1 - Purpose & Use of Financial Statements

Question 1

Internal users:

Answer 1

Internal Users: have access to internal accounting information to help them make the decisions required to run the company.

Example:senior management), as well as managers and directors in finance, marketing, human resources, production, and other functional areas within a company.

Question 2

External users:

Answer 2

External users are not involved in managing a company and do not have access to accounting information other than that which is available to the general public.

• Investors, Lenders, Creditors

Question 3

Investors (Shareholders):

Answer 3

Investors use accounting information to make decisions to buy, hold, or sell their ownership interest

Question 4

Lenders (Creditors):

Answer 4

Lenders, such as bankers, use accounting information to evaluate the risks of lending money.

Question 5

Creditors:

Answer 5

Creditors, such as suppliers, use accounting information to decide whether or not to grant credit (sell on account) to a customer.

Question 6

Investors, lenders, and other creditors are considered to be the ______ users of ______ information.

Answer 6

Investors, lenders, and other creditors are considered to be the primary users of accounting information.

Question 7

There are three common forms of business organization:

Answer 7

There are three common forms of business organization: proprietorships, partnerships, and corporations.

Question 8

A proprietorship is:

Answer 8

A proprietorship is a business owned by one person, known as a proprietor. It is often called a “sole” proprietorship because there is a single owner.

• life of the proprietorship is limited to the life of the owner
• business income is reported as self-employment income and taxed on the owner’s personal income tax return (but kept separate)

Question 9

Unlimited liability:

Answer 9

The owner receives any income, suffers any losses, and is personally liable (responsible) for all debts of the business. This is known as unlimited liability.

Question 10

A partnership is:

Answer 10

A partnership is a business owned by more than one person.

• partnership agreement is necessary
• each partner generally has unlimited liability for all debts of the partnership (but limited liability is possible)
• income of the partnership is reported as self-employment income and taxed on each partner’s personal income tax return.
• usually to organize professional services: practices of lawyers, doctors, architects, engineers, and accountants.

Question 11

A corporation is:

Answer 11

A corporation is a business organized as a separate legal entity owned by shareholders (most complex)

• you receive shares to indicate your ownership claim
• you and the company are separate reporting entities under the reporting entity concept
• corporation is a separate legal entity, its life is indefinite
• Shareholders are not responsible for corporate debts unless they have provided a personal guarantee to the lender for them.

Question 12

Shares are also known as

Answer 12

stocks

Question 13

Public corporations are required to distribute their _____ ________ to investors, lenders, other creditors, other interested parties, and the general public on a ________ and _______ basis.

Answer 13

Public corporations are required to distribute their financial statements to investors, lenders, other creditors, other interested parties, and the general public on a quarterly (every three months) and annual basis.

Question 14

Private corporations also issue _____, but they do not make them available to the ______ ______ nor are they traded on ______ stock exchanges.

Answer 14

Private corporations also issue shares, but they do not make them available to the general public nor are they traded on public stock exchanges.

• ‘closely held’
• not as easy to raise capital as public
• do not need to disclose financial statements

Question 15

Accounting principles are also commonly known as accounting ______ or accounting _______.

Answer 15

Accounting principles are also commonly known as accounting standards or accounting policies.

Question 16

GAAP includes broad _____ and _______ as well as _____ and ______ that have substantive authoritative support and agreement about how to record and report economic events.

Answer 16

GAAP includes broad policies and practices as well as rules and procedures that have substantive authoritative support and agreement about how to record and report economic events.

Question 17

Publicly traded corporations must use _______, a set of global accounting standards developed by the International Accounting Standards Board.

Answer 17

Publicly traded corporations must use International Financial Reporting Standards (IFRS), a set of global accounting standards developed by the International Accounting Standards Board.

Question 18

Private corporations, whose users can have different needs than those of publicly traded corporations, have a choice between using ______ or _____.

Answer 18

Private corporations, whose users can have different needs than those of publicly traded corporations, have a choice between using IFRS or Accounting Standards for Private Enterprises (ASPE).

Question 19

Reasons that a private company may adopt IFRS:

Answer 19

Reasons that a private company may adopt IFRS:

• it is considering accessing public debt or equity markets in the future
• it wants to be able to compare its financial results with competitors that use IFRS
• it has foreign subsidiaries that are required to use IFRS and it wants a common set of accounting standards across the company.

Example: Sobeys

Question 20

Proprietorships and partnerships are privately owned (even though they are not private corporations), these businesses generally follow _____.

Answer 20

Proprietorships and partnerships are privately owned (even though they are not private corporations), these businesses generally follow ASPE.

Question 21

All businesses are involved in three types of activity:

Answer 21

All businesses are involved in three types of activity: financing, investing, and operating.

Question 22

Two primary ways of raising outside funds for corporations are:

(1)
(2)

Answer 22

Two primary ways of raising outside funds for corporations are:

(1) issuing (selling) shares (equity financing) in exchange for cash (or other assets)
(2) borrowing money (debt financing)

• inflow

Question 23

Common shares is the term used to describe:

Answer 23

Common shares is the term used to describe the amount paid by investors for shares of ownership in a company.

• just one class or type of shares (collectively known as share capital)
• owners = shareholders

Question 24

Payments that distribute a portion of

income to shareholders are called _______ and are normally in the form of cash, although they can also take other forms.

Answer 24

Payments that distribute a portion of
income to shareholders are called dividends and are normally in the form of cash, although they can also take other forms.

• outflow

Question 25

Corporations can also _______ shares that have been previously issued.

Answer 25

Corporations can also repurchase shares that have been previously issued.

• result in an outflow of cash

Question 26

Amounts owed to lenders and other creditors—in the form of debt and other obligations—are called _________.

Answer 26

Amounts owed to lenders and other creditors—in the form of debt and other obligations—are called liabilities.

Question 27

Operating line of credit is a pre-arranged ____ ______ for a _______ amount that allows a company to draw more money than it has on deposit in its bank account.

Answer 27

Operating line of credit is a pre-arranged bank loan for a maximum amount that allows a company to draw more money than it has on deposit in its bank account.

• overdrawing you OLC results in a liability called bank indebtedness

Question 28

Long-term debt can include ______ payable, _____ payable, ______ ______ obligations, and other types of debt securities borrowed for longer periods of time.

Answer 28

Long-term debt can include mortgages payable, bonds payable, finance lease obligations, and other types of debt securities borrowed for longer periods of time.

Question 29

Corporations may borrow using a short-term ____ _____ payable (also known as a note payable) or using ______ debt.

Answer 29

Corporations may borrow using a short-term bank loan payable (also known as a note payable) or using long-term debt.

• inflow
• outflow when repaying debts

Question 30

In the event of nonpayment, the lender or creditor may force the company to ____ assets to pay its debts.

Answer 30

In the event of nonpayment, the lender or creditor may force the company to sell assets to pay its debts.

Question 31

The payment of interest on borrowed funds may be treated as a ______
activity or as an _____ activity under IFRS.

Answer 31

The payment of interest on borrowed funds may be treated as a financing
activity or as an operating activity under IFRS.

• both an outflow of cash

Ex. North West paid interest of $5 million in 2016 and elected to report this as a financing activity.

Question 32

Investing activities involve the purchase (or sale) of ______ assets that a company needs in order to _____.

Answer 32

Investing activities involve the purchase (or sale) of long-lived assets that a company needs in order to operate.

Question 33

Assets are resources that a company _____ or ______.

Answer 33

Assets are resources that a company owns or controls.

Question 34

The purchase of long-lived assets such as furniture, equipment, computers, vehicles, buildings, and land are all examples of what kind of investing activity.

Answer 34

Property, plant, and equipment

Question 35

Property, plant, and equipment is also known as _____ assets or _____ assets.

Answer 35

Property, plant, and equipment is also known as capital assets or fixed assets.

Question 36

Goodwill results when a company ______ another company, paying a price that is ______ than the value of the purchased company’s net identifiable assets.

Answer 36

Goodwill results when a company acquires another company, paying a price that is higher than the value of the purchased company’s net identifiable assets.

Question 37

Intangible assets are assets that do not have any ______ _______ themselves but represent a ______ or a ____ granted to, or held by, a company.

Answer 37

Intangible assets are assets that do not have any physical substance themselves but represent a privilege or a right granted to, or held by, a company.

Ex. patents, copyrights, and trademarks

Question 38

For most companies, the vast majority of investing activities are normally related to the _______ and ______ of ____ _____, rather than investments in the shares or debt securities of other companies.

Answer 38

For most companies, the vast majority of investing activities are normally related to the purchase and sale of long-term assets, rather than investments in the shares or debt securities of other companies.

Question 39

Interest revenue is also known as _____ income.

Answer 39

Interest revenue is also known as finance income.

Question 40

Sources of income that are common to many businesses are _____ revenue, _____ revenue, _____ revenue, and ____ revenue. (SSIR)

Answer 40

Sources of income that are common to many businesses are sales revenue, service revenue, interest revenue, and rent revenue.

Question 41

This right to receive money in the future is called an _______ ________.

Answer 41

This right to receive money in the future is called an account receivable.

• shorter-term asset (investing activity)

Question 42

Accounts receivable are ______ because they represent an economic resource—cash—which will be received when the amounts owed are eventually collected.

Answer 42

Accounts receivable are assets because they represent an economic resource—cash—which will be received when the amounts owed are eventually collected.

Question 43

Supplies are another example of a _____-term asset used in day-to-day operations.

Answer 43

Supplies are another example of a short-term asset used in day-to-day operations.

• office and cleaning supplies, but do not include any items that are purchased to be resold to customers

Question 44

Items that are held for future sale to customers are called _______ or merchandise ________.

Answer 44

Items that are held for future sale to customers are called inventory or merchandise inventory.

Question 45

Cost of the inventory sold is an expense called _______.

Answer 45

Cost of the inventory sold is an expense called cost of goods sold (COGS).

Question 46

Expenses are ______ in economic resources, normally the costs of assets that are consumed or services that are used in the process of _______ revenues.

Answer 46

Expenses are decreases in economic resources, normally the costs of assets that are consumed or services that are used in the process of generating revenues.

Question 47

Interest expense is commonly known as ______ ______.

Answer 47

Interest expense is commonly known as finance costs.

Question 48

When a company purchases inventory or supplies on credit (on account) from suppliers, the obligations to pay for these goods are called ______ _______.

Answer 48

When a company purchases inventory or supplies on credit (on account) from suppliers, the obligations to pay for these goods are called accounts payable.

Question 49

When a company purchases inventory or supplies on credit (on account) from suppliers it is a ______ liability.

Answer 49

When a company purchases inventory or supplies on credit (on account) from suppliers it is a short-term liability.

Question 50

When _______ exceed ________, net income results.

Answer 50

When revenues exceed expenses, net income results.

Question 51

Financing activities involve either _____ or ______ financing. Activities related to equity financing include:

Answer 51

Financing activities involve either equity or debt financing.

Question 52

Equity financing include:

Answer 52

Equity financing include issuing shares to shareholders, paying dividends to shareholders, or repurchasing shares.

Question 53

Debt financing include:

Answer 53

Debt financing include borrowing cash from lenders by issuing debt, or conversely, using cash to repay debt.

Question 54

Investing activities include purchasing and disposing of _______ assets such as _____ and ______ investments.

Answer 54

Investing activities include purchasing and disposing of long-lived assets such as property, plant, and equipment and long-term investments.

Question 55

Operating activities result from _______operations and include ______ and expenses and changes in related accounts, including _______, _______, ______, and ________ accounts.

Answer 55

Operating activities result from day-to-day operations and include revenues and expenses and changes in related accounts, including receivables, supplies, inventory, and payables accounts.

Question 56

Income statement: reports ______ and ______, showing how a company’s _______ performed during _______.

Answer 56

Income statement: reports revenues and expenses, showing how a company’s operations performed during a period of time.

• reports the success or failure
• lists the company’s revenues first and then its expenses

Question 57

Statement of changes in equity: shows the _______ in each component of ______ _________ (including common ____ and retained ______), as well as total ______, during a period of time.

Answer 57

Statement of changes in equity: shows the changes in each component of shareholders’ equity (including common shares and retained earnings), as well as total equity, during a period of time.

• starts with the account balances at the beginning of the period and ends with the account balances at the end of the period.

Question 58

Statement of financial position: presents a picture of what a company ______ (its _____), what it ______ (its _______), and the resulting ________ (its ______’ ____) at a specific point in time.

Answer 58

Statement of financial position: presents a picture of what a company owns (its assets), what it owes (its liabilities), and the resulting difference (its shareholders’ equity) at a specific point in time.

Question 59

Statement of cash flows: shows ______ a company obtained _______ during a period of time and _______ that cash was ______.

Answer 59

Statement of cash flows: shows where a company obtained cash during a period of time and how that cash was used.

Question 60

Quarterly financial statements are also called _____ financial statements.

Answer 60

Quarterly financial statements are also called interim financial statements.

Question 61

An accounting time period that is one year in length is called a ______ year.

Answer 61

An accounting time period that is one year in length is called a fiscal year.

Question 62

The income statement is also commonly known as the statement of ________ or statement of ______ and _______.

Answer 62

The income statement is also commonly known as the statement of earnings or statement of profit and loss.

Question 63

Investors are interested in a company’s past income because these numbers provide information that may help predict ______ _______.

Answer 63

Investors are interested in a company’s past income because these numbers provide information that may help predict future income.

Question 64

Total shareholders’ equity includes:

(1) ____ _____
(2) _____ ______

Answer 64

Total shareholders’ equity includes:

(1) share capital
(2) retained earnings

*can also include other accounts

Question 65

Share capital represents amounts _______ by the shareholders in exchange for ______ of ______.

Answer 65

Share capital represents amounts contributed by the shareholders in exchange for shares of ownership.

Question 66

Retained earnings represent the _______ amounts of ______ ________ that have been retained in the corporation.

Answer 66

Retained earnings represent the cumulative amounts of net income that have been retained in the corporation.

• the income that has not been distributed as dividends to shareholders that has accumulated since the company’s date of incorporation.

Question 67

If retained earnings is negative— that is, net losses have exceeded net income—it is known as a ______.

Answer 67

If retained earnings is negative— that is, net losses have exceeded net income—it is known as a deficit.

Question 68

Dividends are not reported as an expense in the _______ ________.

Answer 68

Dividends are not reported as an expense in the income statement.

They are not an expense incurred to generate revenue.

Question 69

Dividends are a distribution of ________ earnings (or a distribution of accumulated net income) to ________ and reported in the statement of __________.

Answer 69

Dividends are a distribution of retained earnings (or a distribution of accumulated net income) to shareholders and reported in the statement of changes in equity.

Question 70

Statement of financial position reports _____ and ______ to those ______ at a specific point in time.

Answer 70

Statement of financial position reports assets and claims to those assets at a specific point in time.

• AKA Balance Sheet

Question 71

Claims to assets are subdivided into two categories:

1) claims of ______ and other _____
2) claims of ______

Answer 71

Claims to assets are subdivided into two categories:

1) claims of lenders and other creditor (liabilities)
2) claims of shareholders (shareholders’ equity)

Question 72

Basic accounting equation:

Answer 72

Assets = Liabilities + Shareholders’ Equity

The relationship is where the name balance sheet comes from. Assets must be in balance with the claims to those assets by both creditors (liabilities) and shareholders (shareholders’ equity).

Question 73

The ___________ is dated at a specific point in time.

The ______ statement, ________, and __________ cover a period of time.

Answer 73

The statement of financial position is dated at a specific point in time.

The income statement, statement of changes in equity, and statement of cash flows cover a period of time.

Question 74

External users such as lenders and other creditors analyze a company’s statement of financial position to determine the likelihood that they will be ______.

Answer 74

External users such as lenders and other creditors analyze a company’s statement of financial position to determine the likelihood that they will be repaid.

Question 75

The main function of a statement of cash flows is to provide financial information about the ____ _______ and ______ ________ of a business for a specific period of time.

Answer 75

The main function of a statement of cash flows is to provide financial information about the cash receipts and cash payments of a business for a specific period of time.

Question 76

Statement of cash flows reports the effects on cash of a company’s:

(1) _______ activities
(2) ________ activities
(3) _______ activities during the period of time

Answer 76

Statement of cash flows reports the effects on cash of a company’s:

(1) operating activities
(2) investing activities
(3) financing activities during the period of time

Question 77

Numbers in parentheses indicate cash _______.

Answer 77

Numbers in parentheses indicate cash outflows.

Question 78

Because each financial statement depends on information contained in another statement, financial statements must be prepared in the following order (1-4)

Answer 78

Because each financial statement depends on information contained in another statement, financial statements must be prepared in the following order:

(1) income statement;
(2) statement of changes in equity;
(3) statement of financial position;
(4) statement of cash flows

Question 79

Public corporations must produce an ______ report each year, which includes _______ information, as well as useful ________ information about the company, for the previous ______ year.

Answer 79

Public corporations must produce an annual report each year, which includes financial information, as well as useful non-financial information about the company, for the previous fiscal year.

Non-financial information may include the company’s mission, goals and objectives, products, and people.

• MD&A is an important section

Question 80

Management discussion and analysis (often abbreviated as MD&A provides management’s perspective on the ______ results and can provide important ______ for interpreting them.

Answer 80

Management discussion and analysis (often abbreviated as MD&A provides management’s perspective on the financial results and can provide important context for interpreting them.