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MOS 1023 Chapter 1: The Purpose and Use of Financial Statements > Chapter 1 (1.4) > Flashcards

Chapter 1 (1.4) Flashcards

Financial Statements

1
Q

What are the two main types of users of accounting information?

A

Internal users and external users

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2
Q

What are users (especially external users) particularly interested in regarding a company?

A

Financial position, financial performance, and capital structure

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3
Q

What does a company’s financial position include?

A
  • Assets
  • Liabilities
  • Shareholders’ equity
  • As well as its cash flow
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4
Q

What does a company’s financial performance include?

A
  • Revenues
  • Expenses
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5
Q

What does a company’s capital structure include?

A
  • Components of liabilities
  • Shareholders’ equity
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6
Q

Why is it customary to arrange info ( financial position, financial performance, and capital structure) into 4 different financial statements?

A

For external reporting purposes, it is the backbone of accounting

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7
Q

What is the primary purpose of the statement of income?

A

Reports revenues and expenses, showing how a company’s operations performed during a period

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8
Q

What does the statement of changes in equity show?

A

Changes in each component of shareholders’ equity (includ. common shares & retained earnings), as well as total equity during a period of time

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9
Q

What is presented in the statement of financial position?

A

Picture of what company owns (assets), owes (liabilities), and resulting difference (shareholders’ equity) at a specific point in time

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10
Q

What information does the statement of cash flows provide?

A

Where a company obtained cash during a period of time and how that cash was used

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11
Q

What additional information is reported in financial statements?

A

Notes to the financial statements that are cross-referenced to the 4 statements

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12
Q

What is the role of explanatory notes in financial statements?

A

Clarify information presented and provide additional detail

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13
Q

Why are notes to the financial statement important?

A

They are essential to understanding a company’s financial performance and position

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14
Q

Are there more than 4 financial statements?

A

Yes the 4 are the most commonly provided by publicly traded companies but there are other ones as well

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15
Q

What is a statement of comprehensive income?

A

Prepared when a public company reports other comprehensive income earned from certain items

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16
Q

What do private corporations prepare instead of a statement of changes in equity?

A

Statement of retained earnings

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17
Q

How often must public corporations produce financial statements?

A

Annually and quarterly

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18
Q

Why do some companies produce financial statements monthly?

A

For internal use

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19
Q

What is an accounting time period that is one year in length called?

A

Fiscal year

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20
Q

Fill in the blank: Quarterly financial statements are also called _______.

A

Interim financial statements

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21
Q

What is the common fiscal year end date for many companies?

A

December 31

Some companies choose different dates based on their inventory or operations.

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22
Q

Why do some companies choose to end their fiscal year when operations are low?

A

It allows for easier gathering of accounting information and counting of inventory, therefore reducing the cost of counting

Managers prefer to gather accounting data when business is slow.

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23
Q

What is a typical slow period for retailers after the holiday season?

A

After the Christmas/New Year’s holiday period

This period allows for easier inventory counting.

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24
Q

What fiscal year end does lululemon use?

A

Sunday closest to January 31

Many companies have unique fiscal year end dates.

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25
Q

What is the fiscal year end for Jean Coutu?

A

Saturday closest to February 29 or March 1

This variation helps in managing their accounting processes.

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26
Q

What fiscal year end does Canadian Tire follow?

A

Saturday closest to December 31

This allows them to align their fiscal reporting with seasonal business patterns.

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27
Q

What is the fiscal year end for Lions Gate Entertainment?

A

March 31

Different companies have different fiscal year ends based on their operations.

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28
Q

What is the fiscal year end for Shaw Communications?

A

August 31

This date helps them manage their accounting during a specific business cycle.

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29
Q

What fiscal year end do most governments and government-related entities use?

A

March 31

This date is commonly adopted for public sector accounting.

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30
Q

What are the 4 primary financial statements?

A
  1. Statement of income
  2. Statement of changes in equity
  3. Statement of financial position
  4. Statement of cash flows
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31
Q

What is a statement of income?

A

The main financial statement that reports a company’s financial performance during the period.

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32
Q

What is a statement of changes in equity?

A

A financial statement that summarizes the changes in total shareholders’ equity, as well as each component of shareholders’ equity, for a specific period of time.

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33
Q

What is a statement of financial position?

A

(also known as balance sheet) A financial statement that reports the assets, liabilities, and shareholders’ equity at a specific date.

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34
Q

What is a statement of cash flows?

A

A financial statement that provides information about the cash inflows (receipts) and cash outflows (payments) for a specific period of time.

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35
Q

What is a fiscal year?

A

An accounting period that is one year long

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36
Q

What does the statement of income report?

A

The success or failure of the company’s operations for a period of time.

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37
Q

How often can the statement of income be prepared?

A

Annually, quarterly, and/or monthly.

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38
Q

How does a statement of income indicate its reporting the results of operations for a period of one month?

A

Month Ended (insert month) (date), (year).

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39
Q

What comes first in the statement of income: expenses or revenue?

A

Revenues first and then its expenses

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40
Q

What is calculated by deducting expenses from revenues?

A

Income (or loss) before income tax.

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41
Q

Where is the income tax expense shown in the statement of income?

A

Separately, but immediately following the income (or loss) before the income tax line.

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42
Q

How is net income (or net loss) determined?

A

By deducting the income tax expense from income (or loss) before income tax.

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43
Q

What are alternative terms for the statement of income?

A
  • Income statement
  • Statement of earnings
  • Statement of profit and loss
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44
Q

What does the heading of every statement identify?

A
  • The company
  • The type of statement
  • The time period covered by the statement
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45
Q

Why is another line sometimes added to the heading of a statement?

A

To indicate the unit of measure. When it is used, this fourth line usually indicates that the amounts presented are in thousands or millions of dollars.

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46
Q
A
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47
Q

What is the significance of cents in financial statements?

A

Cents are not included in financial statements but are used in internal accounting records.

Financial statements typically round amounts to the nearest dollar, thousand dollars, or million dollars for reporting purposes.

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48
Q

Why do companies round amounts in their external reports?

A

To condense and simplify information for easier understanding by the reader.

For example, North West rounds amounts to the nearest thousand dollars.

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49
Q

How can financial statement amounts be rounded for financial reporting purposes?

A

Normally rounded to the nearest dollar, thousand dollars, or million dollars, depending on the size of the company

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50
Q

Does the presentation format of data in financial statements matter?

A

No, companies use various formats based on preference and reader comprehension.

This may include presenting data in one or two columns.

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51
Q

Why are financial statement users interested in a company’s net income?

A

Because these numbers provide information that may help predict future income

Users can use the statement of income to determine if a company was profitable, in that its revenues exceeded its expenses

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52
Q

What is income required for (in terms of funding the company)?

A

Income is required to generate cash to fund growth, repay debt, and pay dividends

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53
Q

What do investors expect from a company’s performance?

A

If expected that company will be even more successful in the future, and this success will translate into a higher share price, you should buy Sierra’s shares.

Buy and sell shares based on their expectations about the future performance of a company

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54
Q

Why do creditors analyze the statement of income?

A

To predict a company’s future profitability and ability to repay loans.

Banks lend money based on their belief that the company will be able to repay it.

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55
Q

What if a bank thought a loan wouldn’t be repaid?

A

It would not lend the money

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56
Q

How do users determine if a company is profitable?

A

By analyzing the statement of income to see if revenues exceed expenses.

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57
Q

What must a bank’s loan officer predict before lending money?

A

Whether the company will stay in business long enough, be profitable enought, and to generate cash required to repay the loan and interest charges.

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58
Q

How does reporting recurring and increasing income affect a company?

A

It makes it easier for the company to raise additional cash through borrowing or by issuing shares.

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59
Q

What is shareholder’s equity?

A

The shareholders’ claim on total assets, represented by the investments of the shareholders (share capital) and undistributed earnings (retained earnings) generated by the company

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60
Q

What is share capital?

A

Shares representing the ownership interest in a corporation. If only one class of shares exists, it is known as common shares

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61
Q

What changes does the statement of changes in equity show?

A

The changes in total shareholders’ equity for the period, as well as the changes in each component of shareholders’ equity during the period

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62
Q

How does the statement of changes in equity start and end?

A

Starts with the account balances at the beginning of the period and ends with the account balances at the end of the period

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63
Q

What is the time period for the statement of changes in equity?

A

Same as for the statement of income—for the year, quarter, or month

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64
Q

What is the ownership interest in a company known as?

A

Shareholders’ equity

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65
Q

What does total shareholders’ equity include in its simplest form?

A
  1. share capital
  2. retained earnings
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66
Q

What can shareholder’s equity include aditionally?

A

Other types of accounts, such as accumulated other comprehensive income

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67
Q

What does share capital represent?

A

Represents amounts received from the shareholders when the shares were initially issued by the company

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68
Q

Are common shares optional?

A

No, all companies must have common shares

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69
Q

What are the 2 classes of shares?

A
  1. Common shares
  2. Preferred shares
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70
Q

Together, what do the 2 classes of shares combine to form?

A

The company’s share capital

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71
Q

What is the calculation of changes in common shares?

A

Common shares, beginning of period + common shares issued (sold) - common shares repurchased = Common shares, end of period

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72
Q

What does the statement of changes in equity starts with?

A

The beginning balance of share capital—common shares

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73
Q

What does the statement of changes in equity then goes on to add?

A

Any changes in share capital due to new shares issued (or to deduct any changes in share capital due to shares repurchased) during the period to arrive at the ending balance of share capital

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74
Q

What are retained earnings?

A

The amount of accumulated net income (less net losses, if any) from the prior and current periods that has been retained and reinvested in the corporation for future use and not distributed to shareholders as dividends.

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75
Q

What do retained earnings represent?

A

The cumulative amounts of net income that have been retained in the corporation. Aka the income that has not been declared as dividends to shareholders that has accumulated since the company was incorporated

76
Q

What happens if the amount of retained earnings is negative?

A

Net losses have exceeded net income—it is known as a deficit.

77
Q

What is a deficit?

A

A negative balance in retained earnings resulting from cumulative net losses exceeding cumulative net income.

78
Q

In addition to showing the changes in share capital during the period, what does the statement of changes in equity also show?

A

The amounts and nature of changes in retained earnings.

79
Q

What does the column for retained earnings starts with?

A

The beginning balance of retained earnings

80
Q

How are changes in retained earnings calculated?

A

Retained earnings, beginning of period + (revenues - expenses = net income or - loss) - dividends declared = Retained earnings, end of period

81
Q

What happens to the changes in retained earnings if a company reports a net loss?

A

It is deducted (rather than added) to arrive at the ending balance of retained earnings

82
Q

Why are dividends not reported as an expense in the statement of income?

A

They are not an expense incurred to generate revenue. Instead, dividends are a distribution of retained earnings (or a distribution of accumulated net income) to shareholders and are reported in the statement of changes in equity

83
Q

What happens in the statement of changes in equity when there is only one class of shares—common?

A

The statement often just uses common shares rather than share capital as the title of the first column.

84
Q

What are the 3 columns in the Statement of Changes in Equity?

A
  1. Common shares
  2. Retained earnings
  3. Total equity
85
Q

Does a statement of changes in equity only add vertically?

A

Adds both vertically (down; see “Total Equity” column) and horizontally (across; see “Balance, October 31” row)

86
Q

What is the order of items presented in the statement of changes in equity?

A

Varies in public company financial statements

87
Q

What can financial statement users evaluate by monitoring the statement of changes in equity for a publicly traded corporation?

A

The use of equity for financing purposes

Ex: they can determine the amount of shares that were issued during the period. More importantly, the statement of changes in equity allows users to monitor a company’s dividend practices

88
Q

Why is it helpful for users to use the statement of changes in equity to determine whether the company issued or repurchased shares during the period?

A

The issue of shares is one way a company obtains funds to expand or to repay debt, while share repurchases generally indicate that the company has surplus cash that it can return to shareholders.

89
Q

If a company is profitable, at the end of each period what must its board of directors decide?

A

What portion of its retained earnings, if any, to pay to shareholders as dividends.

90
Q

Why in theory, could a company pay all of its current period net income, but few choose to do it?

A

Because they want to retain part or all of the net income in the business so the company can expand when it chooses to or so it will have enough cash to repay debt

91
Q

What should users keep in mind when using the statement of changes in equity to determine how much of the company’s retained earnings was declared as dividends?

A

Companies that are growing, or have debt to repay, normally preserve the cash they generate and pay little or no dividends.

92
Q

What do private companies reporting under ASPE prepare instead of a statement of changes in equity?

A

A statement of retained earnings

93
Q

What does the statement of retained earnings focus on?

A

The changes to retained earnings, rather than presenting all of the changes that affected shareholders’ equity during the period

94
Q

What does the statement of financial position report?

A

Reports assets and claims to those assets at a specific point in time

95
Q

What is the statement of financial position also known as?

A

The balance sheet, especially for companies following ASPE

96
Q

Claims to assets are subdivided into what two categories?

A
  1. Claims of creditors
  2. Claims of shareholders
97
Q

What are claims of creditors called?

A

Liabilities

98
Q

What are claims of shareholders, the owners of the company, called?

A

Called shareholders’ equity

99
Q

What is the basic accounting equation?

A

Assets = Liabilities + Shareholders’ Equity

100
Q

Why is the relationship between assets, liabilities, and shareholder’s equity where the name balance sheet comes out?

A

Assets must be in balance with the claims to those assets by both creditors (liabilities) and shareholders (shareholders’ equity)

101
Q

What does the right-hand side of the accounting equation show?

A

The right-hand side of the equation—the liabilities and equities—also shows how the assets have been financed

102
Q

How could financing of assets occured?

A

Through debt by borrowing from creditors or through equity by investments from shareholders (share capital) or net income retained in the company (retained earnings)

103
Q

What is the difference between the statement of financial position and the statement of income, statement of changes in equity, and statement of cash flows?

A

The statement of financial position is dated at a specific point in time. The statement of income, statement of changes in equity, and statement of cash flows cover a period of time.

104
Q

How should the 3 different types of entries be organized on the statement of financial position (balance sheet)?

A
  1. Assets
  2. Liabilities and Owner’s Equity (liabilities first then owner’s equity)
105
Q

Of these assets: cash, accounts receivable, supplies, prepaid insurance, and equipment, which one would be presented as an investing activity in the statement of cash flows?

A

Purchase of equipments

106
Q

What is prepaid insurance?

A

Premiums paid in advance for insurance coverage in future periods

107
Q

Of these assets: cash, accounts receivable, supplies, prepaid insurance, and equipment, which are examples of operating activities?

A
  • Accounts receivable
  • Supplies
  • Prepaid insurance
108
Q

How should equipment be presented on a statement of financial position?

A

Net of any related depreciation expenses

109
Q

What is deferred revenue?

A

Cash received in advance for which the service has not yet been provided and is therefore still owed

110
Q

Of these liabilities: accounts payable, salaries payable, interest payable, deferred revenue, and a bank loan payable, which one is an example of a financing activity?

A

Bank loan payable

111
Q

Of these liabilities: accounts payable, salaries payable, interest payable, deferred revenue, and a bank loan payable, which are examples of liabilities that arose from operating activities?

A

Everything except bank loan payable

112
Q

How are items listed in the statement of financial position ordered?

A

Can be ordered in different ways. Some companies present these items in a different order, to better represent the nature of their business

113
Q

Why do external users such as creditors analyze a company’s statement of financial position?

A

To determine the likelihood that they will be repaid

114
Q

What do external users analyze in a company’s statement of financial position?

A

Carefully evaluate the nature of the company’s assets and liabilities.
Ex: does the company have assets that could easily be sold, if required, to repay its debts? Do the company’s assets exceed its liabilities in both the short and long term?

115
Q

Why do internal users such as managers use the statement of financial position?

A

To determine whether inventory is adequate to support future sales and whether cash on hand is sufficient for immediate cash needs

116
Q

What do internal users look at/analyze in a company’s statement of financial position?

A

Look at the relationship between total liabilities and shareholders’ equity to determine whether they have the best proportion of debt and equity financing

117
Q

What do users of financial statements look at in a statement of financial position when analyzing a company’s assets and why?

A

Evaluate the % of assets financed by liabilities and the % financed using shareholders’ equity. Gives the user perspective on whether the company relies more on its creditors or investors to finance its assets.

118
Q

What is the main function of a statement of cash flows?

A

To provide financial information about the cash receipts and cash payments of a business for a specific period of time

119
Q

To help investors, creditors, and others in their analysis of a company’s cash position, the statement of cash flows reports the effects on cash of a company’s what 3 activities?

A
  1. operating activities
  2. investing activities
  3. financing activities
    all during the period of time
120
Q

Operating activities result from transactions that create…..

A

Revenues and expenses

121
Q

Investing activities involve the purchase or sale of……

A

Long-lived resources such as property, plant, and equipment that a company needs to operate and the purchase or sale of investments in long-term securities

122
Q

Financing activities involve borrowing (or repaying)…..

A

Long-term debt from (to) lenders and issuing (or repurchasing) shares or distributing dividends to shareholders

123
Q

How are the 3 activities ordered in the statement of cash flows?

A

Operating activities are normally presented first in the statement of cash flows, followed by investing and financing activities

124
Q

What does the statement of cash flows show of the amount of cash in a company and over what period of time?

A

The statement shows the net increase or decrease in cash during the period, and the cash amount at the end of the period

125
Q

What do positive numbers in a statement of cash flows indicate?

A

Indicate cash inflows. Numbers in parentheses indicate cash outflows

126
Q

What can users of the statement of cash flows compare when evaluating the amount of cash provided by a company’s operating activities?

A

Compare it with the amount of cash required for its investing and financing activities

127
Q

What 3 important questions does the statement of cash flows answer?

A
  1. Where did cash come from during the period?
  2. How was cash used during the period?
  3. What was the change in the cash balance during the period?
128
Q

How can the statement of cash flows answer where cash came from, how it was used, and the change in balance by summarizing cash flows as operating, investing, or financing activities?

A

A user of this statement can then determine the amount of cash provided (or used) by operating activities, the amount of cash provided (or used) by investing activities, and the amount of cash provided (or used) by financing activities.

129
Q

What are operating activities in the context of statement of cash flows?

A

Operating activities are activities the company performs to generate net income

130
Q

How do operating activities affect the balance on statement of cash flows?

A

It is desirable for operating activities to provide cash (positive balance) rather than use cash (negative balance)

131
Q

How can a positive source of cash from operating activities help a company?

A

Can help fund the investment in additional assets to grow the business and/ or fund debt repayments or dividend payments.

132
Q

What are investing activities in the context of statement of cash flows?

A

Investing activities include the purchase or sale of longlived assets used in operating the business, or the purchase or sale of long-term investment securities

133
Q

How do investing activities affect the balance on statement of cash flows?

A

For most growing companies, investing activities use cash (negative balance) rather than provide cash (positive balance), because they spend more cash to purchase or replace more assets than they receive from disposing of assets they have finished using

134
Q

What are financing activities in the context of statement of cash flows?

A

Financing activities include borrowing or repaying money, issuing or repurchasing shares, and paying dividends.

135
Q

How do financing activities affect the balance on statement of cash flows?

A

For most growing companies, financing activities provide cash (positive balance) rather than use cash (negative balance)

136
Q

Are most growing companies able to repay financing?

A

No, have to borrow money or issue shares rather than be able to repay financing. As companies mature, they are able to repay financing, and this balance becomes negative (cash used) more often than positive

137
Q

Why is it said that the statements are interrelated?

A

Because the results on some statements are used as data for other statements

138
Q

What does the statement of changes in equity, in part, depend on?

A

On the results of the statement of income:
net income amount is added to the beginning amount of retained earnings as part of determining ending retained earnings—one of the components of total shareholders’ equity shown in the statement of changes in equity

139
Q

How are the statement of financial position and statement of changes in equity interrelated?

A

The ending balances of each component of shareholders’ equity (common shares and retained earnings), as well as total shareholders’ equity at the end of the month reported on the statement of changes in equity are reported in the shareholders’ equity section of the statement of financial position

140
Q

How is the statement of cash flows and the statement of financial position interrelated?

A

The ending amount of cash shown on the statement of cash flows agrees with the amount of cash shown in the assets section of the statement of financial position

141
Q

The net income from the statement of income also appears on _____

A

The statement of changes in equity

142
Q

The balance from month end on the statement of changes in equity also appears on ______

A

The statement of financial position as “Total shareholder’s equity”

143
Q

Cash from the statement of financial position appears on _______

A

The statement of cash flow from the same time period as stated on the statement of financial position

144
Q

Give examples of statement titles varying between companies.

A

There are a number of statement titles that mean the same thing: Statement of earnings= Statement of income
Statement of changes in shareholders’ equity= Statement of changes in equity
Balance sheet=Statement of financial position

145
Q

What does it mean to present consolidated financial statements?

A

North West presents consolidated financial statements. This means that the financial results include not only North West but also all the companies it owns or controls

146
Q

Why are financial results of companies consolidated?

A

Consolidated (combined) for reporting purposes, individual accounting records and financial statements are also produced for each specific company

147
Q

Why is it important that although financial results of companies can be consolidated, that they keep individual statements/records for each company?

A

To accurately assess the performance and financial position of each company, it has to be possible to distinguish each company’s activities from the transactions of any other, even if the companies are related. This is another application of the reporting entity concept

148
Q

How many years at least are public corporations required to present their financial statements for?

A

2 fiscal years

149
Q

What are financial statements that cover more than one period called and what are they used for?

A

“Comparative statements” and help users compare the financial position and performance of one accounting period with that of the prior period(s)

150
Q

What are examples of expenses that North West reported on their statement of income?

A

A variety of expenses related to operating the business:
- Selling
- Operating & administrative expenses
- Interest expense

151
Q

“Cost of sales” is another term for…?

A

Cost of goods sold

152
Q

How is income before income tax determined?

A

Total expenses are deducted from revenue

153
Q

What is another term for income before income tax?

A

Earnings before income tax

154
Q

What do you get after subtracting income tax from income before income tax?

A

Net income aka net earnings

155
Q

What happens when you add issued shares to the opening balance on the statement of changes in equity?

A

Balance at the end of year increases

156
Q

How can a company’s retained earnings increase and decrease on the statement of changes in equity?

A

Increase: net income
Decrease: declaration of dividends

157
Q

On the statement of changes in equity, what should the net income figure in the retained earnings column be equal to?

A

The same as the net income reported on the statement of income

158
Q

No matter what order the financial statements are presented in, which statement should be prepared first and why?

A

The statement of income must be prepared first, because the net income (or loss) for the period is needed to prepare the statement of changes in equity

159
Q

What additional column can companies include on the statement of changes in equity?

A

A column for accumulated other comprehensive income (abbreviated by North West in its actual financial statements as “AOCI”)

160
Q

What are consolidated financial statements?

A

Financial statements that present the accounts of both the parent company and its subsidiaries on a combined basis

161
Q

What is accumulated other comprehensive income (AOCI)?

A

The cumulative change in shareholders’ equity that results from the gains and losses that bypass net income (recorded in other comprehensive income) but affect shareholders’ equity.

162
Q

Why do is AOCI sometimes included on the statement of changes in equity?

A

Companies under IFRS may have complex items similar to revenues and expenses but, are not used to determine net income. Rather, they are included in other comprehensive income. If they have other comprehensive income (or loss) during the period, it is + to (or - from in the case of a loss) a shareholders’ equity account called accumulated other comprehensive income.

163
Q

How is the the retained earnings account similar to the AOCI account?

A

Retained earnings account accumulates net income over time and the AOCI account is also a shareholders’ equity account that accumulates other comprehensive income over time

164
Q

What are examples of assets included on a statement of financial position (balance sheet)?

A
  • Cash
  • Accounts receivable
  • Inventory
  • Prepaid expenses
  • Property and equipment
  • Goodwill
  • Intangible assets
  • Other types of assets
165
Q

What are examples of liabilities included on a statement of financial position (balance sheet)?

A
  • Accounts payable
  • Accrued liabilities
  • Income tax payable
  • Long-term debt, as well as other types of liabilities
166
Q

The ending balances of share capital, retained earnings, accumulated other comprehensive income, and other items taken from the statement of changes in equity agree to (are equal to) what items?

A

The same items shown in the shareholders’ equity section of the statement of financial position

167
Q

How can the reasons for increases in cash be determined by?

A

Examining the statement of cash flows

168
Q

How did North West company spend considerable cash on investing activities?

A

Opening new stores, renovating existing stores, and replacing equipment: new property and equipment, new point-of-sale, merchandise management and workforce management systems

169
Q

Is cash provided from financing activities always providing the vast majority of funding for a company?

A

No
Ex: The cash provided by operating activities—$127,120 thousand—provided the vast majority of the funding for North West’s investing and financing activities

170
Q

On the statement of cash flows, where is the net increase (net result of net result of the sources and uses of cash during the year) added to?

A

This increase in cash is added to the opening balance on the statement of cash flows

171
Q

Where can the ending balance of cash in the statement of cash flows be traced to?

A

To the ending balance reported in the statement of financial position

172
Q

Public corporations must produce an __________ each year

A

Annual report

173
Q

What does the annual report that public corporations release include?

A

The 4 financial statements and other important info such as:
- A management discussion and analysis
- Independent auditor’s report
- The notes to the financial statements
- Statement of management responsibility for the financial statements
- The financial statements introduced in this chapter, which are reported for at least two years
- Historical summary of key financial ratios and indicators

174
Q

No analysis of a company’s financial situation is complete without a review of what 3 items?

A
  1. A management discussion and analysis
  2. Independent auditor’s report
  3. The notes to the financial statements
175
Q

What is management discussion and analysis often abbreviated to?

A

MD&A

176
Q

What is the purpose of the MD&A?

A

Provides management’s perspective on the financial results and can provide important context for interpreting them.

177
Q

What information is included in an MD&A that provides insights on the future of a company?

A

Management also provides a forward-looking perspective (how the company’s operations and results are expected to change in the future)

178
Q

Who is the auditor’s report prepared by?

A

An independent auditor who is appointed by the shareholders on the recommendation by the board of directors

179
Q

What does the auditor’s report provide?

A

Provides shareholders with an opinion on whether the company’s financial statements are fairly presented in accordance with the applicable accounting principles (IFRS for public companies)

180
Q

What will the auditor’s report identify for public company’s?

A

Key audit matters, which are the matters that the auditor concluded were of most significance in the audit of the financial statements

181
Q

What are examples of key audit matters identified in an auditor’s report?

A
  • Areas involving significant risks of misstatement
  • Significant risks that have been identified by the auditor
  • Financial statement items involving significant management estimates
  • The effect on the audit of significant events or transactions that have taken place
182
Q

Why is reading the auditor’s report before reviewing a company’s financial statements important?

A

It will provide users with important additional context

183
Q

What is the purpose for the notes to the financial statements?

A

Clarify the financial statements and provide additional detail

184
Q

T or F: Information in the notes to the financial statements does not have to be quantifiable (numeric).

A

True

185
Q

What are examples of notes to the financial statements?

A
  • Descriptions of the significant accounting policies and methods used in preparing the statements
  • Explanations of uncertainties and contingencies
  • Various statistics and details too voluminous to be included in the statements
186
Q

Why are notes to the financial statements important?

A

The notes are essential to understanding a company’s operating performance

MOS 1023 Chapter 1: The Purpose and Use of Financial Statements (6 decks)

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