Chapter 1: The purpose of financial statements

- records economic events, tells the information to users

o Internal users- need to be hired by the company, managers, employees etc
o External users- investors, creditors, CRA, customers
- Financial vs Managerial Accounting:
o Financial:
 External users
 Rigid rules
 Historical perspective (last year, month etc.)
 Aggregate information (summarized)
 Quantitative (numerical) information
o Managerial:
 Internal users
 Flexible format
 Future perspective
 Detailed information
 Quantitative and qualitative information
- Legal forms of business
o Sole proprietorship- owned by one person (personal tax return)
o Partnership- owned by more than one person but not incorporated (personal tax
return
o Corporation- separate legal entity (separate tax) held by shareholders, can be
public or private, profit or not-for-profit
 Advantages:
 Corporate management
 Separate legal existence
 Limited liability of shareholders
 Differed or reduced taxes
 Transferable ownership rights (sell or buy shares)
 Ability to get capital (issue bonds or sell shares
 Continuous life
 Disadvantages:
 Increased cost and complexity to adhere to regulation by the
government
 Additional taxes
 Difficulty in borrowing funds (because of limited liability)
- Types of business activities
o Operating
 Main day-to-day activites of a business
 Includes current assets/ liabilities (cash, AR, AP etc.)
o Investing (what businesses have invested in)
 Getting the resources and assets needed to operate the business in the
long term
  Includes long term assets (investments, property, land, equipment)
o Financing
 Getting and repaying funds to finance operations of the business, usually
long-term liabilities, or shareholders’ equity
- Financial statements
o Balance sheet
 AKA statement of financial position
 Owned and owed
 Assets- resources owned by a business (bank account, vehicle, land,
building)
 Liabilities- obligations of the business (bank loans, bonds, money)
 Shareholder’s equity- share capital and retained earnings (when
shareholders get shares to give money to the company)
 Assets=liabilities + shareholders’ equity
 At a point in time “as at” or “as of”
o Income statement
 AKA statement of earnings
 Revenues- obtained from the sale of a product or service
 Expenses- costs of assets consumed or services used to generate revenue
 Net income (loss)= revenues – expenses
 For a period of time “for the year ended”
 Measures gains and losses
o Statement of cash flows
 Details on all cash inflows and outflows
 Operating, investing and financing activities
 For a period of time
 Shows net increase or decrease in cash for the period
o Statement of retained earnings
 For ASPE (private)
 Shows the changes in retained earnings for the period
 Net income for a period of time
 Dividends paid to shareholders
o Retained earnings opening balance + net earnings –
dividends = retained earnings closing
 Retained earnings (the account) is the cumulative net income (less losses)
that is retained in the business (not given to shareholders)
 For a period of time
o Statement of changes in equity
 for public businesses using IFRS
 Shares and retained earnings
 Shows the changes in each component of shareholders equity for the
period
 Share capital:
  Amounts contributed by shareholders
 Each class of shares is shown in a separate column (common or
preferred)
 Retained earnings/ deficit
 For a period of time
o Other financial components
 Notes/ footnotes- gives more detail on the information in the statements
 Publicly traded companies would include management discussion and
analysis, and independent auditors report
o Generally accepted accounting principles (GAAP)
 Rules and practices for the preparation of financial statements
 Different for public and private corporations (IFRS vs ASPE)
 Proprietorships and partnerships don’t need to use either if their
statements are for internal users only. If prepared for CRA or any other
external user, they will need to use ASPE