Financial Accounting

1 The Purpose and Use of Financial Statements 1-1


Trading on a Long Tradition: The North West Company 1-1


Uses and Users of Accounting Information 1-2


Internal Users 1-3


External Users 1-3


Forms of Business Organization 1-5


Proprietorships 1-5


Partnerships 1-5


Corporations 1-6


Generally Accepted Accounting Principles for Business Organizations 1-8


Types of Business Activity 1-9


Financing Activities 1-9


Investing Activities 1-10


Operating Activities 1-11


Summary of Business Activities 1-12


Financial Statements 1-13


The Financial Statements 1-14


North West’s Financial Statements 1-22


Elements of an Annual Report 1-26


2 A Further Look at Financial Statements 2-1


Fashioning Value for Investors: Aritzia 2-1


The Classified Statement of Financial Position 2-2


Assets 2-3


Liabilities 2-7


Shareholders’ Equity 2-10


Comprehensive Illustration 2-11


Using the Financial Statements 2-13


Using the Statement of Financial Position 2-14


Using the Statement of Income 2-17


Framework for the Preparation and Presentation of Financial Statements 2-20


Objective of General-Purpose Financial Reporting 2-21


Qualitative Characteristics of Useful Financial Information 2-21


Going Concern Assumption 2-24


Elements of Financial Statements 2-24


Measurement of the Elements 2-24


Summary of Conceptual Framework 2-25


3 The Accounting Information System 3-1


Keeping Good Accounts: It’s What You Do for the Brew: True Büch Kombucha 3-1


Analyzing Transactions 3-2


Analyzing Transactions Using the Accounting Equation 3-3


Analyzing Transactions Using the Accounting Equation—Illustrated 3-5


Recording Transactions 3-14


T Accounts 3-15


Normal Balances and Debit and Credit Effects 3-15


Financial Statement Relationships 3-20


Journalizing Transactions 3-21


General Journal 3-22


Posting Transactions 3-23


Chart of Accounts 3-24


Posting 3-25


The Recording Process Illustrated 3-26


Preparing a Trial Balance 3-34


Procedure for Preparing a Trial Balance 3-34


Limitations of a Trial Balance 3-35


Review of the Accounting Cycle—Steps 1–4 3-36


4 Accrual Accounting Concepts 4-1


School’s Out, Time to Balance the Books: Western University 4-1


Accrual Accounting and the Need for Adjusting Entries 4-2


Accrual Versus Cash Basis of Accounting 4-3


Revenue Recognition 4-5


Expense Recognition 4-8


Adjusting Entries 4-9


Adjusting Entries for Prepayments 4-12


Prepaid Expenses 4-12


Deferred Revenues 4-18


Adjusting Entries for Accruals 4-20


Accrued Expenses 4-21


Accrued Revenues 4-25


Summary of Basic Relationships 4-27


The Adjusted Trial Balance and Financial Statements 4-30


Adjusted Trial Balance 4-30


Financial Statements 4-31


Closing the Books 4-33


Closing Entries 4-34


Post-Closing Trial Balance 4-40


Review of the Accounting Cycle 4-41


5 Merchandising Operations 5-1


Going with the Flow: Loblaw Companies Limited 5-1


Merchandising Operations 5-3


Income Measurement Process 5-4


Inventory Systems 5-4


Recording Purchases of Merchandise 5-7


Purchases 5-8


Adjusting Entry at Period End 5-11


Summary of Purchase Transactions 5-12


Recording Sales of Merchandise 5-13


Sales 5-14


Summary of Sales Transactions 5-17


Statement of Income Presentation 5-19


Single-Step Statement of Income 5-19


Multiple-Step Statement of Income 5-20


Statement of Comprehensive Income 5-23


Evaluating Profitability 5-24


Gross Profit Margin 5-24


Profit Margin 5-25


Appendix 5A: Periodic Inventory System 5-26


Recording Purchases of Merchandise 5-27


Recording Sales of Merchandise 5-28


Calculating Cost of Goods Sold 5-29


Adjusting Entry at Period End 5-31


Statement of Income 5-32


Comparison of Entries: Perpetual vs. Periodic 5-33


Appendix 5B: Sales Returns and Sales Discounts Under ASPE 5-34


Sales Returns 5-34


Sales Discounts 5-35


6 Reporting and Analyzing Inventory 6-1


lululemon athletica Stretches Inventory Levels: lululemon 6-1


Determining Inventory Quantities 6-3


Determining Ownership of Goods 6-3


Taking a Physical Inventory and Making Count Adjustments 6-5


Internal Controls 6-5


Inventory Cost Determination Method 6-6


Specific Identification 6-7


First-In, First-Out (FIFO) 6-8


Average Cost 6-11


Effects of Cost Determination Methods 6-13


Choice of Cost Formula 6-14


Financial Statement Effects 6-14


Inventory Errors 6-17


Errors Made When Determining the Cost of Inventory 6-17


Errors Made When Recording Goods in Transit at Period End 6-19


Presentation and Analysis of Inventory 6-20


Valuing Inventory at the Lower of Cost and Net Realizable Value 6-20


Reporting Inventory 6-22


Inventory Turnover 6-23


Appendix 6A: Inventory Cost Determination Methods in Periodic System 6-25


First-In, First-Out (FIFO) 6-26


Average Cost 6-28


7 Internal Control and Cash 7-1


Cash Control Down to a Tea: DAVIDsTEA 7-1


Internal Control 7-2


Control Activities 7-3


Limitations of Internal Control 7-8


Fraud 7-10


Cash Controls 7-11


Control Activities over Cash Receipts 7-11


Control Activities over Cash Payments 7-13


Bank Accounts—A Key Control Activity 7-15


Bank Statements 7-15


Reconciling the Bank Account 7-18


Reporting and Managing Cash 7-24


Reporting Cash 7-25


Managing Cash 7-25


8 Reporting and Analyzing Receivables 8-1


Steering Clear of Bad Debts: NFI Group 8-1


Accounts Receivable 8-2


Recording Accounts Receivable 8-3


Subsidiary Ledgers 8-4


Uncollectible Accounts Receivable 8-6


Measuring and Recording Expected Credit Losses 8-7


Writing Off Uncollectible Accounts 8-11


Collecting Uncollectible Accounts 8-12


Summary of Allowance Method 8-13


Notes Receivable 8-14


Recording Notes Receivable 8-15


Derecognizing Notes Receivable 8-16


Statement Presentation of Receivables 8-18


Statement of Financial Position 8-18


Statement of Income 8-18


Managing Receivables 8-19


Extending Credit 8-20


Establishing a Payment Period 8-20


Monitoring Collections 8-20


Evaluating Liquidity of Receivables 8-21


9 Reporting and Analyzing Long-Lived Assets 9-1


WestJet’s Assets Are for the Long Haul: WestJet 9-1


Property, Plant, and Equipment 9-2


Determining Cost 9-3


To Buy or Lease? 9-6


Depreciation 9-7


Depreciation Methods 9-8


Comparison of Depreciation Methods 9-14


Other Issues 9-15


Derecognition 9-18


Sale of Property, Plant, and Equipment 9-18


Retirement of Property, Plant, and Equipment 9-21


Intangible Assets and Goodwill 9-23


Accounting for Intangible Assets 9-23


Goodwill 9-27


Statement Presentation of Long-Lived Assets 9-29


Statement of Financial Position 9-29


Statement of Income 9-31


Statement of Cash Flows 9-31


Analyzing Assets 9-32


Return on Assets 9-32


Asset Turnover 9-33


Profit Margin Revisited 9-33


10 Reporting and Analyzing Liabilities 10-1


Planting and Planning for the Future: Interfor 10-1


Current Liabilities 10-2


Operating Line of Credit 10-3


Sales Taxes 10-4


Property Taxes 10-5


Payroll 10-6


Provisions and Contingent Liabilities 10-9


Interest-Bearing Liabilities 10-11


Liabilities with Principal Due at Maturity 10-12


Liabilities with Instalment Payments 10-14


Advantages and Disadvantages of Debt Financing 10-18


Statement Presentation and Analysis 10-18


Presentation 10-18


Analysis 10-20


Appendix 10A: Bonds Payable 10-24


Accounting for Bond Issues 10-25


Accounting for Bond Interest Expense 10-26


Accounting for Bond Retirements 10-29


Determining the Issue Price of Bonds 10-30


11 Reporting and Analyzing Shareholders’ Equity 11-1


Owning Shares Is a Family Affair: Leon's Furniture 11-1


Corporate form of Organization 11-2


Characteristics of a Corporation 11-3


Share Issue Considerations 11-5


Share Capital 11-8


Common Shares 11-8


Preferred Shares 11-11


Dividends 11-14


Cash Dividends 11-15


Stock Dividends 11-16


Stock Splits 11-18


Comparison of Effects 11-19


Presentation of Shareholders’ Equity 11-20


Statement of Financial Position 11-20


Statement of Changes in Equity (IFRS) 11-23


Statement of Retained Earnings (ASPE) 11-24


Summary of Shareholders’ Equity Transactions 11-24


Measuring Corporate Performance 11-26


Dividend Record 11-26


Earnings Performance 11-29


12 Reporting and Analyzing Investments 12-1


Managing Money for Clients and the Company: Scotiabank 12-1


Classifying Investments 12-2


Why Companies Invest 12-3


Non-Strategic Investments 12-3


Strategic Investments 12-4


Accounting for Non-Strategic Investments 12-5


Valuation of Non-Strategic Investments 12-6


Using a Fair Value Model 12-7


Accounting for Strategic Investments 12-10


Using the Equity Method 12-12


Using the Cost Model 12-14


Reporting Investments 12-16


Statement of Income 12-16


Statement of Comprehensive Income 12-17


Statement of Changes in Equity 12-17


Statement of Financial Position 12-18


Appendix 12A: Investments in Bonds 12-23


Recording a Bond Investment for the Investor 12-24


Recording a Bond for Investor and Investee 12-26


13 Statement of Cash Flows 13-1


The Statement of Cash Flows: A Feature Presentation: Cineplex 13-1


Reporting of Cash Flows 13-3


Classification of Cash Flows 13-3


Format of the Statement of Cash Flows 13-5


Preparation of the Statement of Cash Flows 13-6


The Operating Activities Section of the Statement of Cash Flows Using the Indirect Method 13-9


Preparing the Operating Activities Section 13-10


Summary of Conversion to Net Cash Provided (Used) by Operating Activities 13-16


The Investing Activities Section of the Statement of Cash Flows 13-18


Preparing the Investing Activities Section 13-18


The Financing Activities Section and Completion of the Statement of Cash Flows 13-22


Preparing the Financing Activities Section 13-23


Completing the Statement of Cash Flows 13-26


Using Cash Flows to Evaluate a Company 13-28


Corporate Life Cycle and Cash Flows 13-28


Free Cash Flow 13-30


Appendix 13A: The Operating Activities Section of the Statement of Cash Flows Using the Direct Method 13-31


Cash Receipts 13-32


Cash Payments 13-33


Summary of Conversion to Net Cash Provided (Used) by Operating Activities 13-36


14 Performance Measurement 14-1


Growing a Business, Shrinking Expenses: Sobeys 14-1


Comparative Analysis 14-3


Horizontal Analysis 14-3


Vertical Analysis 14-7


Ratio Analysis 14-12


Liquidity Ratios 14-13


Current Ratio 14-13


Receivables Turnover 14-14


Inventory Turnover 14-16


Liquidity Conclusion 14-17


Summary of Liquidity Ratios 14-17


Solvency Ratios 14-19


Debt to Total Assets 14-19


Times Interest Earned 14-20


Free Cash Flow 14-20


Solvency Conclusion 14-21


Summary of Solvency Ratios 14-21


Profitability Ratios 14-22


Gross Profit Margin 14-23


Profit Margin 14-24


Asset Turnover 14-25


Return on Assets 14-26


Return on Common Shareholders’ Equity 14-27


Basic Earnings per Share 14-28


Price-Earnings (P-E) Ratio 14-29


Payout Ratio 14-30


Dividend Yield 14-31


Profitability Conclusion 14-32


Summary of Profitability Ratios 14-32


Limitations of Financial Analysis 14-34


Diversification 14-34


Alternative Accounting Policies and Estimates 14-34


Other Comprehensive Income 14-35


Nonrecurring Items 14-35


Appendix A Specimen Financial Statements: The North West Company Inc. A-1


Appendix B Specimen Financial Statements: Sobeys Inc. B-1


Glossary G-1


Rapid Review RR-1


Company Index / Subject Index I-1