Financal Accounting chapter 2

 Financial statements

• Classified statement of financial position

• Assets, libailities shareholders' equity

• Using the fiananical statements

• Framework for the preparation and presentation of financial statements

• Qualitative characterisitics

• Cost constaint, going concern assumption

• Elements of financal statements and measurement

• Conceptual framework

 

 

Classified statement of financial position

• Classified statement of fiancal position generally contains the following standard classifications:

• Assets

• Current assets

• Cash

• Trading investments

• Accounting receivable

• Notes receivable

• Inventory

• Supplies

• Prepaid expenses

• Non-current assets

• Long-term investments

• Property, plan and equpment

• Intangible assets

• Goodwill

• Liabilities and Shareholders' equity

• Current Liabilities

• Bank indebtedness

• Accounts payable

• Deferred revenue

• Notes payable

• Current portion of long term debt

• Non-current Liabilities

• Notes payable

• Bank Loan payable

• Shareholder's equity

• Share capital retained earnings

 

 

Current Assets

• Assets expected to be converted to cash, sold or used in the business within one year of the fianancial statement date or one operating cycle, whichever is longer

• Operating cycle is the average time between when a business pays cash to obtain products or services and which it recieves cash from customers for these products or services

• Usually listed in order of liqudity, the order in which they expect current assets to be converted to cash, sold or used up

• Reverse order of liquidity also possible

 

 

 

Non-current assets

• Also known as long-term assets

• All assets not considered current

 

 

Long-term Investments

• Multi-year investments

• Debt securities: loans, notes, bonds, mortgages

• Equity securities: shares of other companies

• These assets are normally not intended to be sold and converted into cash within one year

 

 

 

Property, plant and equipment

• Tangible assets with relatively long useful lives

• Used in operating a business and provide benefits to companies over their useful lives

• Examples

• Land

• Buildings

• Equipment

• Furniture

• Computers

• Vechicales

• Usually listed in order of permanency

 

 

Depreciation

• Allocation (expense) of the cost of the property, plant, and equipment over their estimated useful lives

• Companies systematically assign a portion of the costs of an asset to expense every year

• IFRS recommends use the term depreciation for depreciable tangible assets and the term amortization of intangible assets with definite lives

• Under, ASPE, amortization is often used instead of depreciation for both tangible and intangible assets with definite lives

• The cost of long-lived assets with indefinite lives is not depreciated

• Accumulated depreciation accounting shows the total amount of depreciation expense recorded to date

• Accumulated deprecation is a contra asset account

• The difference between the cost of the asset and its accumulated depreciation is referred to as the carrying amount of the asset

• Depreciable assets are presented at their carrying amount

 

Intangible Assets

• Assets do not have physical subtance but have signigicant value

• Represent a privilege or a right granted to or held by the company

• Examples

• Patents, copyrights, trademarks, and licenses

• Generate a future value to the company

• Amortized if they do not have an indefinite life

 

 

Goodwill

• Represents the value of favourable, unidentifiable attributes related to the company as a whole

• Like intangibles it has no physical subtance

• Results from the acquistion of another company

• Unlike intangibles, it cannot be sold by itself

• Not amortized as it has indefinite life

• Reported separtely from other intangibles

 

 

Current Liabilities

• Obligations that are to be paid or settled within the longer of the one year of the financial statement date or on operating cycle

• Examples

• Bank indebtedness

• Accounting payable

• Deferred revenue

• Bank loand/notes payable

• Current portion of long-term debt

 

Non-current liabilities

• Obligations expected to be paid or settled after one year

• Examples

• Bank loans/notes payable

• Lease liabilites

• Pension and benefit obligations

• Deferred liabilities

• Usually accompanied by extensive notes to the financial statements

 

Shareholders' equity

• A residual amount equal to the difference between a company's assets and its liabilites

• Has 2 components

• Share capital

• Investment of cash or other assets in the company by shareholders in exchange for preferred or common shares

• Retained earning

• Cumulative net income or earning kept for sue in the company

 

 

 

Using the financial statements-data analytics

• Process of analyzing large amounts of data to find patterns and correlations, trends, insights

• Used to exchange decision making, including decisions impacting financial reporting

• Starts with developing questions that the data will help to answer

• Specific tools can be used to analyze the financial statements

• Ratio analysis expresses the relationships between selected fiancnial statement data

• Use comparisions to aid in analyses

• Intracompany comparisions

• Cover2 or more periods for the same company

• Intercompany comparisons

• Between the company and a competitor

• Industry average comparions

• Based on averages for particular industries

 

 

Ratio Analysis

• Profitability ratios

• Measure a company's income or operating success for a given period of time

• Liquidity Ratios

• Measure the company's short-term ability to pay its maturing obligatiosn and to meet unexpected needs for cash

• Solvency ratios

• Measure the company's ability to survive over a long period of time

 

 

Liquidity Ratios

• Measure a company's short term ability of a company to pay its maturing obligations and to meet its expected needs for cash

• Working capital = Current assets-current liabilites

• Current ratio= current assets/ currents liabilites

• Higher is generally better

• Working capital is ability to fulfil short term obligations

 

 

 

Solvency Ratio

• Measure a company's ability to survive over a long period of time

• The higher the % of debt to total assets, the greater risk that debts cannot be repaud when they are due

• Debt to Total assets = Total liabilites/Total assets

• Lower is generally better

 

 

Profitability Ratios

• Measure the income or operating success of a company for a given period of time, usually one year

• Basic earning per share= income available to commone shareholders/ weighted average number of common shares

• Price-earningsratio = market price per share/ basic earning per share

• Highre is generally better

 

 

 

 

Conceptual framwork for fiancial reporting

• The foundation foe the arrual basis of accounting

• Guides dcisions about

• What to present in fianancial statements

• Alternative ways of reporting economic events

• Appropriate ways of communcating this informaiton

• Some key items

• Objective of general-purpose financial reporting

• Qualitative characteristics of useful financial information

• Cost constraint

• Elements of financial statements

• Measurement of the elements of financial statements

 

 

General purpose financial reporting

• To provide financial information that is useful to existing and potential investors, lenders and other creditors

• Who are making decisions about prodivding resources to a company

• Buying, selling, holding equity and ebt

• Providing or settling loans or other credit

• Financial informatino is provided by general purpose financial statements

 

 

Fundamental qualitative Characteristics

• Relevance:

• Information has relevance if it makes a difference in users' decisions

• May have predictive value and or confirmatory value

• Materiality is important: will info if omitted or missTATED INFLUENnce the decisiosn of users

• Faithful representation:

• Info should reflect economic reali

• It must be complete, neutral and free from error

 

 

Enhancing qualitative characteristics

• Comparability

• When difference companies use the same accounting principles and apply them consistently each year

• Verifiability

• Indepdendent consensus that info is faithfully represented

• Timeliness

• Available before it loses its usefulness in decision-making

• Understandability

• Classified, characterized and preented clearly and concisely

 

 

Cost constraint

• Ensures that the value of th einfo procided by financial reporting is greater than the cost of providing it

• The benefits of financial reporting should justify the costs of providing  and using it

 

 

Going Concern Assumption

• The business will continue operating in the foreseeable future

• The key assumption - provides a foundation for accounting and justification for using costs as the value of certain assets

 

 

Measurement of the elements

• Accountants have developed principles that describe which, when and how the elements of financial statements should be

• Regcognized

• Measured

• Reported

• Known as generally accepted accounting principles

 

 

 

Generally accepted accounting principles- measurement

• Historical costs

• Assets and liabilities should be recorded at their cost when acquired

• Not only at the time of purchase, but throughout the life of  each asset and liability

• Fiar value

• Certain assets and liabilities can be recorded and reported at fair value

• In choosing between these 2 apply the concepts of relevance and faithful representation

 

 

Accounting and environment

• Users of statements have begun demanding more info about a company's environmental, social and goverance factors

• Public companies are now preparing sustainability reports

• Standards for preparation of this info are still evolving.