Principles of Financial Accounting: Rapid Review PDF

Rapid Review Pt 1-3.indd Page EP-1 05/05/14 2:31 PM user1 /208/WB01391/XXXXXXXXXXXXX/ch01/text_s PRINCIPLES OF FINANCIAL ACCOUNTING: RAPID REV...

Rapid Review Pt 1-3.indd Page EP-1 05/05/14 2:31 PM user1 /208/WB01391/XXXXXXXXXXXXX/ch01/text_s PRINCIPLES OF FINANCIAL ACCOUNTING: RAPID REVIEW Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow, and Atkins: Canadian Edition: Chapters 1-17 and Appendix B FORMS OF BUSINESS ORGANIZATION (CHAPTER 1) Calculations Proprietorship Partnership Corporation Depreciation = Cost ÷ Useful life (in years) × Time (Number of months ÷ 12) Interest = Face value × Annual interest rate × Time (Number of months ÷ 12) Owners Proprietor: one Partners: Shareholders: two or more one or more Owner’s liability Unlimited Unlimited Limited CLOSING ENTRIES (CHAPTER 4) Private or public Private Usually private Private or public Taxation of profits Paid by the Paid by the Paid by the TEMPORARY PERMANENT These accounts are closed. These accounts are not closed. owner partners corporation Life of organization Limited Limited Indefinite All revenue accounts All asset accounts Equity section Owner’s equity Partners’ equity Shareholders’ All expense accounts All liability accounts called equity Owner’s drawings account Owner’s capital account Investments by Owner’s capital Partners’ capital Share capital owners added to Profits added to Owner’s capital Partners’ capital Retained earnings Withdrawals by/ Drawings Drawings Dividends Purpose distributions to owners called 1. Update the owner’s capital account by transferring profit (loss) and draw- Withdrawals/ Owner’s capital Partners’ capital Retained earnings ings to the account. dividends 2. Prepare the temporary accounts (revenue, expense, drawings) for the deducted from next period’s postings by reducing their balances to zero. Name of statement Statement of Statement of Statement of Process Owner’s Equity Partners’ Equity Retained Earnings (ASPE) Statement 1. To close revenue accounts: Debit each individual revenue account for of Shareholders’ its balance and credit Income Summary for total revenues. Equity (IFRS) 2. To close expense accounts: Debit Income Summary for total expenses Statement of Not allowed Not allowed Not allowed and credit each individual expense account for its balance. Comprehensive under ASPE 3. To close income summary: Debit Income Summary for the balance in Income Required under the account (or credit if a loss) and credit (debit) the owner’s capital IFRS account for the same amount. 4. To close drawings: Debit the owner’s capital account for the balance in the Drawings account and credit Drawings for the same amount. STOP AND CHECK: Is the balance in the Income Summary account, before ACCOUNTING EQUATION WITH DEBIT/CREDIT RULES (CHAPTER 2) transfer to the owner’s capital account, equal to the profit (loss) report- ed in the income statement? Does the balance in the owner’s capital Assets 5 Liabilities + Owner’s Equity account equal the ending balance reported in the balance sheet and statement of owner’s equity? Are all of the temporary account balances Owner’s zero? Assets 5 Liabilities + Drawings + Revenues Expenses Capital Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. + – – + – + + – – + + – ACCOUNTING CYCLE (CHAPTERS 2-4) 1 ADJUSTING ENTRIES (CHAPTER 3) Analyze business transactions (Chapter 2) Type Original Entry Adjusting Entry 9 2 Prepayments 1. Prepaid Dr. Asset account Dr. Expense account Prepare a post-closing trial balance (Chapter 4) Journalize the transactions (Chapter 2) expenses Cr. Cash or liability Cr. Asset account account 8 3 Journalize and post closing entries (Chapter 4) 2. Unearned Dr. Cash Dr. Liability account Post to ledger accounts (Chapter 2) revenues Cr. Liability account Cr. Revenue account 7 Accruals 1. Accrued No entry Dr. Asset account Prepare financial statements: income 4 revenues Cr. Revenue account statement/statement of owner’s equity/ Prepare a trial balance (Chapter 2) balance sheet (Chapter 3) 2. Accrued No entry Dr. Expense account 5 expenses Cr. Liability account 6 Journalize and post adjusting entries: Prepare an adjusted trial balance (Chapter 3) prepayments/accruals (Chapter 3) Note: 1. Each adjusting entry affects one income statement account and one balance sheet account. 2. Adjusting entries never include the Cash account. Optional steps: 1. Prepare a work sheet. 2. Prepare reversing entries Rapid Review Pt 1-3.indd Page EP-2 05/05/14 2:31 PM user1 /208/WB01391/XXXXXXXXXXXXX/ch01/text_s FINANCIAL STATEMENTS (CHAPTERS 1-5) Note: Alternative presentation formats are possible under international financial reporting standards, which may report noncurrent items Order of Preparation Date before current items and list items within each category in order 1. Income statement Period ended of reverse liquidity. 2. Statement of owner’s equity Period ended 3. Balance sheet End of the period INVENTORY (CHAPTERS 5 AND 6) Income Statement (perpetual inventory system) Freight Terms Freight Costs Paid / Recorded By NAME OF COMPANY Shipping point Buyer Income Statement Destination Seller Month Ended April 30, 2014 Sales revenues Perpetual vs. Periodic Journal Entries (buyer) Sales $X Less: Sales returns, allowances, and discounts X Event Perpetual Periodic Net sales $X Purchase of goods Dr. Merchandise Inventory Dr. Purchases Cost of goods sold X Cr. Cash or A/P Cr. Cash or A/P Gross profit X Operating expenses Freight on Dr. Merchandise Inventory Dr. Freight In (Examples: salaries, advertising, freight out, purchases (shipping Cr. Cash or A/P Cr. Cash or A/P depreciation, amortization, utilities, insurance) X point) Profit from operations X Return of Dr. Cash or A/P Dr. Cash or A/P Other revenues purchased goods Cr. Merchandise Inventory Cr. Purchase Returns (Example: interest) $X and Allowances Other expenses Payment on Dr. Accounts Payable Dr. Accounts Payable (Example: interest) X X account with a Cr. Merchandise Inventory Cr. Purchase Discounts Profit (loss) $X discount Cr. Cash Cr. Cash Adjustment of Dr. Cost of Goods Sold No entry Statement of Owner’s Equity inventory in Cr. Merchandise Inventory accounting records NAME OF COMPANY to lower physical Statement of Owner’s Equity count amount Month Ended April 30, 2014 Owner’s capital, beginning of period $X Add: Investments by owner $X Perpetual vs. Periodic Journal Entries (seller) Profit (or deduct loss) X X X Event Perpetual Periodic Deduct: Drawings X Sale of goods Dr. Cash or A/R Dr. Cash or A/R Owner’s capital, end of period $X Cr. Sales Cr. Sales Dr. Cost of Goods Sold No entry Cr. Merchandise Inventory Balance Sheet Freight on sales Dr. Freight Out Dr. Freight Out NAME OF COMPANY (destination) Cr. Cash or A/P Cr. Cash or A/P Balance Sheet Return of sold Dr. Sales Returns and Dr. Sales Returns and April 30, 2014 goods (assuming Allowances Allowances Assets resaleable) Cr. Cash or A/R Cr. Cash or A/R Current assets Dr. Merchandise Inventory No entry (Examples: cash, short-term investments, accounts Cr. Cost of Goods Sold receivable, merchandise inventory, prepaid expenses) $X Long-term investments Cash received on Dr. Cash Dr. Cash (Examples: equity investments, debt investments) X account with a Dr. Sales Discounts Dr. Sales Discounts Property, plant, and equipment discount Cr. Accounts Receivable Cr. Accounts Receivable (Examples: land, land improvements, buildings, equipment) $X Less: Accumulated depreciation X X Natural resources Formula for Cost of Goods Sold (periodic inventory system) (Examples: oil wells, mines, timberland) $X Less: Accumulated depreciation X X Cost of Goods Intangible assets Beginning Cost of Goods Ending Cost of Goods + 5 Available 2 5 Inventory Purchased Inventory Sold Limited life intangibles (Examples: patents, copyrights) $X for Sale Less: Accumulated amortization X X Indefinite life intangibles (Examples: trademarks, franchise) X X Inventory Cost Determination Methods Goodwill X Perpetual Periodic Total assets $X Specific identification Liabilities and Owner’s Equity First-in, first-out (FIFO) First-in, first-out (FIFO) Liabilities Average Average Current liabilities (Examples: notes payable, accounts payable, accruals, Calculation Cost of goods available for sale unearned revenues, current portion of mortgage/notes payable) $X Weighted average unit cost = Total units available for sale Non-current liabilities (Examples: notes payable, mortgage payable) X Total liabilities X Effects of Cost Determination Methods (assuming rising prices) Owner’s equity Owner’s capital (end of period) X PURCHASES COST OF GOODS SOLD BALANCE Total liabilities and owner’s equity $X Date Units Cost Total Units Cost Total Units Cost Total Jan. 1 100 $10 $1,000 F STOP AND CHECK: Do total assets on the balance sheet equal total liabilities Apr. 15 200 $11 $2,200 100 10 and owner’s equity? Does the ending owner’s capital on the balance sheet 3,200 200 11 equal the ending owner’s capital on the statement of owner’s equity? Rapid Review Pt 1-3.indd Page EP-3 05/05/14 2:31 PM user1 /208/WB01391/XXXXXXXXXXXXX/ch01/text_s CASH (CHAPTER 7) Honouring notes receivable Dr. Cash Cr. Notes Receivable Physical and IT Control Activities Cr. Interest Revenue or Receivable (if any) Establishment of responsibility Physical controls Segregation of duties Independent checks of performance Dishonouring notes receivable Dr. Accounts Receivable (if eventual collection assumed) Cr. Notes Receivable Documentation procedures Human resource controls Cr. Interest Revenue or Receivable (if any) USING THE INFORMATION IN THE FINANCIAL STATEMENTS Dishonouring notes receivable Dr. Allowance for Doubtful Notes/Accounts (if eventual collection not Cr. Notes Receivable (CHAPTERS 1-7) assumed) Cr. Interest Receivable (if any) Liquidity Ratios Desired LONG-LIVED ASSETS (CHAPTER 9) Chapter Ratio Formula Purpose Result Tangible Intangible and Goodwill 4 Working Current assets – Measures short-term Higher capital Current liabilities debt-paying ability. Property, plant, and equipment Intangible assets, finite lives Natural resources Intangible assets, indefinite lives 4 Current Current assets Measures short-term Higher Goodwill ratio Current liabilities debt-paying ability. 4 Acid-test Cash + Short-term Measures immediate Higher Recording Depreciation and Amortization investments + short-term debt-paying Accounts receivable ability. Type of Long- Methods Journal Entry Current liabilities Lived Asset 6 Inventory Cost of goods sold Measures liquidity Higher Property, plant, Straight-line, Dr. Depreciation Expense turnover Average inventory of inventory. and equipment diminishing-balance, Cr. Accumulated Depreciation or units-of-production 6 Days sales Days in year Measures number of days Lower Natural Units-of-production Dr. Inventory in inventory Inventory turnover inventory is on hand. resources Cr. Accumulated Depreciation Intangible assets, Straight-line Dr. Amortization Expense Profitability Ratios finite lives Cr. Accumulated Amortization Desired Chapter Ratio Formula Purpose Result Calculation of Annual Depreciation/Amortization Expense 5 Gross profit Gross profit Measures margin Higher Depreciation/ margin Net sales between selling price Amortization Method Calculation and cost of goods Straight-line Cost – Residual value sold. Estimated useful life (in years) 5 Profit margin Profit Measures amount of Higher Diminishing- Carrying amount at beginning of year × Straight-line rate Net sales profit generated by balance Straight-line rate = 1 ÷ Estimated useful life (in years) each dollar of sales. Units-of- Cost – Residual value × Units of production production Estimated total units of production during year RECEIVABLES (CHAPTER 8) Estimating Bad Debts Note: 1. If depreciation or amortization are calculated for a partial period, the straight-line and diminishing-balance methods must be adjusted for he relevant proportion of the year. Multiply the annu- Balance sheet approach Determines balance in Allowance for al depreciation/amortization expense by the number of months (% of total receivables or aging) Doubtful Accounts expired in the year divided by 12 months. Alternatively, simply use one-half year for all acquisitions. Recording Bad Debts 2. The total depreciation for any method is limited to the depreciable cost (cost – residual value). Event Journal Entry Record credit sales Dr. Accounts Receivable Cr. Sales Revision of Depreciation (straight-line method) Estimate bad debts Dr. Bad Debts Expense Carrying Revised Remaining depreciable Remaining Revised annual Cr. Allowance for Doubtful Accounts amount at time of + residual 5 amount at time of change 2 estimated 5 depreciation change value in estimate useful life expense Write-off uncollectible account Dr. Allowance for Doubtful Accounts Cr. Accounts Receivable Subsequent recovery Dr. Accounts Receivable Disposal of Property, Plant, and Equipment Cr. Allowance for Doubtful Accounts Dr. Cash Step Journal Entry of Calculation Cr. Accounts Receivable 1. Update the depreciation from Dr. Depreciation Expense Recording Notes Receivable when depreciation was last Cr. Accumulated Depreciation recorded to date of disposal Event Journal Entry 2. Calculate the carrying Cost – Accumulated Depreciation = Issuing notes receivable Dr. Notes Receivable amount Carrying Amount Cr. Cash or Accounts Receivable 3. Calculate the gain or loss Proceeds – Carrying Amount = Gain (Loss) Recognizing interest Dr. Interest Receivable or Cash Cr. Interest Revenue 4. Record the disposal Dr. Cash (or Receivable) Dr. Accumulated Depreciation Valuing notes receivable Dr. Bad Debt Expense Dr. Loss (or Cr. Gain) Cr. Allowance for Doubtful Notes/Accounts Cr. Long-Lived Asset Account Rapid Review Pt 1-3.indd Page EP-4 05/05/14 2:31 PM user1 /208/WB01391/XXXXXXXXXXXXX/ch01/text_s CURRENT LIABILITIES (CHAPTER 10) Accounting Standards for Private Enterprises (ASPE) Private companies can choose to follow a more simplified conceptual Current Liabilities framework, designed specifically for private enterprises. Determinable (Certain) Liabilities Uncertain Liabilities Operating line of credit and bank overdrafts Estimated liabilities Revenue Recognition Short-term notes payable Product warranties When there has been an increase in an asset or a decrease in a liability due Sales taxes Customer loyalty programs to ordinary profit generating activities. Unearned revenue Gift cards Accounts Payable Lawsuits Expense Recognition Current maturities of long-term debt Contingencies When there is a decrease in an asset or increase in a liability excluding transactions with owners that result in a decrease in owners equity. USING THE INFORMATION IN THE FINANCIAL STATEMENTS (CHAPTERS 1-10) ACCOUNTING FOR PARTNERSHIPS (CHAPTER 12) Liquidity Ratios Profit and Loss Ratios (to allocate profit or loss/bonuses/liquidation gains or losses) Desired Chapter Ratio Formula Purpose A fixed ratio, expressed as a proportion (2:1), a percentage (67% and Result 33%), or a fraction (2/3 and 1/3) 8 Receivables Net credit sales Measures liquidity Higher A ratio based either on capital balances at the beginning or end of the turnover Average gross of receivables. year, or on average capital balances during the year accounts receivable Salaries to partners and the remainder in a fixed ratio 8 Collection Days in year Measures number Lower Interest on partners’ capital balances and the remainder in a fixed period Receivables turnover of days receivables ratio are outstanding. Salaries to partners, interest on partners’ capital balances, and the remainder in a fixed ratio 8 Operating Days sales in inventory + Measures number Lower cycle Collection period of days to purchase inventory, sell it on account, and Admission of a Partner (ABC Partnership) collect the cash. Transaction Sample Journal Entry No investment of assets in partnership Purchase of a portion of partners A and B’s interests by C Dr. A, Capital Profitability Ratios Dr. B, Capital Cr. C, Capital Desired Chapter Ratio Formula Purpose Investment of assets (Cash) in partnership Result (1) New partner C’s investment 5 capital acquired Dr. Cash 9 Asset Net sales Measures how Higher Cr. C, Capital turnover efficiently assets are (2) New partner C’s investment ≠ capital acquired Average total assets used to generate sales. (a) Bonus to old partners A and B Dr. Cash Cr. A, Capital 9 Return on Profit Measures overall Higher Cr. B, Capital assets Average total assets profitability of assets. Cr. C, Capital (b) Bonus to new partner C Dr. Cash Dr. A, Capital Dr. B, Capital FINANCIAL REPORTING CONCEPTS (CHAPTER 11) Cr. C, Capital Conceptual Framework OBJECTIVE OF FINANCIAL REPORTING Withdrawal of a Partner (DEF Partnership) Constraint Transaction Sample Journal Entry Cost No payment from partnership assets Payment from partners E and F’s personal assets to D Dr. D, Capital Cr. E, Capital Cr. F, Capital Fundamental Characteristics Elements Payment from partnership assets Relevance Assets (1) Payment to D 5 capital retired Dr. D, Capital Liabilities Cr. Cash Equity (2) Payment to D ≠ capital retired Faithful Representation (a) Bonus to D from partners E and F Dr. D, Capital Revenue Expenses Dr. E, Capital Other Comprehensive Income Dr. F, Capital Enhancing Characteristics Cr. Cash Comparability (b) Bonus to remaining partners E and F from D Dr. D, Capital Verifiability Cr. E, Capital Timeliness Recognition Criteria Cr. F, Capital Understandability Measurement Criteria Cr. Cash Underlying Assumptions and Concepts Economic Entity Full Disclosure Going Concern Liquidation of Partnership 1. Sell noncash assets for cash and recognize any gain or loss on realization 2. Allocate any gain or loss on realization to the partners, based on their International Financial Reporting Standards (IFRS) profit and loss ratios Public companies must follow IFRS. 3. Pay partnership liabilities in cash Rapid Review Pt 1-3.indd Page EP-5 05/05/14 2:31 PM user1 /208/WB01391/XXXXXXXXXXXXX/ch01/text_s 4. Remove any capital deficiency either by repayment or allocation to the Accounting Standards for Private Enterprises (ASPE) other partners Accounting for equity transactions under ASPE differs from IFRS in 5. Distribute the remaining cash to partners, based on their capital balances several areas, including the following: FORMS OF BUSINESS ORGANIZATION (CHAPTERS 12 AND 13) 1. No other comprehensive income or loss, nor a statement of compre- hensive income, is reported. Proprietorship Partnership Corporation 2. A statement of retained earnings is prepared. Under IFRS a statement Owners Proprietor: Partners: Shareholders: of changes in shareholders’ equity is prepared. one two or more one or more 3. Earnings per share are not reported. Owner’s liability Unlimited Unlimited Limited Private or public Private Usually private Private or public Taxation of profits Paid by the Paid by the Paid by the NON-CURRENT LIABILITIES (CHAPTER 15) owner partners corporation Bonds Payable Life of organization Limited Limited Indefinite Equity section called Owner’s equity Partners’ equity Shareholders’ equity Impact of Interest Rates on Bond Issue Price Withdrawals by/ Drawings Drawings Dividends Premium Market interest rate , Contractual interest rate distributions to Face Value Market interest rate 5 Contractual interest rate owners called Discount Market interest rate. Contractual interest rate Withdrawals/ Owner’s capital Partners’ capital Retained earnings dividends Calculation of Bond Interest Expense, Interest Paid, and Amortization of deducted from Bond Discount or Premium Investments by Owner’s capital Partners’ capital Share capital owners added to Profit added to Owner’s capital Partners’ capital Retained earnings (1) (2) (3) Bond Interest Paid Bond Interest Expense INTRODUCTION TO CORPORATIONS (CHAPTER 13) F ace Value Contractual 3 Amortized Cost of Bonds Market 2 at Beginning of Period 3 Interest Rate 5 Amortization of Bonds Interest Rate Amount Calculation of Preferred Dividend Assume $6 preferred, 10,000 shares issued for $100 per share. Annual dividend is $6 per share; quarterly dividend is $1.50 ($6 4 4) per share. Total annual dividend is $60,000 ($6 3 10,000) Notes Payable (Instalment Payment Schedule) CORPORATIONS: ADDITIONAL TOPICS AND IFRS (CHAPTER 14) A B C D Interest Cash Interest Reduction Principal Reacquisition of Common (or Preferred) Shares Payments Period Payment Expense of Principal Balance Average cost of shares 5 Dollar amount in share account 4 Number of shares Fixed Month Variable D* x Annual Principal balance D* 2 C Below Average Cost Above Average Cost principal B1C interest rate 4 12 4 # of months Dr. Common Shares (@ average cost) Dr. Common Shares (@ average cost) Blended Month Fixed D* x Annual A2B D* 2 C Cr. Contributed Surplus— Dr. Contributed Surplus— B1C interest rate 4 12 Reacquisition of Shares Reacquisition of Shares (if any) Cr. Cash Dr. Retained Earnings *From the prior period Cr. Cash Comparison of Dividend Journal Entries (Chapters 13 and 14) THE CASH FLOW STATEMENT (CHAPTER 16) Date Cash Dividend Stock Dividend Operating, Investing, and Financing Activities Declaration Dr. Cash Dividends Dr. Stock Dividends Cash Receipts Activity Cash Payments Cr. Dividends Payable Cr. Stock Dividends Distributable (liability account) (shareholders’ equity account) To suppliers for inventory Record No entry No entry From the sale of goods or services To employees for services Payment/ Dr. Dividends Payable Dr. Stock Dividends Distributable Operating To governments for taxes From returns on debt investments distribution Cr. Cash Cr. Common/Preferred Shares To lenders for interest (interest) and on equity investments (dividends) To others for expenses Transactions Affecting Shareholders’ Equity (Chapters 13 & 14) Transaction Impact on Shareholder’ Equity Accounts From the sale of property, plant, and To purchase property, plant, and equipment and intangible assets equipment and intangible assets 1. Issue of share capital 1. Common or Preferred Shares is increased From the sale of non trading debt Investing To purchase non trading debt or 2. Reacquisition of 2. Common or Preferred Shares is decreased or equity investments equity investments share capital Contributed Surplus may be increased or From the collection of principal on decreased To make loans to other companies loans to other companies Retained Earnings may be decreased 3. Correction of a prior 3. Opening Retained Earnings is either From the sale of shares (preferred To shareholders as dividends period error that increased or decreased as required to and common) Financing affected the prior year’s make the correction From the issue of debt (notes To redeem long-term debt or ending retained earnings and bonds) reacquire shares 4. Cumulative effect of 4. Opening Retained Earnings is either a change in accounting increased or decreased as required to policy on the prior year’s make the adjustment Steps in Preparing the Cash Flow Statement ending retained earnings Steps Details 5. Profit (loss) 5. Retained Earnings is increased (decreased) 1 Prepare operating activities section: Determine the net cash pro- 6. Other comprehensive 6. Accumulated Other Comprehensive vided (used) by operating activities by converting profit from an income (loss) Income is increased (decreased) accrual basis to a cash basis. 7. Cash dividends 7. Retained Earnings is decreased 2 Prepare investing activities section: Determine the net cash are declared provided (used) by investing activities by analyzing changes in 8. Stock dividends 8. Retained Earnings is decreased and Stock the long-term asset accounts. are declared Dividends Distributable is increased 3 Prepare financing activities section: Determine the net cash pro- 9. Stock dividend 9. Stock Dividend Distributable is decreased vided (used) by financing activities by analyzing changes in non is distributed and Common Shares is increased current liability and equity accounts. 10. Stock splits 10. Number of shares issued increases; 4 Complete the cash flow statement: Prepare the cash flow there is no effect on account balances statement and determine the net increase (decrease) in cash. Rapid Review Pt 1-3.indd Page EP-6 05/05/14 2:31 PM user1 /208/WB01391/XXXXXXXXXXXXX/ch01/text_s CORPORATE FINANCIAL STATEMENTS (CHAPTERS 13-17) Balance, beginning of period, as adjusted X Profit X ASPE IFRS Date Reacquired common shares (X) (not separately illustrated) (illustrated below) Stock dividends (X) 1(a). Income statement 1(a). Income statement Period ended Cash dividends (X) Total retained earnings, end of period X 1(b). No equivalent state- 1(b). Statement of Accumulated other comprehensive income (loss) ment under ASPE comprehensive income Period ended Balance, beginning of period $X 2. Statement of 2. Statement of changes in Period ended Other comprehensive income X retained earnings shareholders’ equity Total accumulated other comprehensive income (loss), 3. Balance sheet 3. Statement of financial end of period X position or balance sheet End of the period Total shareholders’ equity, end of period $X 4. Cash flow statement 5. Cash flow statement Period ended Statement of Financial Position Income Statement NAME OF COMPANY NAME OF COMPANY Statement of Financial Position Income Statement End of the Period Period Ended Assets Sales revenues Current assets Sales $X (Examples: cash, short-term investments, accounts Less: Sales returns, allowances, and discounts X receivable, merchandise inventory, prepaid expenses) $X Net Sales $X Long-term investments Cost of goods sold (assuming perpetual inventory system) X (Examples: equity investments, debt investments) X Gross Profit X Property, plant, and equipment Operating expenses (Examples: land, land improvements, buildings, equipment) $X (Examples: salaries, advertising, freight out, depreciation, Less: Accumulated depreciation X X amortization, utilities, insurance) X Natural resources Profit from operations X (Examples: oil wells, mines, timberland) $X Other revenues Less: Accumulated depreciation X X (Example: interest) $X Intangible assets Other expenses Finite life intangibles (Examples: patents, copyrights) $X (Example: interest) X X Less: Accumulated amortization X Profit before income taxes X X Income tax expense X Indefinite life intangibles (Examples: trademarks, franchise) X X Profit Statement of Comprehensive Income $X Goodwill X Total assets $X Liabilities and Shareholders’ Equity Statement of Comprehensive Income Liabilities NAME OF COMPANY Current liabilities Statement of Comprehensive Income (Examples: notes payable, accounts payable, accruals, unearned revenues, current portion of long-term liabilities) $X Period Ended Non-current liabilities Profit $X (Examples: notes payable, bonds payable) X Other comprehensive income Total liabilities X (Example: Gains and losses on fair value adjustments of long-term Shareholders’ equity strategic investments with no significant influence, net of income tax) X Contributed capital Comprehensive income $X Share capital Preferred shares $X Common shares X Total share capital X Statement of Changes in Shareholders’ Equity Contributed surplus—reacquisition of common shares X X NAME OF COMPANY Retained earnings X Accumulated other comprehensive income X Statement of Changes in Shareholders’ Equity Total shareholders’ equity X Period Ended Total liabilities and shareholder’s equity $X Contributed capital Share capital, preferred shares Balance, beginning of period, X shares issued $X Issued for cash, X shares X STOP AND CHECK: (1) Total assets on the balance sheet must equal total Balance, end of period, X shares issued X liabilities and shareholders’ equity. (2) Each component of shareholders’ Share capital, common shares equity on the balance sheet must equal its respective ending balance on Balance, beginning of period, X shares issued X the statement of changes in shareholders’ equity. Reacquired X shares (X) Stock dividend issued, X shares X Note: The classifications and the ordering within the classifications may be Issued for cash, X shares X presented in a reverse order of liquidity in some IFRS statements. Balance, end of period, X shares issued X Cash Flow Statement Stock dividends distributable Balance, beginning of period 0 NAME OF COMPANY Common stock dividend declared X Cash Flow Statement Common stock dividend distributed (X) Period Ended Balance, end of period 0 Contributed surplus—reacquired shares Operating activities (assuming use of direct method) Balance, beginning of period X Cash receipts Reacquired common shares (X) (Examples: from sales of goods and services to customers, from Balance, end of period X receipts of interest and dividends on loans and investments) $X Total contributed capital, end of period $X Cash payments Retained earnings (Examples: to suppliers, for operating expenses, for interest, Balance, beginning of period, as previously reported $X for taxes) (X) Correction for prior period error, net of income tax expense X Cash provided (used) by operating activities $X Rapid Review Pt 1-3.indd Page EP-7 05/05/14 2:31 PM user1 /208/WB01391/XXXXXXXXXXXXX/ch01/text_s Increases in noncash current liability accounts that affect Investing activities operating activities X (Examples: purchase/sale of long-term assets) Deduct: Gains (e.g., on disposals of assets, fair value adjustments of Cash provided (used) by investing activities X trading investments) (X) Financing activities Increases in noncash current asset accounts that affect (Examples: issue/repayment of long-term liabilities, operating activities (X) issue of shares, reacquisition of shares, payment of dividends) Decreases in noncash current liability accounts that affect Cash provided (used) by financing activities X operating activities (X) Net increase (decrease) in cash X Cash provided by (used in) operating activities X Cash, beginning of the period X Cash, end of the period $X FINANCIAL STATEMENT ANALYSIS (CHAPTER 17) Horizontal (Trend) Analysis STOP AND CHECK: Cash, end of the period, on the cash flow statement must Horizontal Percentage Base-Period Amount Formula equal cash presented on the balance sheet. Horizontal Percentage Analysis-Period Amount Prior Period Amount 5 4 of Base-Period Amount Note: The operating activities section may also be prepared using the Horizontal Percentage Change for Period Formula indirect method: Analysis-Period Amount 2 Prior Period Amount Horizontal Percentage Operating Activities 5 Change for Period Profit Prior Period Amount Add: Noncash expenses (e.g., depreciation) $X Losses (e.g., on disposals of assets, fair value adjustments of Vertical (Common-Size) Analysis trading investments) X Vertical Percentage Formula Decreases in noncash current asset accounts that affect operating activities X Vertical Percentage 5 Analysis Amount 4 Base Amount Liquidity Ratios Ratio Formula Purpose Desired Result Working capital Current assets 2 Current liabilities Measures short-term Higher debt-paying ability. Current ratio Current assets Measures short-term Higher Current liabilities debt-paying ability. Acid-test Cash 1 Short-term investments 1 Accounts receivable Measures immediate short- Higher Current liabilities term debt-paying ability. Receivables turnover Net credit sales Measures liquidity Higher Average gross accounts receivable of receivables. Collection period Days in year Measures number of days Lower Receivables turnover receivables are outstanding. Inventory turnover Cost of goods sold Measures liquidity Higher Average inventory of inventory. Days sales Days in year Measures number of days Lower in inventory Inventory turnover inventory is on hand. Operating cycle Days sales in inventory 1 Collection period Measures number of days to Lower purchase inventory, sell it on account, and collect the cash. Solvency Ratios Ratio Formula Purpose Desired Result Debt to total assets Total liabilities Measures percentage of total Lower Total assets assets provided by creditors. Interest coverage Proft 1 Interest expense 1 Income tax expense(EBIT) Measures ability to meet Higher Interest expense interest payments. Free cash flow Cash provided (used) by operating activities 2 Measures cash available Higher Cash used (provided) by investing activities operating activities that management can use after paying capital expenditures. Profitability Ratios Ratio Formula Purpose Desired Result Gross profit margin Gross profit Measures margin between selling price Higher Net sales and cost of goods sold. Profit margin Profit Measures amount of profit Higher Net sales generated by each dollar of sales. Asset turnover Net sales Measures how efficiently assets Higher Average total assets are used to generate sales. Return on assets Profit Measures overall profitability of assets. Higher Average total assets Return on equity Profit Measures profitability of Higher Average shareholders’ equity shareholders’ investment. Earnings per share Profit 2 Preferred dividends Measures amount of profit Higher Weighted average number of common shares earned on each common share. Price-earnings ratio Market price per share Measures relationship between market price Higher Earnings per share per share and earnings per share. Payout ratio Cash dividends Measures percentage of profit Higher Profit distributed as cash dividends. Rapid Review Pt 1-3.indd Page EP-8 05/05/14 2:31 PM user1 /208/WB01391/XXXXXXXXXXXXX/ch01/text_s APPENDIX B: INVESTMENTS Short-term Debt or Equity Investments (held for trading purposes) Classification and Measurement of Investments Transaction Sample Journal Entry Reporting of Acquisition Dr. Trading Investments Balance Sheet Purpose of Measurement Fair Value Cr. Cash Reason Type Classification Investment Basis Adjustment Recording dividends Dr. Cash ⎧ ⎧ ⎧ Trading ⎪ Fair value Income (equity) or Cr. Dividend/Interest Revenue ⎪ Current statement interest (debt) ⎪ ⎪ assets ⎨ ⎪ Held to earn Amortized Fair value adjustment Dr. Trading Investments Non- ⎪ Debt ⎨ ⎩ interest income cost n/a Cr. Gain on Fair Value Adjustment Strategic⎨ ⎪ Non- Held to earn Amortized (or Dr. Loss and Cr. Trading Securities) ⎪ ⎪ ⎩ current assets interest income cost n/a Sale Dr. Cash ⎪ Current Income Cr. Trading Investments Cr. Gain on Sale (or Dr. Loss) ⎩ Equity assets Trading Fair value statement Note: Both the gain or loss on fair value adjustment and the gain or loss on sale are reported as other revenue or expense in the income state- ment for short-term non-strategic trading investments.