MBA 642

Financial Reporting for

Responsible Decision Making

C. BenAli,
Associate Professor
Accountancy Department PhD
Chiraz.benali@concordia.ca
Fall2022
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Chapter 1
The Economic Environment of
Accounting Information

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Learning Objectives

 What is financial accounting?

 How financial accounting facilitates a properly functioning
capital market
 Identify financial statements and the relation among them
 Describe accounting principles and the role of accounting
in investment decisions.
 Identify the most common myths about financial
accounting.

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Financial accounting

 Process of capturing, analyzing and reporting transaction

information to financial statement users
 Enables users to make informed decisions
 Provided in a company’s financial statements/annual report
 Often available to the public
 Financial versus managerial accounting
 Managerial accounting:
 Internal to a firm
 Helpful in deciding operational questions

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Users of
Financial Accounting Information

Internal users Management

In charge of the company

Investment
Debtholders
Professionals
Have loaned money to the company
Provide financial advice about the company

External users

Government
Shareholders
Agencies
Own the company through Such as regulators
purchased shares and taxing authorities

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Financial statements

Balance Sheet

Statement of Income
Cash Flow Statement

Statement of
Shareholders’
Equity
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Financial Accounting Information

 Management's responsibility for the consolidated

financial statements
 Financial statements subjected to examination
 Independent auditors
 Audit report

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Financial Accounting Information

 Management's responsibility for the consolidated

financial statements
 Financial statements subjected to examination
 Independent auditors
 Public Companies Accounting Oversight Board
(PCAOP)-
 SOX
 Audit report -KAM

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 1-Income Statement
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 Shows how successfully (earnings) the business was during a

period or interval of time (usually 12 months).
 The “bottom-line” of this statement is Net Income (profit) and
Comprehensive income.
Revenue – Expenses = Net Income.
 Common items
 Sales revenues
 Other income
 Cost of goods sold
 Selling, general, and administrative expenses
 Amortization/depreciation expense, interest, and income tax
expenses
Canadian Tire Corporation: Income
Statement
For the years ended
(C$ in millions, except share and per share amounts) January 1, 2022 January 2, 2021

Revenue (Note 28) $ 16,292.1 $ 14,871.0

Cost of producing revenue (Note 29) 10,456.9 9,794.4
Gross margin 5,835.2 5,076.6
Other (income) expense (23.5) 48.7
Selling, general and administrative expenses (Note 30) 3,934.3 3,599.3
Net finance costs (Note 31) 222.5 256.5
Income before income taxes 1,701.9 1,172.1
Income taxes (Note 16) 441.2 309.5
Net income $ 1,260.7 $ 862.6
Basic earnings per share $ 18.56 $ 12.35
Diluted earnings per share $ 18.38 $ 12.31
Weighted average number of Common and Class A Non-Voting
Shares outstanding:
Basic 60,744,440 60,896,809
Diluted 61,345,072 61,090,111

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 2- Balance sheet
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 Financial status of the company at a particular point in time

(end of fiscal year usually)
 Lists what is owned (assets) and what is owed (liabilities),
measuring net worth (equity) shareholders’
 The Basic Accounting Equation:
Assets = Liabilities +Shareholders Equity
Shareholders Equity = Assets - Liabilities
The Accounting Equation

A = L + SE

Liabilities
Assets
Shareholders’
Equity

A business’s assets must equal the sum of liabilities and

shareholders’ equity.
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 Balance sheet: common items
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 Assets  Liabilities
• Cash and cash equivalent • Bank indebtedness
• Accounts receivable • Accounts payable
• Inventory • Unearned Revenue
• Prepaid expenses • Accrued liabilities
• Property, Plant and • Dividends payable
Equipment • Taxes payable
• Intangible Assets • Future income tax
• Goodwill liabilities
 Shareholders’ equity
• Share capital
• Retained earnings
• OCI
 Canadian Tire Corporation : Balance Sheet
CANADIAN TIRE CORPORATION EXPLANATIONS
Consolidated Statement of Financial Position* “Consolidated” means all subsidiaries are combined
January 2, xxx Point in time for which the balance sheet was prepared
(in thousands of dollars, except per share data)
ASSETS
Current assets
Cash $ 901 Amount of cash in the company’s bank accounts
Current Short-term investments 96 Investments in highly liquid assets
assets Accounts receivable 5,790 Amounts owed by customers from prior sales
Inventories 1,765 Products stored but not yet sold
Prepaid expenses & other ___140 Rent, advertising, and insurance paid in advance, and other assets
Total current assets _8,692
Non-current assets
Long-term receivables 731 Amounts owed on loans receivable after one year
Long-term investments 154 Ownership of other companies’ shares and bonds
Property and equipment 4,116 Land, stores, and sales equipment
Noncurrent Goodwill 437 An intangible asset that results from the acquisition of another business
assets Intangible assets 810 Assets that do not have physical substance but have a long life
Other non-current assets _____48 A variety of assets that are covered in future chapters
Total non-current assets __6,296
Total assets $14,988
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable $ 920 Amount owed to suppliers for prior purchases
Accrued liabilities 1,037 Amounts owed to suppliers of services
Provisions 262 Estimated liabilities whose amounts and timing are uncertain
Current Short-term borrowings 89 Amounts owed to lenders within one year
liabilities Income taxes payable 62 Amount of taxes owed to the government
Current portion of long-term debt 24 Amounts owed on written debt contracts within one year
Other current liabilities __1,536 A variety of current liabilities
Total current liabilities 3,930
Noncurrent Long-term debt 2,971 Amounts owed on written debt contracts after one year
liabilities Other non-current liabilities __2,297 A variety of non-current liabilities
Total liabilities __5,268
Shareholders’ equity
Shareholders’ Contributed capital 674 Amounts invested in the business by shareholders
equity Retained earnings 4,172 Past earnings not distributed to shareholders
Other components ___944 Adjustments to assets and liabilities (explained in future chapters)
Total shareholders’ equity __5,790
Total liabilities and shareholders’ equity $14,988

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3- Statement of Changes in Equity

 Is Shareholders’ equity different from Market value of the

shares ?
 How each component of shareholder’s equity has changed
over the period
 The two major components of shareholder’s equity include:
 Share Capital (also called contributed capital)
 Retained Earnings
Ending Retained Earnings = Opening Retained Earnings
+ Profit – Dividends Declared
 4- Statement of Cash Flows
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 Measures inflows and outflows of cash during a

specific period of time
 Sections
• Cash Flow from Operating Activities
All inflows & outflows related to the company’s sale of
goods or services
• Cash Flow from Financing Activities
Transactions that either generate new funds from investors
or return funds to investor
• Cash Flow from Investing Activities
Inflows and outflows related to long-term assets
Business activity cycle

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 Relation among financial statements:
beginning and ending period
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Some accounting principals
 Cash basis versus accrual ?
 Conservatism?
 Going concern: the entity will continue operating in the
future foreseeable future. Important for investors!
Going Concern Ceasing of Operations

 Focus is on revenue and net  Focus is on shareholders’ equity

income on the balance sheet
 Desire to forecast future  Need to determine what an
operating performance investor might receive upon
liquidation
 Attributes of accounting information
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 Decision Usefulness =2 Primary characteristics
Relevance : capacity to impact a decision
Timely
Predictive
Confirmatory
Faithful representation
Free from errors and objective
Verifiable
Constraints: materiality + benefits exceed costs
 GAAP
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 Accounting standards used by US firms:
 Created by Financial Accounting Standards Board (FASB)
Overseen by the Securities and Exchange Commission (SEC)
 Why did they arise?
 To mutually benefit the capital market participants who use
financial statements
?
?
 GAAP are flexible what does it mean?
 International Accounting Standard board: IFRS
 Harmonization
 Used in Canada since 2015 for listed companies
Accounting information at the heart of the
economic environment
Balance Sheets and Income Statements: “Stocks” and “Flows”

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 Myths about accounting
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 GAAP are rigid rules
 No political influence, No lobbying in setting and changing
these rules
 The 4 Financials statements reflect a complete, accurate, and
timely portrayal of the financial performance and well-being
of a firm
 All of a firm’s identifiable assets and liabilities appear on the
balance sheet, and the difference between a firm’s assets and
its liabilities represents the value of the firm
 Cash flow is ultimately what matters to a firm and its
investors;
 A knowledge of accounting is necessary only for someone
who wants to be an accountant.
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