Chapter 8 - Financial Statements

Question 1

What is Capital Cost Allowance (CCA) and how much CCA may be claimed in the first and last year of a holding period?

CCA is the amount that an owner of an income producing asset is allowed to deduct as an expense for Income Tax purposes as a result of ownership of that depreciable asset. Only 1/2 of the ordinary CCA maybe claimed in the first year. No CCA may be claimed in the year of sale.

Question 2

What is a balance sheet?

It is a financial statement listing assets, liabilities, and owners equity at a specific point of time. It is also known as a statement of financial position or Statement of Assets and Liabilities.

Question 3

A Generally Accepted Accounting Principle known as COST PRINCIPLE states that the historical cost of asset must be reflected in a company’s financial statement.

Question 4

Define book value?

Book value is the original cost of a non-less all depreciation claimed to date.

Question 5

Current Assets will be converted into cash, sold, or consumed within ONE year or the NORMAL operating cycle of a business, whichever is longer. Current assets may include cash, marketable securities, accounts receivable, inventories, and prepaid EXPENSES

Question 6

What is the book value in terms of a mortgage, and when is it equal to the face value of a mortgage.

The book value is the:
Original Face Value less Amount of Principle Repayment

Or the mortgage amount outstanding at a particular point in time

At origination, the book value and face value are the same.

Question 7

Define accrual basis.

Accrual basis is an accounting procedure that recognizes revenues at the time it is earned, as opposed to when it is actually received.
The method ties in to the revenue recognition principle.

Question 8

When is revenue recognized under Cash Basis of accounting.

At time when cash is received not when earned.

Question 9

Is the following statement regarding corporation’s

The directors are primarily liable to the company

Question 10

How does one apply the consistency principle in accounting.

Same method of recording accounting transactions must be used in subsequent accounting periods Must be GAAP compliant.

Question 11

Sole Proprietorship

One individual
Unlimited Liability- can be sued for all personal and business assets

Tax - do your personal tax return. Cannot separate from personal from business earnings

Question 12

General Partnership (GP)

Similar to Sole Proprietorship
But:
2 plus partners - cannot separate business from personal

Liability - Unlimited

• all owners are personally liable for all business debts incurred by partnership
• creditors may collect from personal assets of Both partners

Tax
GP itself is NOT subject to income tax.
Each partner must claim income/loss on their personal income tax.

Question 13

Limited Partnership (1+ plus GP partners - UNLIMITED LIABILITY cannot separate business from personal

1+ plus Limited Partnership (LP). - LIMITED LIABILITY - is limited to their investment. They are much like a Silent Partner or Investor.

It is GENERAL Partners (GP) who run the business.

LP have NO right to take part in day to day operations.

Tax
LP itself is NOT subject to income tax.
Each partner must claim income/loss on their personal income tax based on share of business. Income is Pro-rated based on their business ownership %

1+ plus GP partners - UNLIMITED LIABILITY cannot separate business from personal

1+ plus Limited Partnership (LP). - LIMITED LIABILITY - is limited to their investment. They are much like a Silent Partner or Investor.

It is GENERAL Partners (GP) who run the business.

LP have NO right to take part in day to day operations.

Tax
LP itself is NOT subject to income tax.
Each partner must claim income/loss on their personal income tax based on share of business. Income is Pro-rated based on their business ownership %

Question 14

Corporation

Corporation - is a “person” under law - a SEPARATE LEGAL ENTITY

Never Dies - corporations exist until terminated by an act of All shareholders

Public - shares traded on stock exchanges

Private - does not trade on public exchanges

Shareholders liability to their own Equity; fi NOT own assets of the corporation- they own shares ( and earn Dividends or Capital Gains from selling shares

Board of Directors manages the company, NOT shareholders

Liability-

• liability limited to corporation
• can Sue or be Sued
• Can acquire, hold, and dispose of assets

Tax

• Taxable entity
• has its own income status
• the CORPORATION is subject to income tax

Question 15

PREC - Personal Real Estate Corporation

Limited liabilities- personal assets protected

The licence remains personally liable 
Benefits
- business taxation 
- income splitting 
- tax deferral 
-lower tax rates for corporations

Question 16

Corporate Search

Make sure the corporation exists.
Status, address, incorporation, names of registered directors / officers
When last reports filed
Previous names of corp

Question 17

GAAP Principles

1. Cost (Historical Cost) Principle
2. Revenue Recognition Principle
3. Matching Principle
4. Objectivity Principle
5. Consistency Principle
6. Materiality Principle

Question 18

Cost (Historical Cost) Principle

Relates To ASSETS

Record the AMOUNT YOU PAID for an asset at the time of purchase. Not the Market Value.

WHAT YOU ACTUALLY PAID- verifiable by Receipts.

Question 19

Revenue Recognition Principle

This principle is ABOUT REVENUE

REVENUE should be Recognized (put into the financial statement) when earned, not when cash received.

Accrual basis of accounting
— NOT “cash method”

Subject clauses removed - the Revenue can be recorded and earned even if received in a future year.

Question 20

Matching Principle

About Expenses and Revenues

Expenses should be recognized and deducted in the same period as the revenues they generated.

Matching EXPENSES to REVENUES

Recognized when incurred, not when paid.

Question 21

Objectivity Principle

All amounts must be objective ( unbiased) and verifiable i.e. by government CRA

Is closely aligned to the cost principle

The best way to ensure objectivity in accounting transactions is to record the amount of consideration given up at the date of transaction. RECORD WHAT YOU PAID NOT LIKE FMV

Question 22

Consistency Principle

Once a principle is adopted. It should be used in future years.

Allows for comparisons between years and firms. .

The changes to accounting principles should only be made where the changes results in providing more relevant and useful information to the user of Financial Statements

Question 23

Materiality Principle

Low cost items like office supplies ( assets) may be expensed immediately (not a material consideration in any significant decisions)

Bigger expense maybe a VEHICLE depreciation used to expense.

An exception to the Matching Principle

The financial reports only have to include information that will be significant (material) to the users.

Question 24

Fiscal Year

A business can choose the start and end date for its fiscal year, but once specified, cannot change it at will.

Cannot be changed at will

Personal Jan 1 to Dec 31

Corporations can set their own F/Y

Question 25

Book Value

Original cost less Depreciation

Question 26

CCA Rule

1st Year - only 1/2 half of available CCA % can be deducted

Last Year Rule - NOTHING can be deducted

Question 27

Trust

Beneficial Interest (family trust)

REIT

No taxation at the trust level. Distribution at individual level is taxed.

Liability is Limited

Whereas, Corporations paid tax, distribution of dividends are also taxable.

Question 28

Accounting is the systematic recording, reporting, and analysis of financial transactions.

Ultimate purpose : to aid make decision making.