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Chapter 1 The Purpose and Use of Financial Statements Financial Accounting: Tools for Business Decision- Making Ninth Canadian Edition Kimmel; Weygandt; Mitchell; Trenholm; Irvine; Burnley Prepared by Debbie Musil, F CPA, FCM A Learning Objectives LO 1:...

Chapter 1 The Purpose and Use of Financial Statements Financial Accounting: Tools for Business Decision- Making Ninth Canadian Edition Kimmel; Weygandt; Mitchell; Trenholm; Irvine; Burnley Prepared by Debbie Musil, F CPA, FCM A Learning Objectives LO 1: Identify the uses and users of accounting. LO 2: Describe the primary forms of business organization. LO 3: Explain the three main types of business activity. LO 4: Describe the purpose and content of each of the financial statements. Copyright ©2023 John Wiley & Sons, Inc. 2 Learning Objective 1 Identify the uses and users of accounting information. Copyright ©2023 John Wiley & Sons, Inc. 3 The Purpose and Use of Financial Statements (1 of 2) Uses and Users of Accounting o Internal and external users o Ethics in financial reporting o Data analytics Forms of Business Organization o Proprietorships, partnerships and corporations o Generally accepted accounting principles for business organizations Types of Business Activity o Financing, Investing and operating activities o Summary of business activities Copyright ©2023 John Wiley & Sons, Inc. 4 The Purpose and Use of Financial Statements (2 of 2) Financial Statements o The financial statements o North West’s financial statements o Elements of the annual report Copyright ©2023 John Wiley & Sons, Inc. 5 Uses and Users of Accounting Accounting identifies and records the economic events of an organization and communicates to interested users There are two broad categories of users o Internal users o External users Copyright ©2023 John Wiley & Sons, Inc. 6  Users of Financial Information Internal users o Manage companies, not-for-profit, & government organizations o Company officers, managers and directors in finance, marketing, human resources, production and other functional areas External users o Do not work for the company. This includes: Investors, lenders, and other creditors Customers, employees, labour unions Taxing authorities and regulators Copyright ©2023 John Wiley & Sons, Inc. 7 Discussion Question 1 Identify the internal and external users of financial information for a local hospital. Copyright ©2023 John Wiley & Sons, Inc. 8 In-Class Problem Copyright ©2023 John Wiley & Sons, Inc. 9 Ethics in Financial Reporting For accounting information to have value, preparers must have high ethical standards o Actions are legal and responsible and o Consider organization’s interests Accountants, other professionals, and most companies have rules or codes of conduct to guide ethical behavior Copyright ©2023 John Wiley & Sons, Inc. 10 Discussion Question 2 What are some ethical issues that might exist for financial information in a local hospital? Copyright ©2023 John Wiley & Sons, Inc. 11 Data Analytics Involves analyzing data, using software and statistics, to draw inferences Use of data analytics is becoming increasingly common Four most common types of data analytics: o What happened? (descriptive) o Why did it happen? (diagnostic) o What is likely to happen? (predictive) o What should we do about it? (prescriptive) Copyright ©2023 John Wiley & Sons, Inc. 12 Learning Objective 2 Describe the primary forms of business organization. Copyright ©2023 John Wiley & Sons, Inc. 13  Forms of Business Organizations: 1. Proprietorship Owned by one person (proprietor) Simple to set up Owner has control over business Limited life Unlimited liability Income tax paid by owner Copyright ©2023 John Wiley & Sons, Inc. 14  Forms of Business Organizations: 2. Partnership Similar to proprietorship except owned by more than one person Formalized in a written agreement Limited life Each partner has unlimited liability Income tax paid by individual partners Copyright ©2023 John Wiley & Sons, Inc. 15  Forms of Business Organizations: 3. Corporations Separate legal entity owned by shareholders (owners of shares) Indefinite life Ease of raising capital Shareholders enjoy limited liability Corporation pays income tax May be public or private: o Public if shares are publicly traded o Private if shares are not available to the general public Copyright ©2023 John Wiley & Sons, Inc. 16 In-Class Problem Copyright ©2023 John Wiley & Sons, Inc. 17  Generally Accepted Accounting Principles (GAAP) for Business Organizations Accounting rules and practices for the preparation of financial statements Different for publicly-traded and private corporations o Publicly-traded corporations use International Financial Reporting Standards (I FRS) o Private corporations may use IFRS or Accounting Standards for Private Enterprises (ASPE) Proprietorships and partnerships generally follow ASPE for external reporting o Not required to follow any particular standards for internal use Copyright ©2023 John Wiley & Sons, Inc. 18 In-Class Problem Copyright ©2023 John Wiley & Sons, Inc. 19 Learning Objective 3 Explain the three main types of business activity. Copyright ©2023 John Wiley & Sons, Inc. 20 Three Types of Business Activities All businesses are involved in three types of activities: Financing Investing Operating Copyright ©2023 John Wiley & Sons, Inc. 21 Financing Activities Obtaining (and repaying) funds to finance the operations of the business Examples: o Issuing (selling) or repurchasing shares (equity financing) o Borrowing money or repaying loans (debt financing) Forms of debt o Bank indebtedness, bank loan payable, long- term debt such as mortgages payable, bonds payable, finance lease obligations Copyright ©2023 John Wiley & Sons, Inc. 22 Investing Activities Purchase or sale of long-lived assets needed to operate the company Examples o Purchase or sale of long-lived assets such as property, plant and equipment and intangible assets o Purchase or sale of investments, such as shares or debt securities of other companies Copyright ©2023 John Wiley & Sons, Inc. 23 Operating Activities Operating activities are the main day-to-day activities of the business Examples o Sources of income (revenue and income) o Expenses o Related accounts such as accounts receivable and accounts payable Copyright ©2023 John Wiley & Sons, Inc. 24 Discussion Question 3 What are the potential operating, investing, and financing activities for a retail company? Would your answer differ for a service company? Copyright ©2023 John Wiley & Sons, Inc. 25 Learning Objective 4 Describe the purpose and content of each of the financial statements. Copyright ©2023 John Wiley & Sons, Inc. 26 Financial Statements (1 of 2) Statement of income o Reports revenues and expenses for a specific period of time Statement of changes in equity o Reports the changes in each component of shareholders’ equity during a period of time Statement of financial position o Shows the assets, liabilities and shareholders’ equity at a specific point in time Copyright ©2023 John Wiley & Sons, Inc. 27 Financial Statements (2 of 2) Statement of cash flows o Shows, for a specific period of time, how company obtained cash and how that cash was used Order of preparation of statements Copyright ©2023 John Wiley & Sons, Inc. 28 Statement of Income Revenues o Arise from the sale of products or services o Result in an inflow of assets Expenses o Costs of assets consumed or services used to generate revenues Net Income (loss) = Revenues − Expenses Copyright ©2023 John Wiley & Sons, Inc. 29 Statement of Income - Example Copyright ©2023 John Wiley & Sons, Inc. 30 Statement of Changes in Equity (1 of 2) Shows the changes in each component of shareholders’ equity for the period Share capital o Amounts contributed by shareholders o May include common and preferred share classes Retained earnings /deficit o Cumulative net income retained in the corporation LESS any dividends paid to shareholders Other shareholders’ accounts Copyright ©2023 John Wiley & Sons, Inc. 31 Statement of Changes in Equity (2 of 2) Changes in common shares Changes in retained earnings Copyright ©2023 John Wiley & Sons, Inc. 32 Statement of Changes in Equity - Example Copyright ©2023 John Wiley & Sons, Inc. 33 Statement of Financial Position Assets o Resources owned or controlled by a business Liabilities o Claims of lenders and other creditors Shareholders’ equity o Claims of shareholders Accounting equation o Assets = Liabilities + Shareholders’ Equity Copyright ©2023 John Wiley & Sons, Inc. 34 Statement of Financial Position - Example (1 of 2) Copyright ©2023 John Wiley & Sons, Inc. 35 Statement of Financial Position - Example (2 of 2) Copyright ©2023 John Wiley & Sons, Inc. 36 In-Class Problem Copyright ©2023 John Wiley & Sons, Inc. 37 Statement of Cash Flows Reports the effect on cash related to the company’s o Operating activities o Investing activities o Financing activities Shows net increase or decrease in cash for the period Copyright ©2023 John Wiley & Sons, Inc. 38 Statement of Cash Flows - Example Copyright ©2023 John Wiley & Sons, Inc. 39 Relationships Between Statements The statements are interrelated o Results from some statements are used as data in other statements Examples o Net income from statement of income is reported in statement of changes in equity o Ending balances of each shareholders’ equity account is reported in both statements of financial position and changes in equity o Statement of cash flows is related to statement of financial position Copyright ©2023 John Wiley & Sons, Inc. 40 Annual Report Public corporations must produce an annual report each year, which contains: o Financial statements o Statement of management’s responsibility for the statements o Management discussion and analysis o Auditor’s report o Notes to financial statements o Historical summary of the key financial ratios and indicators Copyright ©2023 John Wiley & Sons, Inc. 41 In-Class Problem Copyright ©2023 John Wiley & Sons, Inc. 42 Review of IFRS and ASPE International Financial Key Standard Accounting Standards for Reporting Standards (I Differences Private Enterprises (A SPE) FRS) Accounting Publicly traded Private corporations normally Standards corporations must use I FR use ASPE, but can choose to use S; private corporations IFRS. Once the choice is made, normally use A SPE, but it must be applied consistently. can choose to use I FRS Proprietorships and partnerships generally follow A SPE. Statement of A statement of changes in A statement of retained changes in equity equity must be presented earnings is presented that vs. statement of that shows the changes in shows the change in only one retained earnings all components of component of shareholder’s shareholder’s equity (for equity retained earnings. example, share capital and retained earnings). Copyright ©2023 John Wiley & Sons, Inc. 43 Copyright Copyright © 2023 John Wiley & Sons, Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. Copyright ©2023 John Wiley & Sons, Inc. 44