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Chapter 11 Shareholders equity: Accumulated Other Comprehensive Income (includes): -Gains and losses on some types of investments -Some foreign currency translation adjustments-Gains and losses on complex financial instruments to hedge events. -Reported either in a separate statement or at the bottom of the statement of earnings directly below net earnings. -Other comprehensive income is added to net earnings to determine the total comprehensive income for the year. These other comprehensive gains and losses affect shareholders’ wealth but are not included in retained earnings. Authorized shares: –The maximum number of shares that a company can issue, as specified in the articles of incorporation. Many companies establish an unlimited number.Issued shares:Shares that have been sold by the company. Are also considered to be outstanding shares. Treasury shares:Shares that have been repurchased by the firm and have not been cancelled.Legal capital:Total amount received for shares when issued. Must be kept intact. Cannot be paid out as dividends.Par value:A specified dollar amount attached to each share.Used in the past, no longer permitted in most Canadian jurisdictions. When shares are sold, par value is credited to the share capital account and any excess is credited to an account called Contributed Surplus.No par value:Commonly used today. Total amount received for the shares is credited to the Common Shares or Share Capital account. Share Repurchase: Reduces the number of shares outstanding. Can be used to meet obligations under stock option plans. Can be repurchased and subsequently retired or cancelled.Contributed Surplus: Arises from certain transactions with shareholders involving the sale or repurchase of company’s shares or the issuance of stock options. Common shares: Represent the basic voting ownership rights of the company. At least one class of a company’s common shares must have ALL three of the following rights: -To vote at meetings of the company’s shareholders–To receive dividends if declared–To share in the company’s net assets upon liquidation. Preferred shares:Have preference over common shares in one or more areas: –Receiving Dividends–Receiving a return on their share capital in the event of company liquidation, giving up right to vote. If a dividend is declared, preferred shareholders will receive dividends before common shareholders. Paying dividends: In order to declare dividends a company must have both: -sufficient retained earnings-sufficient cash. Four key dates for dividend declaration include: -Date of declaration-Ex-dividend date-Date of record-Date of payment. Cash dividends: Payments to be made to shareholders from the total net income retained in the company’s Retained Earnings account. Payment in return for the company’s use of the shareholders’ money. Paid only if the board of directors has voted to declare a dividend.Cash dividends result in a cash payment from the company to the shareholders, whereas stock dividends result in shareholders receiving additional shares.Why issue stock dividends?Company is able to capitalize a portion of its retained earnings.Stock split occurs when a company issues additional shares to shareholders. Usually stated as a ratio. Example: A two-for-one stock split. Each share currently held is exchanged for two new shares. Compares the price per share on the stock market with the company’s earnings per share. Companies with high growth expectations or low levels of risk will have higher P/E multiples.Rate of return that the common shareholders are earning on the amount they have invested in the company. Equity financing: Advantages: -It does not have to be repaid -Dividends are optional. Disadvantages: -Ownership interests may be diluted. -Dividends are not tax deductible. Closing Entries: Revenues to Income Summary, Income Summary to Expenses, Income Summary to Retained earnings, Retained earnings to dividends.
Chapter 10 Long term liabilities:Long term liabilities are significant for a number of reasons:-Will affect the company far into the future-May be unrecorded such as contractual commitments or possible outcomes of litigation proceedings-May have a significant impact on future operating results-The most common long term (non current) liabilities include:-Long Term loans-Bonds Payable-Lease Liabilities-Pension and other post employment benefit liabilities-Future Income Taxes. Bonds: Companies may raise long-term funds through either: –Equity (stock) marketORDebt market: –Borrow money from a commercial bank–Sell bonds to investors.Bonds traded in public markets are standardized: –Face value: $1,000 per bond–the cash payment to be made at the maturity date of the bond–Usually semi-annual interest payments–Bond interest rate (contract or coupon rate)–Stated as an annual percentage Lease agreement. One party (the lessor) buys the asset and the second party (the lessee) makes periodic payments in exchange for the use of the asset over the lease term.There are a number of reasons why a company may choose to lease an asset rather than purchase it: –Frees up capital (cash) for other purposes–Unwilling or unable to obtain loan to finance purchase.Income tax expense is an accrual accounting concept since it is based on accounting income from the income statementIncome taxes payable must be calculated according to the rules established by Canada Revenue Agency (CRA)Difference is deferred income tax – it can be either an asset or a liability, depending on the cause of the difference.Deferred Income Tax – Liability Method:-Canadian practice uses the liability method to account for these differences. (the differences between the accounting records and the tax records) that exist in the current period.Commitments and Guarantees: Mutually unexecuted contracts are related to future transactions and can include commitments to:-Purchase certain quantities of raw materials at certain price-Operating leases-Utility contracts-Fixed labour rates on maintenance contracts-Presented on the financial statements as commitments. Contingent Liabilities: A liability may not meet the definition of a liability and as such may not be recognized in the financial statements when:–The future obligation is contingent on certain events occurring and / or is outside company control–It is not considered probable and the amount of the obligation can not be reliably measured–Should be disclosed in the notes to the financial statements–For Example:Company is the defendant in a lawsuit.
Chapter 9 Current liabilities:Significance of Current Liabilities:-Assessment of liquidity-Indicator of short term cash requirements-Measurement of current financial health-Normally recorded at fair value.Bank Indebtedness / Line of Credit: –Revolving credit facility–Used to deal with short term cash shortages or timing differences. Short Term / Working Capital Loans:–Short term loan maybe guaranteed (secured) by inventory or A/R or both–Loan is considered secured if specific assets, referred to as collateral, are pledged against the loan.Current Portion of Long Term Debt–Longer term loans require blended payments of principal plus interest–Portion of the principal payment due within the next 12 months is considered the current portion of the long-term debt Entry: Dr Long-term Loan Payable Cr Current Portion of Long-Term Debt. Trade Accounts Payable (trade payables):-Occur when a company buys goods or services on credit–Generally required to be paid within 30 to 60 days–Do not carry explicit interest charges and commonly thought of as “free debt”–Can sometimes be a provision for discount for early payment. Unearned Revenue / Gift Cards:-The company has received a cash payment in advance of providing the goods or services or,–The company has sold gift cards representing a performance obligation to provide goods or services equal to the value of the card–Breakage, the amount of gift cards that will never be used, is calculated and can be recognized as revenue and reduction of unearned revenue/gift card liability. Customer Loyalty Provision: –Used to encourage customers to buy from them. Two common types of loyalty programs:–Points can be redeemed only to purchase goods or services from company making sale–Points are redeemed by another party (not the company making the sale)–Under both types, points are considered to be a separate performance obligation and a portion of transaction price must be allocated to the points.Two types of warranties: Assurance type warranty:–provides assurance that the product will perform as expected –protects against any defects with the product that existed at the time of sale–Company must estimate cost expected to be incurred for warranty and record as an expense (warranty expense)–A corresponding liability (warranty provision) is also recorded. Service-type warranty:-Provides assurance beyond basic product performance –May provide protection related to wear and tear occurring subsequent to purchase and may provide some additional level of service.-Represents a separate performance obligation –revenue related to sale of warranty must be deferred until related performance obligation is satisfied; recorded as a liability (unearned warranty revenue)–Revenue from the sale of the warranty is recognized over the period covered by the warranty–Claims made are recorded as warranty expense in the period incurred. Government remittances can consist of:Property taxes, workplace safety insurance, provincial sales taxes, GST, payroll taxes. Corporate Taxes:-Based on a company’s annual net income as part of the corporate tax return (T2)–Taxes may be paid in monthly installments but the balance owing must generally be paid within two months of year end–A company has up to 6 months to file its tax return. Dividens: The most common liability corporations have to shareholders is dividends payable–Dividends are generally declared at the end of a quarter or year, once declared a liability is created and recorded as follows: Dr Dividens declared. Cr Dividens payable.
Chapter 5 Statement of cash flows: Cash: Includes both cash and cash equivalents. –Cash includes cash on hand together with demand deposits-Cash Equivalents include short term, highly liquid investments, for example:Money market funds, short term deposits, treasury bills-Cash equivalents must be convertible into known amounts of cash and be maturing within next three months. Statement of cash flows vs income: The statement of cash flows differs from the statement of income because it:–Reflects the cash basis rather than the accrual basis of accounting–Focuses on more than just operating activities – it includes investing and financing activities as well.Measures the cash flow the company in three categories:-Operating Activities -Investing Activities-Financing Activities.Operating activities:Sale of goods and services to customers–Changes to current assets and current liabilities–All other transactions not covered by financing or investing activities–Cash flows from operating activities are key because:-They are result of day to day business operations-They are the source for future debt repayments-They are the source for future dividend payments. Investing activities:–Investment, sale, or disposal of long-term assetsExamples: property, plant, equipment, long-term marketable securities.Financing activities:-Obtaining and repaying resources from shareholders and lendersExamples: shares, bonds, mortgages, notes, dividends. Direct vs Indirect Methods: –Companies may choose between the direct method and the indirect method-The only difference is in how the cash flows from operating activities are determined. Total operating cash flows are the same under both methods-The choice of method has NO effect on cash flows from investing or financing activities.Most companies prefer the indirect method for the following reasons:-Simpler to prepare-Uses information available in most accounting systems-Provides a linkage between net income and cash flows from operating activities-The indirect method is also known as the reconciliation method-Standards setters prefer the direct method; however, most public companies still use the indirect method.Under IFRS:options enable companies to present information in a way that is most informative to users:–Interest paid can be classified as an operating or financing activity–Interest and dividends received can be classified as operating or investing activities–Dividends paid can be classified as a financing activity–Classifications chosen must be applied consistently from period to period. NOT appear on the cash flow:-Company purchased assets by assuming debt or issuing shares-Company acquired the shares of another company by assuming debt or issuing shares rather than paying cash-Company repaid debt by issuing shares rather than paying debt-Since there is no cash inflow or outflow needs only to be disclosed in the notes to the financial statements.The direct method differs only in the way the operating activities section of the cash flow statement is prepared. The direct method categorizes cash flows by cash receipts and cash payments. These categories are as follows:-Receipts from customers-Payments to suppliers-Payments to employees-Payment of interest-Payment of income taxes.Cash to cash cycle:The longer a company’s cash-to-cash cycle the more pressure is placed on cash flow.Mitigating Cash Flow Challenges:Companies can resolve common cash flow challenges by taking the following measures:-Reduce the rate of growth-Shorten the cash-to-cash cycle-Increase company’s capitalization.
Chapter 6 Cash and Accounting Receivables Percentage of Credit Sales Method: Example: Company has $112,000 in credit sales and estimates that 4.5% will be uncollectible. Dr Bad Debts Expense 5,040 Cr Allowance for Doubtful Accounts 5,040.A/R are reflected at their carrying value= Gross Receivables – Allowance for Doubtful Accounts
Chapter 7 Inventory:NRV = Expected Selling Price – Estimated Costs to Make SaleGross Margin Ratio= Gross Margin / Sales Revenue. Gross Margin Estimation Method:Sales revenue x Normal cost-to-sales ratio = Cost of goods sold Can also be calculated:Beginning inventory + Purchases** – COGS = Ending Inventory
Chapter 8 Long term assets:Valuation of PP & E:An asset represents future economic benefits:-Used to generate future revenue through sales of products or services-Can be sold in the future when it is no longer of use to company Under IFRS there are two valuation models:-Cost Model – only model allowed under ASPE-Revaluation Model. Subsequent cost: Costs incurred after an asset’s purchase will be treated in one of two ways:-Capitalized – or added to the cost of the asset-Expensed – treated as a period cost.Straight line depreciation method: the simplest and most commonly used method.Units-of-production method (units-of-activity)method. Diminishing-balance method (declining-balance) method. Impairment loss: At the end of 2017 the carrying amount of an asset is $23,000. Management determines that as a result of damage to the equipment the recoverable from its future use is only $20,000. Dr. Loss on Impairment $3,000 Cr. Accumulated Impairment Losses, Equipment $3,000.Canada Revenue Agency (CRA):-Depreciation expense is not allowed to be deducted to calculate accounting income-Capital cost allowance (CCA) instead must be used to calculate taxable income-Similar to depreciation. CCA: There are a few important differences between depreciation and CCA:-The Income tax act specifies the method of depreciation that must be used, it is similar to the diminishing-balance-method-The tax act also specifies the CCA Rate that must be used. There are a few important differences between depreciation and CCA (cont.):-Residual values are ignored-The tax act determines the maximum depreciation that a company may claim on its income tax return.Intangible assets: have probable future value but may not have physical form.-Initially recorded at costs, IFRS allows for either the cost model or revaluation model to be used-Management must determine whether or not the asset has an indefinite useful life or a finite useful life-Often the legal life exceeds an asset’s useful life. Goodwill: Goodwill is a long term asset that arises when two businesses are combined.-It is the premium or excess paid by one business when it is acquiring another -Related to factors such as management expertise, corporate reputation, customer loyalty-Will contribute to the generation of revenues in future periods-Internally generated goodwill can not be recognized-Goodwill is not amortized (considered to have an indefinite useful life)-Must be reviewed annually to determine whether there is evidence that it has been impaired.
Chapter 12 Financial statement analysis: The financial statement analysis is a process of evaluating a company’s performance based on an analysis of the financial statements:-Statement of Financial Position-Income Statement-Statement of Cash Flows-Statement of Changes in Equity -Notes to the Financial Statement-It provides signals about financial health, cash flows and operating efficiency. Prospective analysis (forward-looking): Lender might make a forecast of future cash flows prior to approving a loan. Retrospective (historical) analysis to try and determine future trends: –Two major types – trend analysis and cross-sectional analysis-This method may be less reliable when something fundamental has changed in the economic environment to make it unlikely that past results will predict the future.Trend analysis: –Compares the results of the same company over a period of time, such as 3 – 10 years–Is useful for identifying patterns and changes. Cross-sectional analysis:–Compares results of two or more companies normally operating in the same industry over the same time period. Raw financial data:–Appear directly in the financial statements–Useful in a trend analysis–Requires at least two years of data for comparative purposes.Common size data: Involves converting dollar values in financial statements into percentages of a specific base amount. Limitation or ratios: Accounting Policies-Definitions of Ratios-Diversity of Operations-Seasonality-Potential for Manipulation.Caution should be exercised when using non-IFRS financial measures and industry metrics: –There are no standard definitions for these measures; management is free to define–Measures are often not comparable across companies or across periods–Information used in determining measures is unaudited.