AH Libby6ce Ch01

FINANCIAL
ACCOUNTING
Sixth Canadian Edition
LIBBY, LIBBY, SHORT, KANAAN, STERLING
Financial Statements
and Business Decisions
Chapter 1
PowerPoint Author:
Robert G. Ducharme, MAcc, CPA, CA
University of Waterloo, School of Accounting and Finance
Modified by: Dr. Ahmad Hammami, PhD.; Concordia University
© 2017 McGraw-Hill Education 1-1
1-2
Understanding the Business

The Key Parties to a Business
Owners = Investors Lenders = Creditors
Managers
CREDITORS &
SUPPLIERS
OWNERS
The
Business
Operations
CUSTOMERS EMPLOYEES
LO1
Copyright © 2014 McGraw-Hill Ryerson Limited
1-3
Understanding the Business

Why do investors purchase shares of companies?
 Business owners (called investors or shareholders) look for two

sources of possible gain:
Sell shares of Receive dividends:

ownership later:
LO1
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Business Background
What do our lenders/creditors gain from lending us
money?
Loan
Mel’s
Diner
LO1
1-5
What is the Accounting System?
2 types of Info
users:
Internal
decision
makers
Communicates
information
Collects & processes to:
financial information
External
decision
makers
LO1
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The Accounting System
Accounting System
External Internal
Reporting Reporting
Financial Accounting Reports Managerial Accounting Reports
Periodic financial statements and related Detailed plans and continuous performance
disclosures reports
LO1
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The Four Basic Financial Statements
1. STATEMENT OF FINANCIAL POSITION (or Balance Sheet):

• Reports at a specific date:
1. Assets
2. Liabilities
3. Shareholders’ equity
2. STATEMENT OF COMPREHENSIVE INCOME:

• Reports for the accounting period
1. Revenues
2. Expenses
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The Four Basic Financial Statements
3. STATEMENT OF CHANGES IN EQUITY:

• Reports for a specific period
4. STATEMENT OF CASH FLOWS:

• Reports for a specific period
LO1
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The Statement of Financial Position/ Balance Sheet

Typical Account Titles
Assets Liabilities
Cash Trade Payables
Short-Term Investment Accrued Liabilities
Trade Receivables Notes Payable
Notes Receivable Taxes Payable
Inventory (to be sold) Deferred Revenue
Supplies Bonds Payable
Prepaid Expenses
Long-Term Investments Shareholders’ Equity
Land Contributed Capital
Equipment Retained Earnings
Buildings
Intangibles LO1
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The Statement of Financial Position/Balance Sheet

The Accounting Equation:
A = L + SE
(Assets) (Liabilities) (Shareholders’
Equity)
Economic Sources of Financing for Economic

Resources Resources
This equation MUST ALWAYS balance
How would your personal balance sheet look like?

LO1
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Your Personal “Statement of Financial Position”
Assets Liabilities
Cash Credit card Bill
Bank Deposit Notes Payable (to parents or friend)
Investment & TFSA Lease Obligation for Car
Computer & Electronics Taxes payable
Apparel & Accessories Student Loan
Car
Knowledge
Retained Earnings / Shareholder’s equity

The Statement of Financial Position
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SUN-RYPE PRODUCTS LTD.

Statement of Financial Position
At December 31, 2012
(in thousands of Canadian dollars)
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
LO1
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The Statement of earnings (i.e. income statement)

& the Statement of Comprehensive Income
• What does it tell us:
• Investors:
• Creditors (lenders):
Typical Account Titles
Revenues Expenses
Sales Revenue Cost of Sales
Fee Revenue Wages Expense
Interest Revenue Rent Expense
Rent Revenue Interest Expense
Depreciation Expense
Advertising Expense
Insurance Expense
Repair Expense
Income Tax Expense
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Statement of Earnings/ Income Statement

Statement of Earnings
For the Year Ended December 31, 2012
(in thousands of Canadian dollars, except for EPS)
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
Earnings per share $ 2.92
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Statement of Comprehensive Income

Revenues
Net sales $ 152,795
Expenses
Distribution 6,813
Finance costs 708
Other comprehensive income (loss)
Foreign currency translation differences (13)
Total comprehensive income (loss) for the year $ 1,254

LO1
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When will the revenue from this transaction be
recognized / recorded?
$1,000 sale made Cash from sale

on May 25. collected on June 10.
X X
May 2015 June 2015
LO1
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Statement of Changes in Equity

 Shows the changes in each component of shareholders’
equity for the period:
1. Share capital (or Equity):
2. Retained earnings / deficit:
LO1
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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. 31, 2012 $ 18,421 $ 28,681 ($ 66)
LO1
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Statement of Cash Flows

Measures a company’s cash inflow and cash outflow during
a specific time period. (ONLY CASH transactions)
Because Revenues . . . And Expenses

do not always equal do not always equal
cash collected. . . cash paid . . .
Net earnings are

usually not equal
to the change
in cash for
the period.
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• Distinguishes between:
• Operating activities
• Investing activities
• Financing activities
LO1
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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
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Relationships Among the Statements
We always prepare financial statements in the following order:
1) Statement of Earnings
2) Statement of Changes in Equity
3) Statement of Financial Position
4) Statement of Cash Flows
LO1
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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
LO1
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Statement of Earnings/ Income Statement

Statement of Earnings
Revenues
Net sales $ 152,795
Expenses
Distribution 6,813
Finance costs 708
LO1
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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. 31, 2012 $ 18,421 $ 28,681 ($ 66)
LO1
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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
Other equity components (66)
Total liabilities and equity $ 90,973
LO1
The Statement of Financial Position
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Statement of Financial Position
At December 31, 2012
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
Other components (66)
Total shareholders' equity 47,036
Total liabilities and shareholders' equity $ 90,973
LO1
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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
LO1
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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
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Notes to the Financial Statements
 All financial statements should be accompanied by notes

 To provide the reader with supplemental information
 Three types of Notes:

1. Accounting rules used to prepare F/S.
2. Additional detail for items in the F/S.
3. Additional information items NOT in the financial
statements (ex: risks).
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Responsibilities for the Accounting

Communication Process
Effective communication means that

the recipient understands what the
sender intends to convey.
Understandability:
Faithful representation
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Reporting Standards
• Generally Accepted Accounting Principles- GAAP
• International Financial Reporting Standards-IFRS
• Reporting standards specify the rules for:

• Measurement and Reporting of Accounting activities
The Rules:
International
Financial Reporting
Standards (IFRS)
LO2
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Releasing F/S affects companies

through:
 Price of their shares.
Bonuses for managers and employees.
 Release of competitive information to competitors.
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Management Responsibility and Auditing

• The information in the F/S is management’s responsibility.
Specifically:
• The highest officer of the company (CEO) and
• the highest financial officer (CFO)
• To ensure the accuracy of the company’s financial info.,

management:
 Maintains a system of controls.
 Hires outside independent auditors.
 Forms a committee of the board of directors (BOD) to
review these two safeguards.
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An Audit Involves:
 Ensuring financial reports comply

with GAAP.
 Examining the transactions
incorporated in the financial
statements.
 Expressing an opinion as to the
fairness of presentation of financial
information.
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3 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
LO4
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End of Chapter 1

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FINANCIAL

Understanding the Business

Understanding the Business

 Business owners (called investors or shareholders) look for two

Sell shares of Receive dividends:

What is the Accounting System?

The Accounting System

Financial Accounting Reports Managerial Accounting Reports

The Four Basic Financial Statements

1. STATEMENT OF FINANCIAL POSITION (or Balance Sheet):

2. STATEMENT OF COMPREHENSIVE INCOME:

The Four Basic Financial Statements

3. STATEMENT OF CHANGES IN EQUITY:

4. STATEMENT OF CASH FLOWS:

The Statement of Financial Position/ Balance Sheet

The Statement of Financial Position/Balance Sheet

Economic Sources of Financing for Economic

This equation MUST ALWAYS balance

How would your personal balance sheet look like?

Your Personal “Statement of Financial Position”

Retained Earnings / Shareholder’s equity

Copyright © 2014 McGraw-Hill Ryerson Limited

SUN-RYPE PRODUCTS LTD.

The Statement of earnings (i.e. income statement)

Statement of Earnings/ Income Statement

Earnings per share $ 2.92

Statement of Comprehensive Income

Earnings per share $ 2.92

Statement of Comprehensive Income

$1,000 sale made Cash from sale

Statement of Changes in Equity

1. Share capital (or Equity):

2. Retained earnings / deficit:

Statement of Changes in Equity

SUN-RYPE PRODUCTS LTD.

Contributed Retained Other

Balance as at Jan. 1, 2012 $ 18,518 $ 27,914 ($ 53)

Statement of Cash Flows

Because Revenues . . . And Expenses

Net earnings are

Statement of Cash Flows

SUN-RYPE PRODUCTS LTD.

Relationships Among the Statements

We always prepare financial statements in the following order:

2) Statement of Changes in Equity

3) Statement of Financial Position

4) Statement of Cash Flows

Relationships Among the Statements

Statement of Earnings/ Income Statement

Earnings per share $ 2.92

Statement of Changes in Equity

SUN-RYPE PRODUCTS LTD.

Contributed Retained Other

Balance as at Jan. 1, 2012 $ 18,518 $ 27,914 ($ 53)

Relationships Among the Statements

Statement of Changes in Equity Statement of Financial Position

SUN-RYPE PRODUCTS LTD.

Relationships Among the Statements

Statement of Cash Flows Statement of Financial Position

SUN-RYPE PRODUCTS LTD.

Notes to the Financial Statements

 All financial statements should be accompanied by notes

 Three types of Notes: