INTG 201 Accounting
Income Statement Equation
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Statement of Cash Flows
reports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing.
Business Activities
Financing Activities Operating Activities Investing Activities
Independent Auditor
The role of the independent auditor is to examine the financial reports to ensure that they represent what they claim and conform to generally accepted accounting principles. In performing an audit, the independent auditor examines the underlying transactions and the accounting methods used to account for these transactions
3 primary categories of cash flow
The statement of cash flows divides a company's cash inflows(receipts) and outflows (payments) into 3 primary categories of cash flows in a typical business: 1. cash flows from operating, 2. investing, and 3. financing activities.
Statement of Stockholder's Equity
reports the changes in each of the company's stockholders' equity accounts, including the change in the retained earnings balance caused by net income and dividends, during the reporting period.
Balance Sheet
reports the financial position (amount of assets, liabilities, and stockholders' equity) of an accounting entity at a point in time. The Balance Sheet is a financial snapshot at a specific point in time
Income Statement
reports the revenues less the expenses during the accounting period.
Stockholders' Equity
- Common Stock - Retained Earnings
Employment in the Accounting Profession Today
- Accountants are usually engaged in professional practice or employed by businesses, government entities, and notfor-profit organizations. - Practice of Public Accounting: - Audit or assurance services, management consulting and advisory services and tax services. - Employment by Organizations: - External reporting, tax planning, control of assets etc. - Employment by Public and Not-for-Profit Sectors - Charitable organizations, hospitals and universities.
Liabilities
- Accounts Payable - Accrued Expenses - Notes Payable - Taxes Payable - Unearned Revenue - Bonds Payable
SFP (Statement of Financial Position) Elements
- Assets are economic resources controlled by the entity as a result of past business events. - Liabilities and shareholders' equity are the sources of financing for the company's economic resources. - Liabilities indicate the amount of financing provided by creditors. They are the company's debts or obligations. - Shareholders' equity indicates the amount of financing provided by owners of the business and reinvested earnings. - The investment of cash and other assets in the business by the shareholders is called contributed capital. - The amount of earnings (profits) reinvested in the business (and thus not distributed to shareholders in the form of dividends) is called retained earnings Accounting Entity: The organization for which financial data are to be collected and reported Statement of financial position has 3 major captions: assets, liabilities, and shareholders' equity.
SFP Format
- Assets may be listed on the statement of financial position in either increasing or decreasing order of their convertibility to cash. - Most Canadian companies list their assets beginning with the most-liquid asset, cash, and ending with the least-liquid assets. - In contrast, many international companies, list their least-liquid assets first and most-liquid assets last. - Similarly, liabilities may be listed by either increasing or decreasing order of maturity (due date) - Most financial statements include the monetary unit sign (in Canada, $) beside the first amount in a group of items (e.g., the cash amount in the assets). - It is common to place a single underline below the last item in a group before a total or subtotal (e.g., Other assets). - A double underline is placed below group totals (e.g., Total assets). - The same conventions are followed in all four basic financial statements. Rule: Never run out of cash!
Assets
- Cash - Short-Term Investments - Accounts Receivable - Notes Receivable - Inventory (to be sold) - Supplies - Prepaid Expenses - Long-Term Investments - Equipment - Buildings - Land - Intangibles
The Statement of Cash Flows: Elements
- Cash flows from operating activities (CFO) are cash flows that are directly related to generating earnings. - Cash flows from investing activities (CFI) include cash flows related to the acquisition or sale of the company's property, plant, and equipment, and investments. - Cash flows from financing activities (CFF) are directly related to the financing of the company itself. They involve both receipts and payments of cash from/to investors and creditors (except for suppliers). The Statement of Cash Flows reports inflows and outflows of cash during the accounting period.
The Statement of Earnings: Elements
- Companies earn revenues from the sale of goods or services to customers . Revenues normally are amounts expected to be received for goods or services that have been delivered to a customer, whether or not the customer has paid for the goods or services. - Expenses represent the monetary value of resources the entity used up , or consumed, to earn revenues during the period . - Net earnings (also called the "bottom line") is the excess of total revenues over total expenses incurred to generate revenue during a specific period .
Why Accounting Standards are Important
- Companies, their managers, and their owners are most directly affected by the information presented in the financial statements. - Companies incur the cost of preparing the statements and bear the major economic consequences of their publication. These economic consequences include, among others, the following: - Changes to the selling price of a company's shares - Changes to the amount of bonuses received by management and employees - The loss of competitive advantage over other companies
Responsibilities for the Accounting Communication Process
- Effective communication means that the recipient understands what the sender intends to convey. - Understandability is the foundation of effective communication. - Decision makers also need to understand the measurement rules applied in computing the numbers on the statements.
Ethical Conduct
- Ethics are standards of conduct for judging right from wrong, honest from dishonest behaviour, and fair from unfair practices. - Intentional misreporting of financial statements is both unethical and illegal. - Many situations are less clear-cut and require that individuals weigh one moral principle (e.g., honesty) against another (e.g., loyalty to a friend)
International Financial Reporting Standards
- For Canadian publicly accountable enterprises, the AcSB has determined that they must prepare their financial statements in accordance with International Financial Reporting Standards. - IFRS are a single set of globally accepted high-quality standards, produced by the International Accounting Standards Board (IASB), which is an independent standard-setting board responsible for the development and publication of IFRS. - An older set of International Accounting Standards (IAS) were issued by the Board of the International Accounting Standards Committee, and they complement the accounting standards issued by the IASB.
Accounting Standards Board (AcSB)
- In Canada, the Accounting Standards Board (AcSB) is the private-sector body given primary responsibility to set the detailed rules that become accepted accounting standards. - The AcSB is responsible for establishing standards of accounting and reporting by publicly accountable enterprises, private enterprises, government organizations, and not-forprofit organizations. - These standards or recommendations, which are published in CPA Canada Handbook, have expanded over time because of the increasing diversity and complexity of business practices
Notes to Financial Statements
- Notes provide supplemental information about the financial condition of a company, without which the financial statements cannot be fully understood. - There are three basic types of notes. 1. The first type provides descriptions of the accounting rules applied in the company's statements. 2. The second presents additional detail about a line on the financial statements. 3. The third type of note presents additional financial disclosures about items not listed on the statements themselves.
How are Accounting Standards Determined?
- Our accounting system has a long and distinguished history. An Italian monk named Luca Pacioli, published the first elements of double-entry bookkeeping in 1494. - Prior to 1933, the management teams of most companies were largely free to choose their own financial reporting practices.
Management Responsibility & the Demand for Auditing
- Primary responsibility for setting up systems to prevent and detect unethical behaviour lies with management, as represented by the highest officer of the company and its highest financial officer. - Companies take three important steps to assure investors that the company's records are accurate: 1. They develop and maintain a system of internal controls over both the records and the assets of the company 2. They hire outside independent auditors to attest to the fairness of the statement presentations, and 3. They form a committee of the board of directors to oversee the integrity of these two safeguards
The Statement of Financial Position
- Purpose: to report the financial position (amount of assets, liabilities, and shareholders' equity) of an accounting entity at a particular point in time. The heading of the statement of financial position identifies four significant items related to the statement: - Name of the accounting entity - Title of the statement - Specific date of the statement - Unit of measure
Statement of Cash flows
- Reported revenues do not always equal cash collected because some sales may be on credit. - Expenses reported on the statement of earnings may not be equal to cash paid out during the period because expenses may be incurred in one period and paid for in another. - Net earnings (revenues minus expenses) does not usually equal the amount of cash received minus the amount paid during the period. - Therefore, because the statement of earnings does not provide information concerning cash flows, the statement of cash flows is prepared to report inflows and outflows of cash. - The statement of cash flows equation describes the causes of the change in cash reported on the statement of financial position from the end of the last period to the end of the current period:
Legal Liability, Professional Conduct, and Independence
- The Canadian accounting profession requires its members to adhere to a code of professional conduct and standards of independence. - These standards are enforced through a disciplinary process. - The provincial CPA institutes all stress how important it is for each member to behave in ways that enhance the reputation of the profession through voluntary compliance. - In addition, CPA Canada treats professional and ethical behaviour as the most important of the enabling competencies possessed by its members.
The Statement of Changes in Equity
- The statement of changes in equity reports all changes to shareholders' equity during the accounting period. - This statement reports how net earnings, distribution of net earnings (dividends), and other changes to shareholders' equity affected the company's financial position during the accounting period. Equity, beginning of the period + Net earnings for the year + Other comprehensive income - Dividends +/- Other changes, net Equity, end of the period
The Statement of Earnings - Income Statement
- The statement of earnings - AKA: income statement, - statement of operations, - statement of comprehensive income - Purpose: reports the accountant's primary measure of performance of a business, revenues less expenses during the accounting period. - While the term profit is used widely for this measure of performance, accountants prefer to use the technical terms net income or net earnings.
Sources of Financial Resources
1) Stockholders - Potential Return for Stockholders: Dividends Higher future stock prices 2) Creditors - Potential Return for Creditors: Interest
Le Nature
1. What business Le Nature is in? 2. Who are the main players in this corporation? 3. Explain the three(3) main business activities of Le Nature. 4. Based on this case, why do we study financial accounting?
Management Responsibility & the Demand for Auditing Continued
3 Steps to ensure the accuracy of records 1. System of controls 2. External auditors 3. Board of directors
Interpreting the Cash Flow Statement
Analyze cash flow from operations in order to check the following: ✓Ability to repay creditors ✓Opportunity for expansion ✓Ability to distribute cash dividends The Operating Activities section indicates the company's ability to generate cash from sales to meet the company's current cash needs.
Statement of Stockholders' Equity
Common Stock - Amounts invested in the business by stockholders. Beginning Common Stock + Stock Issuance divided by Ending Common Stock Retained Earnings Past earnings not distributed to stockholders. Beginning Retained Earnings + Net Income − Dividends declared divided by Ending Retained Earnings The Statement of Stockholders' Equity reports the change in each stockholders' equity account during the period.
Equity
Equity is the owner's right to the resources of a business Equity of an organization is its net worth
Four Basic Financial Statements
Four financial statements are prepared by profit-making organizations for use by shareholders, creditors, and other external decision makers. 1. Statement of financial position reports the economic resources it owns and the sources of financing for those resources. 2. Statement of earnings (the main component of the statement of comprehensive income): reports its ability to sell goods for more than their cost to acquire and sell. 3. Statement of changes in equity reports additional contributions from or payments to shareholders, and the amount of earnings the company reinvested for future growth. 4. Statement of cash flows reports its ability to generate cash and how it was used.
Comparison of Three Types of Business Entities
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Summary of the Four Basic Financial Statements
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Assets, liabilities and shareholder's equity equation
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Balance Sheet Picture
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Income Statement - Statement of Earnings
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Relationships Among the Statements: LeNature
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The Accounting System
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Cash flow Diagram
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Financial statement time period & structure
The four basic financial statements can be prepared at any point in time such as: ▪ End of the year (for the year ended, annual reports) ▪ Quarterly (for the quarter ended, quarterly reports) ▪ Monthly (for the month ended, monthly reports) The financial statement heading includes: ▪ Name of the entity (Company name) ▪ Title of the statement (e.g., Balance Sheet) ▪ Specific date of the statement (e.g., at December 31, 2018) ▪ Unit of measure (in millions of dollars)
Ethical Conduct Continued
When facing an ethical dilemma the following three-step process should be followed: 1. Identify the effects of the decision on both parties, those who will benefit from the situation (often the manager or employee involved) and those who will be harmed (other employees, owners, creditors, the environment) 2. Identify alternative courses of action. 3. Choose the alternative that you would like to see reported on the news. That is usually the ethical choice.