Kế toán, kiểm toán - Chapter 2: A further look at financial statements

CHAPTER 2:A FURTHER LOOK AT FINANCIAL STATEMENTSLO 1: Identify the sections of a classified statement of financial position.LO 2: Identify and calculate ratios for analyzing a company’s liquidity, solvency, and profitability.LO 3: Describe the framework for the preparation and presentation of financial statements.LEARNING OBJECTIVESA classified statement of financial position generally contains the following standard classifications:Classified Statement of Financial PositionAssets expected to be converted to cash, sold or used in the business within one year or one operating cycle, whichever is longerOperating cycle is the average time it takes to go from cash to cash in producing revenueUsually listed in order of liquidity:Reverse order of liquidity also possibleExamples include cash, held-for-trading investments, accounts receivable, inventory, and prepaid expensesCurrent AssetsAssets not expected to be converted to cash, sold or used in the business within one year or one operating cycleAll assets not considered currentExamples:Long-term investmentsProperty, plant, and equipmentIntangible assets and goodwillOther assetsNon-Current AssetsMulti-year investments in:Debt securities: loans, notes, bonds, mortgagesEquity securities: shares of other companiesThese assets are normally not intended to be sold (and converted to cash) within one yearLong-Term InvestmentsTangible assets with relatively long useful livesUsed in operating the businessExamples:LandBuildings, EquipmentFurnitureComputers VehiclesUsually listed in order of permanencyProperty, Plant, and EquipmentAllocation (expense) of the cost of property, plant, and equipment over their estimated useful lives:Companies systematically assign a portion of the cost of an asset to expense each yearUnder IFRS, this allocation is referred to as depreciation for property, plant, and equipment, and amortization for intangible assetsUnder ASPE, amortization is often used instead of depreciationDepreciationThe cost of long-lived assets with indefinite lives is not depreciated (e.g. land) Accumulated depreciation account shows the total amount of depreciation taken to dateThe difference between the cost of the asset and its accumulated depreciation is referred to as the carrying amount of the assetAccumulated depreciation is a contra asset accountDepreciation (continued)Non-current assets that do not have physical substance and represent a privilege or a right held by the companyExamples: Patents, copyrights, trademarks, licensesGoodwill: excess price paid on acquisition of another companyGenerate a future value to the companyAmortized if they do not have an indefinite lifeIntangible AssetsObligations that are to be paid or settled within the (longer of the) coming year or one operating cycleExamples:Bank indebtednessAccounts payableUnearned revenueBank loan/notes payableCurrent maturities of long-term debtCurrent LiabilitiesDebts expected to be paid or settled after one yearExamples:Bank loan/notes payableLease obligationsPension and benefit obligationsDeferred income tax liabilitiesUsually accompanied by extensive notes to the financial statementsNon-Current LiabilitiesShare capital:Investment of cash (or other assets) in the company by shareholders in exchange for preferred or common sharesRetained earnings:Cumulative net income kept for use in the companyShareholders’ EquityWhat do you think would be the main asset, liability, and equity items for a Tim Hortons franchise?Discussion QuestionSpecific tools can be used to analyze the financial statementsRatio analysis expresses the relationships between selected financial statement dataUse comparisons to aid in analyses:Intracompany comparisons cover two or more periods for the same companyIntercompany comparisons between the company and a competitorIndustry average comparison based on averages for particular industriesUsing the Financial StatementsMeasure a company’s short-term ability of to pay its maturing obligations and to meet its unexpected needs for cashLiquidity RatiosWorking capital=Current assets – Current liabilitiesCurrent ratio=Current assetsCurrent liabilitiesHigher is generally betterMeasure a company’s ability to survive over a long period of time:The higher the percentage of debt to total assets, the greater the risk that debts cannot be repaid when they are dueSolvency RatiosDebt to total assets=Total liabilitiesTotal assetsLower is generally betterMeasure a company’s operating success of for a given period of timeProfitability RatiosBasic earnings per share=Profit available to common shareholdersWeighted average number of common sharesPrice-earnings ratio=Market price per shareBasic earnings per shareHigher is generally betterGuides decisions about:what to present in financial statementsalternative ways of reporting economic eventsappropriate ways of communicating this informationConceptual Framework of AccountingFive main sections:Objective of financial reportingQualitative characteristics of useful financial informationUnderlying assumptionElements of financial statementsMeasurement of the elements of financial statementsConceptual Framework for Financial ReportingWhy is a conceptual framework of accounting important?Discussion QuestionTo provide financial information that is useful to existing and potential investors, lenders and other creditorsWho are making decisions about providing resources to a company:Buying, selling, holding equity and debt Providing or settling loans or other creditFinancial information is provided by general purpose financial statementsObjective of Financial ReportingRelevance:Information has relevance if it makes a difference in users’ decisionsMay have predictive value and/or confirmatory valueMateriality is important: will information influence the decisions of users? Faithful representation:Information should reflect economic realityIt must be complete, neutral and free from errorQualitative Characteristics of Accounting InformationComparability:Users can identify and understand similarities and differences among itemsVerifiability:Independent consensus that information is faithfully representedTimeliness:Available before it loses its usefulness in decision-makingUnderstandability:Classified, characterized and presented clearly and conciselyEnhancing Qualities of Useful InformationEnsures that the value of the information provided by financial reporting is greater than the cost of providing itThe benefits of financial reporting should justify the costs of providing and using itCost ConstraintThe business will continue operating in the foreseeable futureThe key assumption – provides a foundation for accountingProvides justification for using cost as the value of certain assetsGoing Concern AssumptionAssetsLiabilitiesEquityIncomeExpensesElements of Financial StatementsAccountants have developed principles that describe which, when and how the elements of financial statements should be:RecognizedMeasured, andReportedKnown as generally accepted accounting principles (GAAP)Measurement of the ElementsHistorical cost:Assets and liabilities should be recorded at their cost when acquiredNot only at time of purchase, but throughout the life of each asset and liabilityCurrent Value:Certain assets and liabilities should be recorded and reported at current valueIn choosing between these two, apply the concepts of relevance and representational faithfulnessGenerally Accepted Accounting PrinciplesComparing IFRS and ASPECOPYRIGHTCopyright © 2017 John Wiley & Sons Canada, Ltd. 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