Chapter 1: Corporate Financial Reporting

Question 1

What do shareholders, bank, and suppliers use a company’s financial statement for?

Answer 1

to see how the company has performed and what its future prospects might be. Shareholders use them to make informed decisions about things such as whether to sell their shares, hold onto them, or buy more. Creditors use financial statements to assess a company’s ability to service its debts (pay interest and repay principal), while suppliers may use them to determine whether to allow the company to purchase on credit.

Question 2

Financial Accounting (AKA external financial reporting)

Answer 2

The process by which information on the transactions of an organization is captured, analyzed, and used to report to decision makers outside of the organization’s management team

Question 3

Creditors

Answer 3

those who have lent money to the organization

Question 4

Owners of a business aka

Answer 4

Investors

Question 5

What is the primary purpose of financial accounting information?

Answer 5

is to aid these users in their economic decision-making relative to the organization. Because these users are generally outside of the organization and are not involved in its day-to-day operations, the financial accounting information they receive is often their only “window” into the organization.

Question 6

Two types of accounting reports

Answer 6

Reports for internal use (managerial accounting - inform decision making

Reports for external use (used for people outside organization) known as financial accounting - help external users make decisions

Question 7

financial statements

Answer 7

which are management’s reports to the company’s owners that are produced at the end of each accounting period, such as every quarter or every year.

Question 8

Internal uses of financial statement information

Answer 8

Management

Question 9

External users of financial statement information

Answer 9

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

Question 10

Shareholders

Answer 10

A company is owned by these people

Question 11

Private company

Answer 11

Single shareholder owns the company

Question 12

Public Company

Answer 12

Thousands of shareholders

Question 13

Board of directors

Answer 13

The board of directors is given the responsibility of overseeing the management team that has been hired to operate the company.

Question 14

Creditors

Answer 14

Creditors are those who lend money or otherwise extend credit to a company rather than invest in it directly as investors do.

Question 15

Two major types of creditors

Answer 15

1. Financial institutions and other lenders

2. Suppliers, employees, and the various levels of government

Question 16

Financial institutions

Answer 16

such as banks and credit unions, lend money to companies. They do so seeking to generate a return on these loans in the form of interest.

Question 17

The other group of creditors includes

Answer 17

suppliers, employees, and various levels of government. These groups often sell goods or provide services prior to receiving payment.

Question 18

Canada Revenue Agency (CRA)

Answer 18

is the federal taxing authority in Canada and is responsible for federal tax collection. Corporate taxes are primarily based on taxable income, which is calculated based on accounting net income.

Question 19

Corporations are owned by who?

Answer 19

Shareholders!

Question 20

There are two main types of corporations

Answer 20

1) public companies (which are also known as publicly traded companies)
2) private companies (which are also known as privately held companies)

Question 21

the Three Categories of Business Activities

Answer 21

(1) financing activities, (2) investing activities, and (3) operating activities

Question 22

Financing Activities

Answer 22

obtaining the funding (or financing) needed to purchase the equipment or buildings they need to start operations.

Question 23

Two ways companies can obtain funding (part of financing activities)

Answer 23

1) Investors (Shares)

2) creditors (taking out loans)

Question 24

dividends

Answer 24

payments made by a company that distribute a portion of the company’s profits to shareholders

Question 25

shareholders' equity.

Answer 25

The funds that flow into the company from issuing shares to its shareholders

Question 26

retained earnings

Answer 26

Any profits that are kept or retained by the company

Question 27

Inflows

Answer 27

Borrowing Money | Issuing shares

Question 28

Outflows

Answer 28

Repaying loan principal | Paying dividends

Question 29

A company's investing activities are related to two things:

Answer 29

1) buying and selling property, plant, and equipment | 2) buying and selling the shares of other companies

Question 30

``` Operating activities (Day to day ongoing activities) CRITICAL TO COMPANY'S LONG RUN SUCCESS ```

Answer 30

Operating activities are all of the activities associated with developing, producing, marketing, and selling the company's products and/or services (putting resources of a business into action to generate profit)

Question 31

Investing Activities

Answer 31

Once a company obtains funds, it must invest them to accomplish its goals. Most companies make both long-term and short-term investments in order to carry out the activities that help them achieve their goals.

Question 32

A company's operating activities are related to the company's revenues and expenses, which fall into two basic categories:

Answer 32

1) inflows from sales to and collections from customers | 2) outflows related to payment of the expenses of the business

Question 33

Components of the Financial Statements

Answer 33

``` Statement of income (accrual) Statement of changes in equity (accrual) Statement of financial position (Balance Sheet) (accrual) Statement of cash flows Notes to the financial statements ```

Question 34

The objective of the statement of income

Answer 34

is to measure the company's performance by the results of its operating activities for a month, a quarter, or a year (revenues - expenses = net income)

Question 35

Profit = Revenue - expenses

Answer 35

KNOW THIS BABY

Question 36

Profit is also known as

Answer 36

Net income, net earnings, or earnings

Question 37

Income, aka Revenue

Answer 37

defined as increases in economic benefits, but this is more commonly thought of as the money or other resources that flow into the company as a result of its ordinary activities, such as sales of goods and services.

Question 38

Expenses

Answer 38

defined as decreases in economic benefits, but are more commonly thought of as the money or other resources that flow out of the company in the course of generating revenues.

Question 39

consolidated financial statement

Answer 39

consolidates the financial information for the main or parent company plus the financial information of all the other companies that it controls (known as the subsidiary companies

Question 40

comparative information

Answer 40

the results of both the current period and preceding period

Question 41

Gross profit aka gross margin

Answer 41

It is equal to the difference between the revenue received from the sale of the goods and the amount these goods cost the seller

Question 42

statement of changes in equity

Answer 42

provides details on how each component of shareholders' equity changed during the period

Question 43

share capital and retained earnings

Answer 43

the earnings or income that have been “retained” by the company and reinvested into the business

Question 44

Retained earnings =

Answer 44

Opening balance + net income - dividends declared + Shares issued

Question 45

Statement of financial position (aka Balance sheet)

Answer 45

The term financial position indicates that this statement presents the company's financial status at a particular point in time (usually end of accounting period). Shows the assets and liabilities

Question 46

Liquidity

Answer 46

refers to how soon something will be received, realized, or consumed, or else settled or paid

Question 47

Current items

Answer 47

Current items are those that will be received, realized, or consumed, or else settled or paid within 12 months from the year end.

Question 48

Non-current items

Answer 48

Those that are non-current will not be received, realized, consumed, or settled or paid within 12 months from the year end.

Question 49

Working Capital =

Answer 49

Current Assets−Current Liabilities

Question 50

The Accounting Equation

Answer 50

Assets = liabilities + shareholder's equity (this is part of statement of financial position)

Question 51

Characteristics of an Asset

Answer 51

1. It is a resource controlled by an entity. 2. The company expects future economic benefits from the use or sale of the resource. 3. The event that gave the company control of the resource has already happened.

Question 52

Liabilities

Answer 52

A simple definition of liabilities might be amounts that the company owes to others. (They are also known as debt and obligations.)

Question 53

Characteristics of a Liability

Answer 53

1. It is a present obligation of the entity. 2. The company expects to settle it through an outflow of resources that represent future economic benefits. 3. The obligation results from an event that has already happened.

Question 54

Shareholders' Equity

Answer 54

Shareholders' equity is often referred to as the net assets of the company. This is the amount of assets that would remain after all of the company's liabilities were settled.

Question 55

The Accounting Equation (Rearranged)

Answer 55

Assets−Liabilities=Shareholders' Equity (Net Assets)

Question 56

market value,

Answer 56

we mean the price at which the shares are trading in the stock market.

Question 57

statement of cash flows (sometimes called the cash flow statement)

Answer 57

presents the flows of cash related to the three categories of business activities

Question 58

Subsections of the Statement of Cash Flows

Answer 58

Cash flow from operating activities Cash flow from financing activities Cash flow from investing activities

Question 59

notes to the financial statements

Answer 59

management gives more detail about specific items, such as the various types of inventory held by the company and details on its long-term assets. By including additional explanations in notes rather than in the financial statements, management keeps the company's statements simple and uncluttered

Question 60

only four main financing activities

Answer 60

two inflows (proceeds from issuing shares and from taking out a loan) and two outflows (paying dividends and repaying loan principal).

Question 61

Remember that there are only four main investing activities

Answer 61

two inflows (proceeds from selling long-term assets, like equipment, or the shares of other companies) and two outflows (purchasing long-term assets, like equipment, and the shares of other companies).

Question 62

Debt financing

Answer 62

When a company borrows money

Question 63

Equity financing

Answer 63

When a company sell shares in exchange for cash

Question 64

Forward-looking budgets are examples of

Answer 64

Internal reports that accounting provides to internal users.

Question 65

Items on the statement of income

Answer 65

``` Sales revenue Other income Cost of goods sold Selling, general, and administrative expense Depreciation expense Interest expense Income tax expense Interest revenue from short-term investment ```

Question 66

Items found on Statement of financial position (balance sheet)

Answer 66

``` Cash Short-term investments Accounts receivable Inventory Prepaid Expense and deposit Non-current assets Property, plant, and equipment Intangible assets Goodwill Bank indebtedness Accounts payable Dividends payable Income tax payable Notes payable Long-term debt Deferred income taxes Common shares Wages payable Retained earnings ```

Question 67

Net income =

Answer 67

Revenue - expenses