Accounting

The statement of cash flows provides answers to these simple but important questions:

(1) Where did cash come from during the period? (2) How was cash used during the period? (3) What was the change in the cash balance during the period? -The statement of cash flows answers these questions by summarizing cash flows as operating, investing, or financing activities. -A user of this statement can then determine the amount of cash provided (or used) by operating activities, the amount of cash provided (or used) for investing purposes, and the amount of cash provided (or used) by financing activities. •Operating activities are activities the company performs to generate net income. It is desirable for operating activities to provide cash (positive balance) rather than use cash (negative balance). A positive source of cash from operating activities can help fund the investment in additional assets to grow the business and/or fund debt repayments or dividend payments. •Investing activities include the purchase or sale of long-lived assets used in operating the business, or the purchase or sale of long-term investment securities. For most growing companies, investing activities use cash (negative balance) rather than provide cash (positive balance), because growing companies purchase or replace more assets than they dispose of. •Financing activities include borrowing or repaying money, issuing or repurchasing shares, and paying dividends. For most growing companies, financing activities provide cash (positive balance) rather than use cash (negative balance). Most growing companies have to borrow money or issue shares rather than being able to repay financing. As companies mature, they are able to repay financing and this balance becomes negative (cash used) more often than positive.

For each of the following financial statement users, indicate whether they would be an "internal" or "external" user: (a)Bank (lender) (b)Shareholders (c)Employees (non-management) (d)Suppliers (e)Labour union (f)Canada Revenue Agency (g)Management

(a)External (b)External (c)External (d)External (e)External (f)External (g)Internal

For each of the following, indicate what type of activity it is (financing, investing, or operating) and whether it would result in an inflow or outflow of cash. (a)Paying dividends (b)Collecting an account receivable from a customer (c)Purchasing new equipment (d)Issuing common shares (e)Paying employee salaries (f)Repaying a bank loan (g)Selling equipment that the company has finished using

(a)Financing/Outflow (b)Operating/Inflow (c)Investing/Outflow (d)Financing/Inflow (e)Operating/Outflow (f)Financing/Outflow (g)Investing/Inflow

For each of the following, indicate what type of activity (financing, investing, or operating) it is related to. (a)Property, plant, and equipment (b)Dividends declared (c)Intangible assets (d)Accounts payable (e)Loan payable (f)Common shares (g)Supplies

(a)Investing (b)Financing (c)Investing (d)Operating (e)Financing (f)Financing (g)Operating

For each of the following questions that could be asked by a financial statement user, indicate which user (select from: management, shareholder, potential shareholder, supplier, labour union, and bank) would be most likely to ask it and whether they would be considered to be an "internal" or "external" user. (a)How do production costs compare across our two manufacturing plants? (b)If we lend the company money, will they be able to repay the loan, together with interest? (c)Should we allow the company to purchase materials on account? (d)Do the company's financial results justify the price I would have to pay to purchase shares in the company? (e)If we demand a 2% salary increase, would it make the company unprofitable? (f)Should we purchase or rent the new equipment we require? (g)If the company maintains its dividend policy (declares and pays the same dividends as it did in the previous year), what would be the dividend I would receive on the 100 shares I own?

(a)Management/Internal (b)Bank/External (c)Supplier/External (d)Potential shareholder/External (e)Labour union/External (f)Management/Internal (g)Shareholder/External

Indicate which financial statement(s) (income statement, statement of changes in equity, statement of financial position, or statement of cash flows) would have to be consulted to answer each of the following questions. (a)Did the company declare dividends during the period? (b)How did the company's salaries expense compare with its revenues? (c)What was the company's income before income taxes? (d)How much does the company owe its suppliers? (e)Did the company issue shares during the period? (f)Were the company's cash flows from operating activities sufficient to cover the cash required to purchase long-term assets? (g)What amount was owed to the company by its customers?

(a)Statement of changes in equity (b)Income statement (c)Income statement (d)Statement of financial position (e)Statement of changes in equity/Statement of cash flows (f)Statement of cash flows (g)Statement of financial position

Indicate on which financial statement(s) (income statement, statement of changes in equity, statement of financial position, or statement of cash flows) each of the following would be reported. (Select as many as are appropriate.) (a)Cash (b)Unearned revenue (c)Net income (d)Cost of goods sold (e)Dividends declared and paid (f)Prepaid insurance (g)Service revenue

(a)Statement of financial position (assets section)/Statement of cash flows (b)Statement of financial position (liabilities section) (c)Income statement/Statement of changes in equity (d)Income statement (e)Statement of changes in equity/Statement of cash flows (f)Statement of financial position (assets section) (g)Income statement

For each lettered item below, indicate which of the following amounts it would be used to calculate: total assets, total liabilities, total shareholders' equity, net income, or retained earnings. (a)Unearned revenue (b)Common shares (c)Cost of goods sold (d)Bank indebtedness (e)Dividends declared (f)Goodwill (g)Interest expense

(a)Total liabilities (b)Total shareholders' equity (c)Net income (d)Total liabilities (e)Retained earnings (f)Total assets (g)Net income

Statement of Financial Position

(also known as balance sheet, especially for those companies following ASPE) -A financial statement that reports the assets, liabilities, and shareholders' equity at a specific date. -The statement of financial position is dated at a specific point in time. The income statement, statement of changes in equity, and statement of cash flows cover a period of time. -Internal users such as managers use the statement of financial position to determine whether inventory is adequate to support future sales and whether cash on hand is sufficient for immediate cash needs. -Managers also look at the relationship between total liabilities and shareholders' equity to determine whether they have the best proportion of debt and equity financing.

Why are financial statement users interested in a company's net income?

- Investors are interested in a company's past income because these numbers provide information that may help predict future income. -Income is required to generate cash to fund growth, repay debt, and pay dividends. -Investors buy and sell shares based on their expectations about the future performance of a company. -Like investors, lenders and other creditors also use the income statement to predict the future.

In its simplest form, total shareholders' equity includes

-(1) share capital and (2) retained earnings. - It can also include other types of accounts, such as accumulated other comprehensive income that we will discuss later in this, and other, chapters.

Partnerships

-2 or more individuals -Normally formalized in written agreement -each partner has unlimited liability for all debts, even if it was created by the other partner. -The income of partnerhips reported as self employment income, declared on each partner's personal income tax return...usually used to organize professional service businesses, like lawyers

account receivable

-Accounts receivable are assets because they represent an economic resource—cash—which will be received when the amounts owed are eventually collected. -ex. Some of North West's sales do not result in an immediate receipt of cash. Instead, credit is extended to its customers. This means they will pay their accounts in the future. This right to receive money in the future is called an account receivable.

Shareholders seldom provide all of the financing required by a company

-Additional financing, often a significant portion, is provided by lenders or creditors. -It is important to understand that, if funds have been borrowed, shareholders have only a residual claim on the assets of the corporation. -In other words, if a corporation was wound up (ceased operations), all debts have to be repaid before shareholders would have any legal right to a return of the capital they invested. -Once shares are issued, the company has no obligation to buy them back, although it may choose to do so (unless it has committed to lenders not to). -On the other hand, debt obligations must be repaid.

Additional information from statements

-Additional information is reported in notes to the financial statements that are cross-referenced to these four statements. -These explanatory notes clarify information presented in the financial statements and provide additional detail. They are essential to understanding a company's financial performance and position.

Proprietorships

-Business consisting of 1. -Relatively small capital, owner is personally liable - unlimited liability. No legal distinction as an economic unit and the owner. -Separation of business and personal records is known in its simplest form as reporting entity concept....must be kept separate and distinct from activities/entities of the owner.

FINANCING ACTIVITIES

-Capital (money) is required to start any business. --The two primary ways of raising outside funds for corporations are (1) issuing (selling) shares (equity financing) in exchange for cash (or other assets) and (2) borrowing money (debt financing)........................................................................................................... • Obtaining (and repaying) funds to finance the operations of the business • Selling or repurchasing shares (equity) • Borrowing money or repaying loans (debt) • Forms of debt • Bank indebtedness, bank loans, long

statements other than the 4 most common

-For example, a statement of comprehensive income must be prepared when a publicly traded company reports other comprehensive income earned from certain items. -In addition, private corporations prepare a statement of retained earnings instead of a statement of changes in equity.

Debt financing and liabilities

-In addition to equity financing, corporations can access funds using debt financing, which involves borrowing money. -Corporations can borrow money in a variety of ways. -The persons or companies that a corporation owes money to are called lenders or creditors, one of the key user groups of accounting information. •Amounts owed to lenders and other creditors—in the form of debt and other obligations—are called liabilities.

Ethics and accounting info

-In order financial info has value, must be prepared by individuals with high standards of ethical behaviour. -Most individuals in business = ethical, their actions are legal and responsible. 3 common forms of business organization: 1. Sole proprietorships 2. Partnerships 3. Corporations

General accepted accounting principles for business organizations

-Include standards about how to report economic events. -Vary depending on the business organizations -Publicly traded organizations must use IFRS (international financial reporting standards) -Privates can use the FRIS OR the accounting standards for private enterprises. -The users of private company financial statements also haveaccess to financial info beyond that of the users of most public companies. -most use ASPE -reasons for using IFRS are accessing public debt or equity markets in the future, comparing financial results with competitors, or has foregin subsidiaries required to use IFRS. -B/c partnerships/proprietorships are privately owned, they generally follow ASPE. prepare financial statements only for internal use

DECISION CHECKPOINTS INFO NEEDED FOR DECISION TOOLS TO USE FOR DECISION HOW TO EVALUATE RESULTS Are the company's operations profitable?

-Income statement -The income statement indicates the success or failure of the company's operating activities by reporting its revenues and expenses. -If the company's revenues exceed its expenses, it will report net income; otherwise it will report a loss.

External users

-NOT involved in management, dont have access to accounting info. -A couple types: -investors (use accounting info to buy, sell, hold ownership interests..should i buy shares of this company? whats the ROI?) -lenders (e.g. bankers, evaluate risks of lending $) -other creditors (such as suppliers, use this info to grant credit - selling on account to a customer. primary users of accounting info.)... -both lendors and other creditors ASK: will company be able to pay its debt? how much does the amount donated by shareholders compare w the amount borrowed from creditors? -WAY broader, can extend outside of these categories... e.g. potential employers to evaluate job opportunities.

The ownership interest in a company is known as

-Shareholder's equity -The shareholders' claim on total assets, represented by the investments of the shareholders (share capital) and undistributed earnings (retained earnings) generated by the company.

DECISION CHECKPOINTS INFO NEEDED FOR DECISION TOOLS TO USE FOR DECISION HOW TO EVALUATE RESULTS Does the company generate enough cash from operating activities to fund its investing activities?

-Statement of cash flows -The statement of cash flows shows the amount of cash provided or used by operating activities, investing activities, and financing activities. -Compare the amount of cash provided by operating activities with the amount of cash used by investing activities. Any deficiency in cash from operating activities must be made up with cash provided by financing activities.

DECISION CHECKPOINTS INFO NEEDED FOR DECISION TOOLS TO USE FOR DECISION HOW TO EVALUATE RESULTS Is the company expanding or contracting its share capital?

-Statement of changes in equity -Did the company issue or repurchase shares? -If share capital is increasing, the company may be gathering the funds for future expansion plans. If share capital is decreasing, the company has surplus cash and is returning it to shareholders by repurchasing some of their shares.

DECISION CHECKPOINTS INFO NEEDED FOR DECISION TOOLS TO USE FOR DECISION HOW TO EVALUATE RESULTS What is the company's policy on dividends and growth?

-Statement of changes in equity -How much of the company's retained earnings was paid out in dividends to shareholders? -A company needing to finance growth or the repayment of debt will preserve the cash it generates from its operations and pay little or no dividends.

DECISION CHECKPOINTS INFO NEEDED FOR DECISION TOOLS TO USE FOR DECISION HOW TO EVALUATE RESULTS Does the company rely mainly on debt or on equity to finance its assets?

-Statement of financial position -The statement of financial position reports the company's resources and claims to those resources. There are two types of claims: liabilities and shareholders' equity. -Compare the amount of liabilities as a percentage of total assets with the amount of shareholders' equity as a percentage of total assets to determine whether the company relies more on lenders and other creditors or on shareholders for its financing.

The first transaction when establishing a corporation

-The issue of shares to shareholders in exchange for cash or other assets. -A corporation may obtain additional equity financing by selling additional shares to investors. The issue of shares for cash results in an inflow of cash. -Common shares is the term used to describe the amount paid by investors for shares of ownership in a company. -Common shares are just one class or type of shares (collectively known as share capital) that a company can issue. -Owners of common shares are known as shareholders.

Short-term liabilities that may result from some of the selling, operating, and administrative expenses

-This occurs, for example, when a company purchases inventory or supplies on credit (on account) from suppliers. -The obligations to pay for these goods are called accounts payable. -A company may also have interest payable on the outstanding (unpaid) liability amounts owed to various lenders and other creditors, salaries payable to employees, property tax payable to the municipal and/or provincial governments, and sales tax payable and income tax payable to the provincial and federal governments. -Deferred tax liabilities are an example of another liability. They result from differences in how items are recorded for accounting and tax purposes.

Relationships between the Statements

-To prepare financial statements, you must understand the sequence in which these amounts are determined and how each statement affects the next. -Because each financial statement depends on information contained in another statement, financial statements must be prepared in the following order: (1) income statement; (2) statement of changes in equity; (3) statement of financial position; (4) statement of cash flows

Year end

-While some companies choose to use December 31 for their fiscal year end, others do not. -Many companies choose to end their accounting year when their inventory or operations are at a low. -This is advantageous because gathering accounting information requires a lot of time and effort from managers. -They would rather do it when business is slow (which is not the case for many retailers over the Christmas/New Year's holiday period, for example). -Also, inventory can be more easily counted when it is low, reducing the cost of counting.

THE FINANCIAL STATEMENTS - Income statements

-also commonly known as the statement of earnings or statement of profit and loss. -The income statement lists the company's revenues first and then its expenses. -Expenses are deducted from revenues to determine income (or loss) before income tax. -Income tax expense is shown separately, immediately following the income (or loss) before income tax line. -Finally, net income (or net loss) is determined by deducting the income tax expense. (LOOK @ NOTEBOOK)

For most companies, investing activities normally result in

-an outflow of cash as companies must continuously invest in long-term assets to grow or even to maintain their operations. -Companies also dispose of long-term assets when they have finished using them. -The sale of long-term assets results in an inflow of cash, though this is generally much less than the outflow of cash related to asset purchases.

Quarterly financial statements

-are also called interim financial statements. -Financial statements must be produced annually, as well as quarterly, by public corporations. -Financial statements are often produced monthly as well for internal use. -An accounting time period that is one year in length is called a fiscal year.

expenses

-decreases in economic resources, normally the costs of assets that are consumed or services that are used in the process of generating revenues. -Expenses are related to assets and liabilities. -When an expense is incurred, an asset will decrease or a liability will increase. -There are many kinds of expenses and they are identified by various names, depending on the type of asset consumed or service used. -For example, North West reports a number of types of expenses: cost of goods sold (which it calls "cost of sales"); selling, operating, and administrative expenses; interest expense; and income tax expense. -Interest expense is commonly known as finance costs.

By monitoring the statement of changes in equity for a publicly traded corporation

-financial statement users can evaluate the use of equity for financing purposes. -For example, using this statement, they can determine the amount of shares that were issued during the period. -More importantly, the statement of changes in equity allows users to monitor a company's dividend practices.

If a company reports a net loss.....

-it is deducted (rather than added) to arrive at the ending balance of retained earnings. -It is important to understand that dividends are not reported as an expense in the income statement. -They are not an expense incurred to generate revenue. Instead, dividends are a distribution of retained earnings (or a distribution of accumulated net income) to shareholders and reported in the statement of changes in equity.

Internal users

-manage companies, non-profits, and government organizations. They work for and manage these organizations. -Have access to internal accounting information to help make decisions required to run the company. -includes : company officers, senior mgmt, managers, directors of finance, HR, and other functional areas in a company. -Anyone who has access to accounting info to assist them in managing and operating = internal user. Typical questions asked by internal users: 1.finance - do we need to borrow more $? 2.marketing - did our advertising campaign increase sales 3.HR-how many employees can we afford to hire? 4.production - which product line is the most profitable?

Supplies

-part of operating activities -example of a short-term asset used in day-to-day operations. These include items such as office and cleaning supplies, but do not include any items that are purchased to be resold to customers. Items that are held for future sale to customers are called inventory or merchandise inventory. -When the goods (inventory) are sold, they are no longer an asset with future benefits but an expense. More specifically, the cost of the inventory sold is an expense called cost of goods sold.

Retained earnings

-represent the cumulative amounts of net income that have been retained in the corporation. -In other words, it is the income that has not been distributed as dividends to shareholders that has accumulated since the company's date of incorporation. -If retained earnings is negative—that is, net losses have exceeded net income—it is known as a deficit.

Share capital

-represents amounts contributed by the shareholders in exchange for shares of ownership. -All companies must have common shares. -companies also have another class of shares, called preferred shares. -Together, these two classes of shares—common and preferred—combine to form the company's share capital.

Statement of Changes in Equity

-shows the changes in total shareholders' equity for the period, as well as the changes in each component of shareholders' equity during the period. -It starts with the account balances at the beginning of the period and ends with the account balances at the end of the period. -The time period is the same as for the income statement—for the year, quarter, or month.

In addition to showing the changes in share capital during the period, the statement of changes in equity also shows

-the amounts and nature of changes in retained earnings. -The column for retained earnings starts with the beginning balance of retained earnings. -Just as Sierra's beginning common shares balance was nil because it only began operations on October 1, so too is its beginning retained earnings balance. -The net income for the period is added and dividends declared (if any) are deducted from the beginning balance to calculate the retained earnings at the end of the period.. (look @ notebook)

The goal of every business

-to sell a good or service for a price that is greater than the cost of producing or purchasing the good or providing the service, plus the cost of operating the business. -This means that revenues should, normally, be greater than the expenses incurred to generate the revenues. -When revenues exceed expenses, net income results. -Net income is also commonly known as net earnings or profit.

now refer to notebook - statement of changes in equity!

....

Summarize the business activities in one sentence

1.Financing activities involve either equity or debt financing. Activities related to equity financing include issuing shares to shareholders, paying dividends to shareholders, or repurchasing shares. Activities related to debt financing include borrowing cash from lenders by issuing debt, or conversely, using cash to repay debt. 2.Investing activities include purchasing and disposing of long-lived assets such as property, plant, and equipment and long-term investments. 3.Operating activities result from day-to-day operations and include revenues and expenses and changes in related accounts, including receivables, supplies, inventory, and payables accounts.

For external reporting purposes, it is customary to arrange information in four different financial statements that are the backbone of financial reporting

1.Income statement: An income statement reports revenues and expenses, showing how a company's operations performed during a period of time. 2.Statement of changes in equity: A statement of changes in equity shows the changes in each component of shareholders' equity (including common shares and retained earnings), as well as total equity, during a period of time. 3.Statement of financial position: A statement of financial position presents a picture of what a company owns (its assets), what it owes (its liabilities), and the resulting difference (its shareholders' equity) at a specific point in time. 4.Statement of cash flows: A statement of cash flows shows where a company obtained cash during a period of time and how that cash was used.

Claims to assets are subdivided into two categories:

1.claims of lenders and other creditors 2.claims of shareholders. -As noted earlier, claims of lenders and other creditors are called liabilities. -Claims of shareholders, the owners of the company, are called shareholders' equity. -This relationship is shown below in equation format and is known as the basic accounting equation. (notebook)

Corporations

A business organized as a separate legal entity -Still reporting entities under the reporting entity concept, but since a corporation is a separate legal identity its life is indefinite, not affected by death/withdrawal of an owner. -Buying shares in corporation is often more attractive than investing in proprietorship. -Shareholders not responsible for corporate debts -Limited liability -Easier for them to raise capital. more favourable income tax treatment -Publicly traded often -Listed on stock exchanges, public ones are required to distribute financial statements to investors, lenders, other creditors, other interested parties on a quarterly (every 3 months) and annual basis. -Private corporations - issue shares, dont make them available to the general public, not traded.

Summary of advantages and disadvantages of corporate forms of business organizations (large, publicly traded corporations)

Advantages: Separate legal entity Limited liability of shareholders Ease of transferring ownership rights (shares) Ability to acquire capital (cash) by issuing shares Continuous life Separation of management and ownership Potential for reduced income tax Disadvantages: Increased cost and complexity to follow government regulations Increased reporting and disclosure requirements Limited liability advantages are not always available for smaller corporations where creditors require personal loan guarantees.

Investing activities and the purchase or sale of shares or debt securities

Companies can also have investing activities related to the purchase (outflow) or sale (inflow) of shares or debt securities (such as bonds) of other companies. These investments may be related to generating returns (such as dividends or interest) in the short term or may be long-term strategic investments that enable the company to have a degree of influence or control over the other company.

Identification and characteristics of major corporations

Corporation: -Separate legal existence - ex. a corporation may buy, sell, or own property, borrow money, and enter in legally binding contracts in its own name. --may also sue or be sued, pays income tax as a separate entity. -Limited liability of shareholders, limited to their investment of shares in the corporation. They will not lose more than their investment. significant advantage. -In smaller, private corps, may demand personal assets. -Transferrable ownership rights through shareholders. -Ability to acquire capital through shareholders -Continuous life -Corporation management -Government regulations -Income tax

Statement of cash flows example

Look @ notebook

Operating activities

Operating activities are the main day-to-day activities of the business • Examples • Revenues (income) • Expenses • Related accounts such as accounts receivable and accounts payable Cash flow activities that include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income.-ex. selling food or clothing at retail locations -also provides services such as money transfers -We call the amounts earned from the sale of these goods and services income, also known as revenue. -Interest revenue is also known as finance income.

Common sources of income to businesses

Sources of income that are common to many businesses are sales revenue, service revenue, interest revenue, and rent revenue.

how assets in statement of financial position could have been financed- right side of equation

The financing could have occurred through debt by borrowing from lenders or other creditors or through equity by investments from shareholders (share capital) or net income retained in the company (retained earnings).

Issue of shares

The first time a corporation's shares are offered for sale to the public, the offer is called an initial public offering (IPO). Issued shares are authorized shares that have been sold.

Accounting

The information system that identifies and records the economic events of an organization, and then communicates them to a variety of interested users. -"Language of business" because the world's economic systems depend on highly transparent, reliable, and accurate financial reporting. 2 types of users of accounting information: 1. internal users 2. external users

HELPFUL HINT for statement of financial position

The statement of financial position is dated at a specific point in time. The income statement, statement of changes in equity, and statement of cash flows cover a period of time.

Other names for liabilities, results

ex. operating line of credit •When a company uses its operating line of credit to cover cash shortfalls and overdraws its bank account, it results in a liability called bank indebtedness. •Corporations may borrow using a short-term bank loan payable (also known as a note payable) or using long-term debt. •Long-term debt can include mortgages payable, bonds payable, finance lease obligations, and other types of debt securities borrowed for longer periods of time. •When funds are borrowed, the result is an inflow of cash from these financing activities. •Conversely, the repayment of short-term or long-term debt results in an outflow of cash.

Generally Accepted Accounting Principles

• Historical cost: Assets and liabilities should be recorded at their cost when acquired -Not only at time of purchase, but throughout the life of each asset and liability • Current Value: Certain assets and liabilities should be recorded and reported at current value • In choosing between these two, apply the concepts of relevance and representational faithfulness

Investing activities

• Purchase or sale of long-lived assets needed to operate the company • Examples • Purchase or sale of long-lived assets such as property, plant and equipment and intangible assets • Purchase or sale of investments, such as shares or debt securities of other companies -After a company raises money through financing activities, it then uses that money for investing activities. -Investing activities= the purchase (or sale) of long-lived assets that a company needs in order to operate. Assets=resources that a company owns or controls. -Every asset is capable of providing future economic benefits that can be short- or long-lived. -Investing activities generally involve long-lived assets. ex. the purchase of long-lived assets such as furniture, equipment, computers, vehicles, buildings, and land are all examples of investing activities. -Together, these assets are referred to as property, plant, and equipment, or "property and equipment," also known as capital assets or fixed assets... -For most companies, the vast majority of investing activities are normally related to the purchase and sale of long-term assets, rather than investments in the shares or debt securities of other companies.

Objectives of financial reporting

• To provide financial information that is useful to existing and potential investors, lenders and other creditors • Who are making decisions about providing resources to a company: Buying, selling, holding equity and debt Providing or settling loans or other credit • Financial information is provided by general purpose financial statements

Statement of Cash Flows

•A financial statement that provides information about the cash inflows (receipts) and cash outflows (payments) for a specific period of time. -To help investors, lenders and other creditors, and others in their analysis of a company's cash position, the statement of cash flows reports the effects on cash of a company's (1) operating activities, (2) investing activities, (3) financing activities during the period of time. -Operating activities are normally presented first in the statement of cash flows, followed by investing and financing activities. -In addition, the statement shows the net increase or decrease in cash during the period, and the cash amount at the end of the period.

Share issue considerations

•After incorporation, a corporation sells ownership rights in the form of shares. •The shares of the company are divided into different classes, such as Class A, Class B, and so on. •The rights and privileges for each class of shares are stated in articles of incorporation, which form the "constitution" of the company. •The different classes are usually identified by the generic terms common shares and preferred shares. •Combined, they form the share capital of the company. •When a corporation has only one class of shares, that class has the rights and privileges of common shares. •Common shares are also known internationally as ordinary shares.

Explain the three main types of business activity.

•All businesses are involved in three types of activity: 1. financing 2.investing 3.operating. -Each of these activities can result in inflows of cash (cash flowing into the company) or outflows of cash (cash flowing out of the company). ex...North West borrowed $13,081 thousand (an inflow) as part of its financing activities in 2016 as it continued to expand its operations. It also distributed $58,210 thousand in dividends to its shareholders, so it had a net outflow of cash related to financing activities. During the year, the company's investing activities included cash outflows of $63,179 thousand related to building new stores, undertaking major store renovations, and purchasing new fixtures and computer equipment. It also invested $12,804 thousand in new point-of-sale, merchandise management, and workforce management systems. As a result, it had an outflow from investing activities of $75,813 thousand. The company was able to use cash generated by its operating activities to finance the majority of these investments as the company generated a net inflow of $132,987 thousand in cash from its operations.

INFLOW/OUTFLOW SUMMARY OF BUSINESS ACTIVITIES (FINANCING, INVESTING, OPERATING)

•Financing activities -Inflows: issuing shares, taking out a loan -Outflows: Paying dividends, repurchasing shares, repaying loans •Investing activities -Inflows: Proceeds from selling long lived assets, proceeds from selling shares of other companies -Outflows: Buying long lived assets, buying shares of other companies •Operating activities -Inflows: Revenues, collection of receivables, sale of services or goods -Outflows: Expenses, payment of payables, purchase of inventory and supplies

Other examples of long-lived assets

•Goodwill & intangible assets -Goodwill = when a company acquires another company, paying a price that is higher than the value of the purchased company's net identifiable assets. -Intangible assets = assets that do not have any physical substance themselves but represent a privilege or a right granted to, or held by, a company. Ex. of intangible assets = patents, copyrights, and trademarks.

IFRS vs ASPE

•IFRS accounting standards: -Publicly traded corporations must use IFRS; private corporations normally use ASPE, but can choose to use IFRS. •IFRS Statement of changes in equity vs. statement of retained earnings -A statement of changes in equity must be presented that shows the changes in all components of shareholders' equity (for example, share capital and retained earnings). •Accounting Standards for Private Enterprises (ASPE) accounting standards: -Private corporations normally use ASPE, but can choose to use IFRS. Once the choice is made, it must be applied consistently. Proprietorships and partnerships generally follow ASPE. •ASPE Statement of changes in equity vs. statement of retained earnings: -A statement of retained earnings is presented that shows the change in only one component—retained earnings—of shareholders' equity.

Paying shareholders/dividends

•Many companies pay shareholders a return on their investment on a regular basis, as long as they are profitable and there is enough cash to cover required payments to lenders and other creditors. -Payments that distribute a portion of income to shareholders are called dividends and are normally in the form of cash, although they can also take other forms. -Dividends are declared by a company's board of directors. - The payment of dividends results in an outflow of cash. -Corporations can also repurchase shares that have been previously issued. Any share repurchases would result in an outflow of cash. North West did not repurchase any shares in 2016.

Authorized Share Capital

•The amount of share capital that a corporation is authorized to sell is indicated in its articles of incorporation. •Most companies in Canada have an unlimited amount of authorized shares. •The authorization of share capital does not result in a journal entry, because the event has no effect on either corporate assets or shareholders' equity. •It is the issue (sale) of shares by the corporation that results in a transaction that must be journalized, and not the authorization of shares. •Some companies will also authorize an unlimited number of preferred shares....This type of share almost always pays out a dividend but holders of these shares usually have no voting rights.

Interest, cash outflows

•The payment of interest on borrowed funds may be treated as a financing activity or as an operating activity under IFRS. •In either case, it will be an outflow of cash.

Common shareholders

•considered to be the "owners" of the corporation. •Only common shareholders have the right to vote on certain matters, such as the election of the board of directors and appointment of external auditors. •Each shareholder normally has one vote for each common share owned.