CH1: Overview of Corporate Financial Reporting Flashcards
(204 cards)
1
Q
What is financial accounting?
A
A PROCESS to capture, analyze, and use the organization’s TRANSACTION information to REPORT to decision makers OUTSIDE of the organization’s MANAGEMENT team.
AKA external financial reporting.
2
Q
What is the other name of “financial accounting”
A
External financial reporting
3
Q
Financial accounting reports transactional information to the decision makers _____ the organization’s _____.
A
outside, management team
4
Q
Who are financial statement users
A
EXTERNAL decision makers who utilize a company’s financial statements.
This includes the owners (shareholders/investors) and those who have lent money to the organization (creditors)
5
Q
What are examples of financial statement users
A
Owners (shareholders/investors), those who have lent money to the organization (creditors)
6
Q
What is an investor
A
Individuals or entities that acquire shares of a company as an investment.
Also an owner/shareholder and financial statement user
7
Q
What are creditors
A
Individuals or entities that lend money or otherwise extend credit to a company, rather than invest in it directly.
8
Q
What is another name for shareholder
A
Owner/investor
9
Q
What is another name for organization owner
A
Shareholder/investor
10
Q
What is the main purpose of financial accounting
A
Aid these users in their economic decision-making RELATIVE to the organization
11
Q
Define “management” (eg. management team)
A
The individuals responsible for running (managing) a company.
12
Q
To what extent does management have access to company financial information
A
Has access to ALL of the organization’s financial information, including information that is NEVER shared with those OUTSIDE of the organization
13
Q
Define forward-looking budgets
A
An example of INTERNAL reports that accounting provides to INTERNAL users
14
Q
What is managerial accounting
A
The study of the preparation and uses of accounting information by a company’s MANAGEMENT, including information that is NEVER shared with those outside of the organization.
15
Q
Financial accounting vs managerial accounting is…
A
Financial accounting = external (investors + creditors)
Managerial accounting = internal (management)
16
Q
Why prepare/what is managerial accounting for, and who uses it
A
To inform decision-making.
Reports for INTERNAL use only (for use by management).
17
Q
Who prepares the financial accounting reports, and for who?
A
Reports prepared by the MANAGEMENT of a company for its shareholders, creditors, and others
18
Q
What is included in financial accounting reports
A
Summarizes HOW the company PERFORMED during a particular PERIOD.
Includes the statement of financial position/financial statement/balance sheet, the statement of income, the statement of changes in equity, the statement of cash flows, and the notes to the financial statements.
19
Q
Why prepare/what is financial accounting for, and who uses it
A
Helps EXTERNAL users make decisions.
Reports for EXTERNAL use (for use by others outside the organization).
20
Q
Where are annual financial statements included
A
Annual financial statements are included in the company’s annual report together with the management discussion and analysis (MD&A) of the company’s results for the year
21
Q
What is an annual report, and what is reported
A
An annual document prepared and published by a corporation.
Reports on its business activities during the YEAR.
Includes corporation’s annual financial statements.
22
Q
Who use/who are annual reports made available to
A
Made available to the company’s owners.
But many other parties, such as lenders, financial analysts, credit-rating agencies, securities regulators, and taxing authorities, also use it.
23
Q
Define management discussion and analysis (MD&A)
A
Section of a company’s annual report where MANAGEMENT provides their perspective and analysis of the financial statements.
24
Q
What is the purpose of MD&A
A
The information is meant to complement or SUPPLEMENT the financial statements and be forward-looking (make predictions).
25
What does MD&A stand for
Management discussion and analysis
26
A group of business stakeholders are also...
Financial statement users
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Financial statement users are...
Groups of business stakeholders
28
Examples of business stakeholders:
- Employees, unions
- Management
- Auditors, federal and provincial government departments, legislators
- Potential investors, customers
- Stock analysts, brokers, financial advisors, business reporters
- Stock exchange regulators
- Shareholders, board of directors
- Creditors, suppliers, landlords
29
What questions might employees, unions be asking about the company
Evaluate company profits for self-benefit (eg. wage increase)
(Is the business PROFITABLE? Will I earn a BONUS this year? Can the company AFFORD to negotiate increased wages? Is the company pension plan in decent shape?)
30
What questions might management be asking about the company
Company performance.
(How do this year’s sales compare with last year’s? How do they compare with the budget? Are we maintaining our profit margins on certain product lines? How much do we owe our employees and suppliers?)
31
What questions might auditors, federal and provincial government departments, legislators be asking about the company
Was financial information reported accurately
(Has the company presented its financial information FAIRLY? How does the company’s financial information COMPARE with the information submitted for taxation or payroll purposes?)
32
What questions might potential investors, customers be asking about the company
Seeking signs of strong/good company performance and promising future.
(What are the LONG-TERM prospects for this company? Has the management team done a reasonable job? Will this company be around to honour its warranties?)
33
What questions might stock analysts, brokers, financial advisors, business reporters be asking about the company
Company performance trends and patterns
(What are the company’s trends? What are the prospects for this company? How has this company performed relative to expectations?)
34
What questions might stock exchange regulators be asking about the company
(Has the company complied with the financial reporting standards and listing requirements?)
35
What questions might shareholders, board of directors be asking about the company
Is management doing good at maintaining good company performance
(Has the company generated a SUFFICIENT return on our investment? How EFFECTIVELY has management used the resources at their disposal? Does the company generate ENOUGH income to be able to pay dividends?)
36
What questions might creditors, suppliers, landlords be asking about the company
(Should we extend credit to this company? Is this a CREDIBLE and SUCCESSFUL company that we want to attach our brand to? Should we enter into a lease with this company?)
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Examples of internal users of financial statement:
Management
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Examples of external users of financial statement:
- Shareholders, the board of directors, and potential investors
- Creditors (for example, financial institutions and suppliers)
- Regulators (for example, a stock exchange)
- Taxing authorities (for example, the Canada Revenue Agency)
- Other corporations, including competitors
- Securities (stock) analysts
- Credit-rating agencies
- Labour unions
- Journalists
39
Define "shareholders"
The individuals or entities that own shares in a company.
40
Who owns a company?
Company is owned by shareholders who have invested resources into a company in exchange for a share of its ownership
41
Define a private company
-A company whose shares DO NOT trade on a public stock exchange
-Only 1 shareholder (owns 100% of shares)
42
Define a public company
-A company whose shares DO trade on a public stock exchange.
-Can have thousands of shareholders
43
Define board of directors
The governing body of a company elected by the shareholders to represent their ownership interests.
Shareholders hire board of directors to oversee management team at the company.
44
What are questions that shareholders ask to assess the effectiveness of the board of directors
-Is the company heading in the right direction (that is, has the strategic direction approved by the board resulted in INCREASED sales, profits, and so on)?
-Is it making decisions that result in INCREASED value to the shareholders?
-Is the company generating a sufficient RETURN on the resources invested in it by the shareholders?
45
Define creditors
Those who LEND money or otherwise extend credit to a company rather than directly invest in it (as investors do).
46
Who are the 2 major creditor groups
#1) Financial institutions (banks and credit unions) and other lenders
#2) Suppliers, employees, and the various levels of government (who usually exchanging a service or good first before getting paid by the company)
47
What are financial institutions interested in when considering lending to a company
Seeks to generate a return on these loans in the form of interest
48
Define interest
An expense on money borrowed from creditors that is incurred with the passage of time.
49
Define principal
The initial amount lent or borrowed
50
Define debt servicing
Repaying interest and principal amount
51
Why do financial institutions/other lenders need financial accounting info?
To check if interest and principal can be repaid (debt servicing) over the bond term (either looks at cash flow or also inventory, equipment, buildings, and land in case loan can’t be repaid through regular means)
52
What are the length of loans
Loans can be short or extended over years (can have short or long term)
53
When large companies issue corporate bonds...
They enter into long-term borrowing arrangements
54
What are suppliers, employees, and the various levels of government interested in regarding a company?
May focus on company’s cash amount because their goal is getting paid
55
What are regulators, and what are they interested in
Federal and provincial governments. Have regulations on how companies report their financial information.
Interested in ensuring that these regulations are followed.
56
Who is the Canada Revenue Agency (CRA)
The federal taxing authority in Canada; responsible for federal tax collection.
57
What are corporate taxes based on
Taxable income (calculated based on accounting net income)
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Who are the "other users" generally of financial statements
Using the same set of financial statements even with different information needs.
59
What are some examples of "other users" of financial statements
Other companies - If they want to enter contracts with observed company. Or a competitor to secure their strengths and future plans
Securities analysts, credit-rating agencies - Provide strengths and weaknesses to those looking to invest
Labour unions- Must understand so they can negotiate labour contracts with management
Journalists -May refer to the actual financial statements to validate the information they were given and to supplement the original information
60
Define common shares
Certificates that represent portions of ownership in a corporation. These shares usually carry a right to vote.
61
What does it mean if a corporation is limited/Ltd
Are seperate legal entity. Can enter into contracts and be sued. Liability of shareholders is limited to their investment.
62
What are the 2 main types of corporations
Public companies (publicly traded/listed) and private companies (privaletly held)
63
What are the differences between public and private companies
Public= widely held (many entities own and trade ownership every day. Usually elect a board of directors to represent them since there is a large number, and are not involved in day-to-day operations. They can hire/fire management team).
Private= privately held (small entities own, and it is hard to transfer ownership. NOT on public exchange)
64
Characteristics of a corporation (# of owners, legal entity status, owner responsibility for debts, tax status, costs to establish and maintain, financial information publishing requirement)
of owners= one or more
legal entity status= yes, shareholders’ personal assets are not at risk in the event of legal action against company
owner responsibility for debts= Only to extent of investment
tax status= yes, taxed seperated
costs to establish and maintain= most expensive
financial information publishing requirement)= Yes, on a quarterly and annual basis
65
Characteristics of a proprietorsihp (# of owners, legal entity status, owner responsibility for debts, tax status, costs to establish and maintain, financial information publishing requirement)
of owners= one
legal entity status= No, owner’s
personal assets are at risk in the event of legal action
owner responsibility for debts= yes
tax status= No, profits taxed in hands of owner
costs to establish and maintain= least expensive
financial information publishing requirement)= no
66
Characteristics of a partnership (# of owners, legal entity status, owner responsibility for debts, tax status, costs to establish and maintain, financial information publishing requirement)
of owners= multiple
legal entity status= No, partners’ personal assets are at risk in the event of legal action
owner responsibility for debts= yes
tax status= No, profits taxed in hands of owners
costs to establish and maintain= moderately expensive
financial information publishing requirement)= no
67
What are 3 categories of business activities
Financing -> investing -> operating -> (circle)
68
Define financing activities
A company’s activities that involve RAISING FUNDS to support other activities or that represent a return of these funds.
69
What are two major ways to raise funds
Issue new shares (investors) or borrow money (creditors)
70
How can funds can be returned
Via debt repayment, dividend payments, or the repurchase of shares.
71
What are company's primary source of financing
Investors, through the issuance of shares (Since investors referred to as shareholders since they own, or hold, shares)
Creditors, through taking out loans or making purchases on credit.
72
Why do shareholders purchase shares
to generate a return (through dividends or capital appreciation)
73
What are dividends
Payments made by a company to shareholders that represent a portion of a company’s net income (Payments that distribute a portion of the company’s profits to shareholders).
Dividends are paid only after they are declared by the board of directors.
74
What is capital appreciation
The gain or increase in value in a company’s share price. Selling their shares for more than they paid for them.
75
What is shareholders' equity
Share capital + retained earnings= shareholders' claim on total assets
The funds that flow into the company from the initial issuance of shares to its shareholders
Synonym= net assets
76
How do the sales of shares by one investor to another impact company cash flow?
Sales of shares by one investor to another do NOT impact the company’s cash flows
77
What is share capital
Investment of the shareholders
78
What is retained earnings
Undistributed earnings. Earnings that are kept within a company and reinvested, rather than being paid out to shareholders in the form of dividends.
If a company is operating profitably, it has an internal source of new funding because generally not all of those profits are being paid out to shareholders as dividends.
79
Define creditors
entities that lend money to a company (Eg. banks)
80
When can companies get funding from creditors
once a company has some shareholders’ equity
81
What do creditors seek from companies
Seek returns which is the INTEREST they receive during the time they allow the company to use their money
82
What is return of principle
creditors also expect to get their money back (the principle)
83
What do investors seek VS creditors in companies
Investors seek dividends and capital appreciation
Creditors seek interest and a return of capital
84
Inflows of financing activities
Taking out a loan (borrowing money)
Issuing shares
85
Outflows of financing activities
Repaying loan principal
Paying dividends
86
Define investing activities
Company activities involving LONG-term investments, primarily investments in property, plant, and equipment, and in the shares of other companies.
Investing in the shares of other companies may be either long-term or short-term.
Once company has funds, must invest them to accomplish goals
87
Are short-term investments investing activities?
NO. Eg. purchase of raw materials and inventories.
Related to the day-to-day operations of the business, so are considered OPERATING activities
88
Inflows of investing activities
Proceeds from the sale of property, plant, and equipment
Proceeds from the sale of shares of other companies
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Outflows of investing activities
Purchase of property, plant, and equipment
Purchase of shares of other companies
90
Define operating activities
The activities of a company that are related to developing, producing, marketing, and selling the company’s goods and/or services to customers, and other basic DAY-to-DAY activities related to operating the business.
91
What is the spending frequency different between financing, investing, and operating activities
Though necessary to conduct operations, financing and investing activities tend to occur on a more sporadic basis than operating activities
92
Which is the most critical to a company’s long-run success or failure out of 3 business activities
Operating
93
Operating activity inflows
sales to and collections from customers (revenue)
94
Operating activity outflows
-Purchases of inventory
-Payments of amounts owed to suppliers
-Payments of expenses such as wages, rent, and interest
-Payments of taxes owed to the government
(All expenses)
95
Failing to generate cash flows from operations leads to:
-Run out of cash
-Financing sources dry up (unable to attract new investors or lenders)
-Would have to sell the property, plant, and equipment that it uses to generate its revenues
-No longer operating
96
5 components of financial statement
-Statement of income
-Statement of changes in equity
-Statement of financial position
-Statement of cash flows
-Notes to financial statement
97
Define statement of income
Financial statement showing a company’s revenues and expenses, indicating the operating performance over a period of time.
98
What is the objective of income statement
To present the results of the company’s operating activities for a month, a quarter, or a year
99
Company profit = ?
Sum of these operating activities = company’s profit
income earned during the same time period minus expenses incurred in the period
100
Profit definition
Synonym for earnings, net earnings, and net income
Standard measure of corporate performance
Profit = income - expense
101
Expenses definition
The decrease in economic benefit that results from resources that flow out of the company in the course of it generating its revenues
EXCLUDING distribution to shareholders
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Does expenses include distribution to shareholders
No
103
Income definition
The inflow of resources that increase shareholders’ equity but are not the result of shareholder activities. Income includes revenues and gains.
104
Revenues definition
Revenues = Inflows of resources to a company that result from its ordinary activities, such as the sale of goods and/or services.
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Gains and losses definition
Gains= Increases in income resulting from sales OUTSIDE of the company’s normal course of operations, such as the sale of investments; property, plant, and equipment; or intangible assets at amounts in excess of their carrying amounts.
Losses= A company can incur losses on sales that are outside its normal course of operations
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Net loss meaning
What results when expenses for a period exceed the income earned.
107
Other names for statement of income
-Income statement
-Statement of operations
-Statement of net earnings
-Statement of earnings
-Statement of profit or loss
108
Are gains and losses presented seperately from revenues and expenses?
Yes. Presented separately from revenues and expenses on the statement of income, so that the users of the financial statements are able to make this distinction (both gains and losses are OUTSIDE of the company’s normal operations)
109
Consolidated financial statements definition
Financial statements that represent the COMBINED financial results of a parent company and its subsidiaries (other companies it controls)
110
Comparitive information definition
Financial information showing the results of both the current period and preceding period.
111
Why must companies show comparative information
Companies must provide this so that users can assess the changes from the previous period
112
Fiscal year meaning
The one-year period that represents a company’s operating year
113
What are some categories that count as expenses
-Cost of goods sold (or cost of sales, or cost of merchandise sold)
-Selling, general, and administrative expenses (or operating expenses)
-Interest expense
-Income tax expense (or provision for income taxes)
114
Gross profit meaning
Equal to the difference between the revenue received from the sale of the goods and the amount these goods cost the seller (revenue - cost of goods).
More meaningful to express as a percentage of revenue than as a dollar figure
Synonym= gross margin
115
Gross profit percentage formula
Gross profit / sales or revenue
Ratio; for every dollar in sales revenue, __ amount remains after paying for products
116
Net earnings (net income/profit) definition
the amount of the company’s revenue that remains AFTER paying all of its expenses, such as product costs, wages, store operating costs, interest, and income taxes.
117
net earnings ratio is...
net earnings / sales or revenue
118
Earnings per share (EPS) definition and formula
A ratio calculated by dividing the earnings for the period by the average number of shares outstanding during the period.
Earnings per share = earnings / average number of outstanding shares
119
Outstanding definition
an expense which is due but has not been paid
120
Basic earnings per share definition and formula
the company’s net income divided by the average number of common shares that are outstanding (owned by shareholders of the company) during the year
Answers: How much income is going to each share?
Basic earnings per share = net income / average number of outstanding shares
121
Why is basic earnings per share useful, and to who
Useful to shareholders since it puts the performance of their investment into perspective. The board of directors determines how much of the company’s earnings, if any, will be paid to shareholders as dividends.
122
Explain diluted earnings per share
On some statements of income, there will also be a diluted earnings per share amount, which is normally lower than the basic earnings per share.
Reflects the earnings per share figure that would have been determined if all of the securities that could be converted into shares actually had been converted.
Lower because more shares means bigger denominator, meaning same cash is split between more shares
123
Common statement of income items:
-Sales revenues = The total amount of sales of goods and/or services for the period.
-Other income = Various types of revenues or income to the company other than sales, including interest or rental income.
-Cost of goods sold = The cost of the inventory that was sold during the period.
-Selling, general, and administrative expense = The total amount of other expenses (such as wages and utilities) during the period that do not fit into any other category.
-Depreciation expense (amortization expense) = The allocation of part of the cost of long-lived items such as equipment or a patent.
-Interest expense = The amount of interest incurred on the company’s debt during the period.
-Income tax expense (provision for taxes) = The taxes levied on the company’s profits during the period.
124
Define earnings management
The practice of choosing revenue and expense methods so that earnings are increased or decreased in particular accounting periods, or smoothed over time.
125
Define Statement of changes in equity
Financial statement that measures the changes in the equity of a company over a period of time, differentiating between changes resulting from transactions with shareholders and those resulting from the company’s operations.
Joins the balance sheet and income statement; does so through retained earnings (add net income to retained earnings which gives us a new figure)
126
Define equity
The net assets of a company (assets - liabilities), representing the interest of shareholders in the company. It is the sum of a company’s share capital and retained earnings. It is also sometimes used to refer simply to the shareholders’ equity section of the statement of financial position.
Includes shareholders’ investments when the company initially issued shares and income generated that has not been distributed to shareholders as dividends
Call these amounts “share capital” and “retained earnings” (the earnings or income that have been “retained” and reinvested into the business)
127
Define share capital
The shares issued by a company to its owners. Shares represent the ownership interest in the company.
Share capital may be "owner's capital" in small companies
Shares = the contributions (money) that were put into the company by the owners (shareholders)
Retained earnings = accumulation of losses and earnings
128
Where do other components of equity appear
Could appear in the statement of equity
Eg. contributed surplus and accumulated other comprehensive income
129
Alternative names for statement of changes in equity:
-Statement of shareholders’ equity
-Statement of changes in shareholders’ equity
-Statement of equity
130
Define deficit
If the loss exceeds the opening retained earnings balance, then retained earnings would be negative. If a company’s retained earnings balance is negative (deficit)
131
Retained earnings formula
beginning retained earnings + net income - dividends declared = ending retained earnings
132
What is share capital
Represents the funds received when the shares were INITIALLY issued by the company to investors
Different types of shares (common shares and preferred shares). There can also be different classes of shares (shares that have different rights and privileges)
133
Common Shareholders’ Equity Components
Retained earnings and share capital
134
Explain retained earnings
Retained earnings = The company’s earnings (as measured on the statement of income) that have been kept (retained) and not paid out as dividends
Deficit: if retained earnings has a negative balance, means that net losses have exceeded net income
135
Explain Statement of financial position (balance sheet)
Financial statement that indicates the resources controlled by a company (assets) and the claims on those resources (by creditors and investors) at a given point in time.
136
What are company's fiscal ended years also known as
year end
137
Define Classified statement of financial position
A statement of financial position in which the assets and liabilities are listed in liquidity order and are categorized into current (or short-term) and non-current (or long-term) sections.
138
Does a balance sheet amount restart or get carried over each year end
In the transition from one accounting period to the next, the ending balances of one accounting period become the beginning balances of the next accounting period.
139
Liquidity definition
An organization’s short-term ability to convert its assets into cash to be able to meet its obligations and pay its liabilities.
Refers to how soon something will be received, realized, or consumed, or else settled or paid
140
"Current" definition
An asset or a liability that will be received, realized, or consumed, or else settled or paid within 12 months from the year end.
141
"Non-current" definition
An asset or liability presented in financial statements that will not be received, realized, consumed, or settled or paid within 12 months from the fiscal year end.
142
Working capital definition and formula
The liquid funds available for use in a company
current assets - current liabilities.
One of the most common measures of liquidity is working capital
143
Current assets definition
assets that are cash or will become cash within the next 12 months
144
Current liabilities definition
liabilities that must be settled within the next 12 months
Measures a company’s ability to meet its short-term obligations using its short-term assets
145
If assets - liabilities total is negative, what is the effect on debt-equity ratio
you will have a negative debt-equity ratio (BAD)
146
Does book value = market value?
Book value DOESN’T EQUAL market value (the real value of good/service is somewhere between book and market value)
147
Price to book ratio formula
share price / book value per share
148
Working capital ratio formula
current assets / current liabilities
Looks better if they inflate current assets and reduce current liabilities
149
Working capital and working capital ratio measures...
Working capital and working capital ratio measure liquidity
150
Solvency formula
debt / equity = entity’s long term ability to pay
Has something to do with debt
151
What’s listed in company’s statement of financial position?
Assets, liabilities, and shareholders’ equity
152
Accounting equation definition and equation
The equation that provides structure to the statement of financial position
assets = liabilities + shareholders’ equity.
153
Characteristics of an asset
PAST: The event that gave the company control of the economic resource has already happened (transaction)
PRESENT: An economic resource controlled by an entity
FUTURE: The company expects future economic benefits from the use or sale of the resource
154
Common Assets Found on a Statement of Financial Position (classified; current)
Cash, Short-term investments, Accounts receivable, Inventory, Prepaid expenses and deposits
155
Accounts receivable definition
Amounts owed to the company by its customers as a result of CREDIT sales.
156
Inventory definition
Goods held for resale to customers.
157
Prepaid expenses and deposits definition
Amounts that have been paid by the company but the underlying service has not yet been used.
Common examples include insurance premiums or rent paid in advance.
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Common Assets Found on a Statement of Financial Position (classified; non-current)
Property, plant, and equipment, Right-of-use assets, Intangible assets, Goodwill
159
Property, plant, and equipment definition
Land, buildings, equipment, vehicles, and so on that the company purchases to use to generate revenues in the future; they are NOT purchased to resell.
160
Right-of-use assets definition
Land, buildings, equipment, vehicles, and so on that the company is leasing or renting to use to generate revenues in the future.
161
Intangible assets means...
Licences, patents, trademarks, copyrights, computer software, and other assets that lack physical form. These are also acquired to generate revenues in the future.
162
Goodwill means:
A premium that has been paid on the acquisition of another company related to factors such as management expertise and corporate reputation that will result in higher future earnings.
163
Characteristics of a Liability
Amounts that the company owes to others (debt and obligations)
It is a present obligation of the entity. (PRESENT)
The company expects to settle it through an outflow of economic resources. (FUTURE)
The obligation results from an event that has already happened. (PAST)
164
How to settle liabilities? (what resource is sacrificed)
In most cases, the economic resource that will be sacrificed is cash, but a company can also settle liabilities by providing services or goods.
165
Common Liabilities Found on a Statement of Financial Position (classified; current)
Bank indebtedness, Accounts payable (trade payables), Deferred revenue, Dividends payable, Accrued liabilities, Income taxes payable
166
Bank indebtedness
Amounts owed to the bank on short-term credit.
167
Accounts payable (trade payables)
Amounts owed to suppliers from the purchase of goods on account (on credit).
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Deferred revenue
Amounts owed to customers for advance payments until the related goods or services have been provided.
169
Dividends payable
Amounts owed to shareholders for dividends that have been declared by the board of directors.
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Accrued liabilities
Amounts owed related to expenses that are not yet due, such as interest and warranty expense.
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Income taxes payable
Amounts owed to taxing authorities.
172
Common Liabilities Found on a Statement of Financial Position (classified; non-current)
Notes payable, Lease liabilities, Long-term debt, Deferred income taxes
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Notes payable
Amounts owed to a creditor (bank or supplier) that are represented by a formal agreement called a note (sometimes called a promissory note). Notes payable often have an interest component, whereas accounts payable usually do not.
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Lease liabilities
Amounts owed to creditors (landlords or leasors) related to leased assets (right-of-use assets).
175
Long-term debt
Amounts owed to creditors due beyond one year.
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Deferred income taxes
Amounts representing probable future taxes the company will have to pay.
177
Where do you get asset and liability values for accounting equation?
This amount is determined using the values of the assets and liabilities on the statement of financial position
178
Are the asset and liability values on balance sheet different than current market values?
Yes, Values often differ from those in the current market
179
What is market value
The amount that an item would generate if it were sold in a transaction between independent parties. The price at which shares are trading in the stock market.
Market value of the shares held by a company’s shareholders is another measure of the shareholders’ company wealth
180
Are market values similar between shareholders' equity and balance sheet
Value is likely very different from the amount of shareholders’ equity reported on the statement of financial position because it reflects the market’s expectations of future earnings and events
181
How is income, equity, and financial position statement linked?
#1) Statement of income: revenues - expenses = net income
#2) changes in equity: net income + beginning retained earnings - dividends declared= ending retained earnings balance
share capital= opening share capital + shares issued
#3) balance sheet: ending retained earnings balance + share capital = total shareholders' equity
182
share capital formula
share capital= opening share capital + shares issued
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Statement of cash flows definition
Financial statement that summarizes the cash flows of a company during the accounting period, categorized into operating, investing, and financing activities.
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What is cash flow statement reporting objectives?
Reporting objective of this statement is to enable financial statement users to assess the company’s inflows and outflows of cash related to each of these activities
See where the cash came from
How it was used.
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What is reporting difference between income and cash flow statement
Cash flow DOESN’T report estimates; reports cash
Income statement, if accrual, is usually built around estimates
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How are balance sheet and cash flow statement connected
Balance sheet assets cash is the ending cash flow in cash flow sheet
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What is the typical starting point of cash flow from operating activities section?
The starting point in this section is frequently net earnings (or net income or profit) from the statement of income
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Why are adjusting entries made to cash flow from operating activities section
Adjusting entries made to this amount because the recognition (recording) of revenues and expenses doesn’t always happen during receipt/payment of cash
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sales on account
customers pay at a later date, resulting in an account receivable rather than cash
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account payable
Expenses can also be paid later if the company is given credit by its suppliers
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Companies that are growing, and even those that are just maintaining their current operations, normally have ___ cash flows from investing activities
NEGATIVE
Results from them spending more cash to purchase new long-term assets than they are receiving as proceeds after selling long-term assets that they have finished using
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Explain cash flow from financing activities
Transactions that either result from new funds OR the return of funds to investors or creditors
Typical activities in this category are the issuance of shares, the proceeds of new borrowings, the repayment of debt, or the payment of dividends.
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Summarize what Statement of income measures
Measures the operating performance of a company over a period of time.
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Summarize what Statement of changes in equity measures
Measures the changes in the company’s equity over a period of time, differentiating between changes that result from transactions with shareholders and those resulting from the company’s operations.
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Summarize what Statement of financial position measures
Measures the resources controlled by a company (assets) and the claims on those resources (by creditors and investors) at a given point in time.
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Summarize what Statement of cash flows measures
Measures the change in cash flow through operating, financing, and investing activities over a period of time.
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Explain Notes to the financial statements
A section of a company’s financial statements where management provides more details about specific items, such as significant accounting policies, the types of inventory and assets held, and so on.
Management gives more detail about specific items (various types of inventory held by the company and its long-term assets)
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Why have a notes section to financial statements
By including additional explanations in notes rather than in the financial statements, management keeps the company’s statements simple and uncluttered
Note disclosures help to increase the usefulness of the financial statements and enhance the user’s understanding of the statements.
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What do the two notes that normally appear at the beginning of the notes to the financial statements tell you
These are the note explaining the basis on which the financial statements have been prepared (IFRS or ASPE) and the note outlining the significant accounting policies used in the preparation of the statements.
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International Financial Reporting Standards (IFRS) definition
The accounting standards that must be followed by Canadian public companies and that private companies may elect to adopt.
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Where to find Management discussion and analysis (MD&A) in financial statements
Not part of the financial statements
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Are companies required to have MD&A in annual report?
All PUBLICLY traded companies are required to include in their annual reports
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What can MD&A tell readers
-Provides readers with senior management’s perspective on the information contained in the financial statements
-Provides a discussion of the risks facing the company and information about future plans
-Often information is presented from the perspective of the company’s various divisions
-Also includes information on significant events and about sales, profits, and cash flow during the year
-The discussion focuses on the financial aspects of the business, including pricing strategies, expenses, earnings, liquidity, environmental and corporate social responsibility, expansion and future development, taxes, events after the end of the current year, and executive compensation policies.
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