
Buildings
Intangibles
Liabilities
Trade Payables
Accrued Liabilities
Notes Payable
Taxes Payable
Deferred Revenue
Bonds Payable
Shareholders Equity
Contributed Capital
Retained Earnings
Typical Account Titles
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Elements
Assets
Economic resources controlled by the entity as a
result of past business events from which future
economic benefits may be obtained.

Liabilities
Debts or legal obligations of the entity that result
from past business events.

Shareholders Equity
Amount of financing provided by owners of the
corporation and from earnings over time.
The Statement of Financial Position
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The Statement of Financial Position
The Accounting Equation
A = L + SE
(Assets) (Liabilities) (Shareholders
Equity)
Economic
Resources
Sources of Financing for Economic
Resources
Liabilities: From Creditors
Shareholders Equity: From Shareholders
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ASSETS
Cash 3,727
Trade receivables 14,047
Inventories 29,149
Prepayments 502
Property, plant, and equipment 42,041
Goodwill 1,061
Other assets 446
Total assets $ 90,973
LIABILITIES
Trade payables 25,672
Short-term borrowings 3,646
Provisions 1,687
Long-term borrowings 8,781
Other liabilities 4,151
Total liabilities 43,937
SHAREHOLDERS' EQUITY
Contributed capital 18,421
Retained earnings 28,681
Other components (66)
Total shareholders' equity 47,036
Total liabilities and shareholders' equity $ 90,973
SUN-RYPE PRODUCTS LTD.
Statement of Financial Position
(in thousands of Canadian dollars)
At December 31, 2012
The Statement of Financial Position
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The Statement of Comprehensive Income
Revenues
Sales Revenue
Fee Revenue
Interest Revenue
Rent Revenue
Expenses
Cost of Sales
Wages Expense
Rent Expense
Interest Expense
Depreciation Expense
Advertising Expense
Insurance Expense
Repair Expense
Income Tax Expense
Typical Account Titles
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Statement of Comprehensive Income
Revenues
Net sales $ 152,795
Expenses
Cost of sales 125,474
Sales and marketing 11,699
Distribution 6,813
General and administrative 5,987
Finance costs 708
Total expenses 150,681
Earnings before income taxes 2,114
Income tax expense 847
Net earnings for the year $ 1,267
Other comprehensive income (loss)
Foreign currency translation differences (13)
Total comprehensive income (loss) for the year $ 1,254
Earnings per share $ 2.92
SUN-RYPE PRODUCTS LTD.
Statement of Comprehensive Income
(in thousands of Canadian dollars, except for EPS)
For the Year Ended December 31, 2012
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June 2015
Cash from sale
collected on June 10.
X
May 2015
$1,000 sale made
on May 25.
X
Revenues
Earnings from the sale of goods or services.
Statement of Comprehensive Income
Revenue is recognized in the period in which
goods and services are sold, not necessarily
the period in which cash is received.
When will the revenue from this transaction be recognized?
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May 2015
$1,000 revenue
recognized in May
June 2015
Statement of Comprehensive Income
When will the revenue from this transaction be recognized?
Earnings from the sale of goods or services.
Revenue is recognized in the period in which
goods and services are sold, not necessarily
the period in which cash is received.
Revenues
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May 2015 June 2015
Paid $75 cash on May 11
for newspaper ad.
X
Ad appears
on June 8.
X
Expenses
The dollar amount of resources used up by the entity
to earn revenues during a period.
Statement of Comprehensive Income
An expense is recognized in the period in which
goods and services are used, not necessarily
the period in which cash is paid.
When will the expense for this transaction be recognized?
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May 2015 June 2015
Advertising expense
recognized in June.
Statement of Comprehensive Income
The dollar amount of resources used up by the entity
to earn revenues during a period.
An expense is recognized in the period in which
goods and services are used, not necessarily
the period in which cash is paid.
When will the expense for this transaction be recognized?
Expenses
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Statement of Changes in Equity
Equity, beginning of the period
Plus: Net earnings for the year
Plus: Other comprehensive income
Less: Dividends
Plus/Less: Other changes, net
Equity, end of the period
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Statement of Changes in Equity
Contributed Retained Other
Capital Earnings Components
Balance as at Jan. 1, 2012 $ 18,518 $ 27,914 ($ 53)
Net earnings for the year 1,267
Other comprehensive income (loss) (13)
Repurchase and cancellation of shares (97)
Distribution of dividends (500)
Balance as at Dec. 1, 2012 $ 18,421 $ 28,681 ($ 66)
SUN-RYPE PRODUCTS LTD.
Statement of Changes in Equity
(in thousands of Canadian dollars)
For the Year Ended December 31, 2012
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Because
revenues reported
do not always equal
cash collected. . .
. . . and expenses
reported do not
always equal
cash paid . . .
Net earnings are
usually not equal
to the change
in cash for
the period.
Statement of Cash Flows
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Statement of Cash Flows
Operating activities
Cash collected from customers 152,181
Cash paid to trade suppliers (111,202)
Cash paid for operating expenses (23,907)
Cash paid for interest (826)
Cash received for taxes (income tax refund) 1,690
Net cash flow from operating activities 17,936
Investing Activities
Cash paid to purchase property, plant,
and equipment (1,418)
Net cash flow used for investing activities (1,418)
Financing Activities
Cash received from borrowings 1,502
Repayment of borrowings (14,264)
Repurchase of own shares (97)
Cash paid for dividends (500)
Net cash provided by financing activities (13,359)
Net increase in cash during the year 3,159
Cash at beginning of year 571
Effect of exchange rate changes on cash (3)
Cash at end of year 3,727 $
SUN-RYPE PRODUCTS LTD.
Statement of Cash Flows
(in thousands of Canadian dollars)
For the Year Ended December 31, 2012
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Relationships Among the Statements
1. Net earnings from the income statement
results in an increase in ending retained
earnings on the statement of changes in
equity.

Income Statement
Revenues $ 152,795 Statement of Changes in Equity
Expenses
151,518
Beginning retained earnings $ 27,914
Net earnings $ 1,267 Net earnings 1,267
Dividends (500)
Ending retained earnings $ 28,681

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Relationships Among the Statements
2. Ending retained earnings from the
statement of changes in equity is one of the
three components of shareholders equity
on the statement of financial position.
Statement of Changes in Equity Statement of Financial Position
Retained
Earnings Cash $ 3,727
Beginning retained earnings $ 27,914 Other assets 87,246
Net earnings 1,267 Total assets $ 90,973
Dividends (500) Liabilities $ 43,937
Ending retained earnings $ 28,681 Contributed capital 18,421
Retained earnings 28,681
Other equity components (66)
Total liabilities and equity $ 90,973

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Relationships Among the Statements
3. The change in cash on the statement of
cash flows is added to the beginning-of-year
balance in cash to arrive at end-of-year cash
on the statement of financial position.
Statement of Cash Flows Statement of Financial Position
Cash flows from operating activities $ 17,933 Cash $ 3,727
Cash flows from investing activities (1,418) Other assets 87,246
Cash flows from financing activities (13,359) Total assets $ 90,973
Change in cash $ 3,156 Liabilities $ 43,937
Beginning cash balance 571 Contributed capital 18,421
Ending cash balance $ 3,727 Retained earnings 28,681
Other equity components (66)
Total liabilities and equity $ 90,973

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Notes
All financial statements should be accompanied by
notes which provide the reader with supplemental
information about the financial condition and
results of operations of the company.
Three types . . .
Describe accounting rules applied.
Present additional detail about an item on the
financial statements.
Provide additional information about an item not on
the financial statements.
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Marketing managers and credit managers use
customers financial statements to decide
whether to extend credit.
Purchasing managers use suppliers financial
statements to decide whether suppliers have the
resources to meet the demand for products.
Employees union and human resource
managers use the companys financial
statements as a basis for contract negotiations
over pay rates.
Management Uses of Financial Statements
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Decision makers need to understand
accounting measurement rules.
Responsibilities for the Accounting
Communication Process
Effective communication means that
the recipient understands what the
sender intends to convey.
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Responsibilities for the Accounting
Communication Process
International
Financial
Reporting
Standards
(IFRS)
The Rules
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How are IFRS and Generally Accepted
Accounting Principles Determined?
Our accounting system has a long
and distinguished history. An
Italian monk named Luca Pacioli,
published the first elements of
double-entry bookkeeping in 1494.
Prior to 1933, the management
teams of most companies were
largely free to choose their own
financial reporting practices.
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The Securities and Exchange Commission (SEC)
has been given broad powers to determine
measurement rules for financial statements in the U.S.
The Ontario Securities Commission (OSC)
has been given broad powers to determine
measurement rules for financial statements in Canada.
Securities Act of 1933
Securities and Exchange Act of 1934
Generally Accepted Accounting Principles
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Currently, the Accounting Standards Board (AcSB)
is recognized as the body to formulate GAAP in Canada.
The OSC has worked closely with the
accounting profession to
work out the detailed rules that have
become known as GAAP.
Generally Accepted Accounting Principles
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Companies incur the cost of preparing
the financial statements and bear the
following economic consequences . . .
Effects on the selling price of shares.
Effects on the amount of bonuses
received by managers and other employees.
Loss of competitive information to other
companies.
Generally Accepted Accounting Principles
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International Perspective
International Financial Reporting Standards
Since 2002, there has been substantial movement toward the
adoption of International Financial Reporting Standards (IFRS)
issued by the International Accounting Standards Board (IASB).
Examples of jurisdictions currently requiring the use of IFRS include:
All countries in the European Union
Australia and New Zealand
Hong Kong, China, India, Malaysia, and South Korea
Israel and Turkey
Argentina, Brazil and Chile
Canada and Mexico
In the United States, the Securities and Exchange Commission (SEC)
now allows foreign companies whose shares are traded in the U.S. to
use IFRS and is considering allowing the same for domestic companies
in the future.
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To ensure the accuracy of the companys
financial information, management:
Maintains a system of controls.
Hires outside independent auditors.
Forms a committee of the board of directors to
review these two safeguards.
Management Responsibility and the Demand
for Auditing
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Auditors express an opinion
as to the fairness of the
financial statements.
Independent auditors have
responsibilities that extend
to the general public.
The CPAB issues detailed
auditing standards that
auditors must follow.
Independent Auditors
Overall, I believe
these financial
statements are
fairly stated.
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Independent Auditors
An audit involves . . .
Examining the financial reports to
ensure compliance with GAAP.
Examining the underlying
transactions incorporated into the
financial statements.
Expressing an opinion as to the
fairness of presentation of financial
information.
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Chartered Professional Accountant = CPA
(newly amalgamated organization of many provincial CA,
CMA, and CGA organizations effective January 1, 2013)
Chartered Accountant = CA
Certified Management Accountant = CMA
Certified General Accountant = CGA


Certified Public Accountant = CPA*
(* in USA)
Accounting Designations
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Ethics, Reputation, and Legal Liability
The Chartered Professional Accountants of
Canada (CPA) and the Canadian Institute of
Chartered Accountants (CA) require that all
members adhere to a professional code of
ethics. The other accounting professions
have similar requirements.
Code of
Ethics
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A CPAs reputation for honesty and
competence is his/her most important asset.
Like physicians, CPAs, CAs, CMAs, and CGAs
have liability for malpractice.
Ethics, Reputation, and Legal Liability
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Appendix 1A: Types of Business Entities
Sole Proprietorship: owned by a single individual.
Partnership: owned by two or more individuals.
Corporation: ownership represented by shares of stock.
Advantages of a Corporation
Limited liability
Continuity of life
Ease of transfer of ownership
Opportunity to raise large amounts of money
Disadvantage of a Corporation
Double taxation
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Appendix 1B: Employment in the Accounting
Profession Today
Professional
Designations








CPA
CA
CMA
Career Opportunities
Public Accounting
Audit and Assurance Services
Management Consulting Services
Tax Services
Employment by Organizations
Internal accounting
External reporting
Tax planning
Various other functions
Employment in the Public and Not-
for-Profit Sector
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End of Chapter 1