Week 2: Financial Statements

Question 1

GAAP

Answer 1

generally accepted accounting principles
-the rules and practices for the preparation of financial statements
-different for public vs private corps
–public corp use IFRS
–private use IFRS or ASPE
-proprietorships and partnerships generally follow ASPE for external reporting
(businesses are not req to follow any standards for internal use (management accounting))

Question 2

IFRS

Answer 2

international financial reporting standards

Question 3

ASPE

Answer 3

accounting standards for private enterprises

Question 4

types of business activities

Answer 4

-operating
-investing
-financing

Question 5

4 financial statements (IFRS terminology)

Answer 5

1. income statement
   -reports revenues and expenses, for a period of time
2. statement of changes in equity (or statement of retained earnings)
   -reports the changes in each component of shareholders’ equity for a period of time
3. statement of financial position (balance sheet)
   -shows the assets, liabilities and shareholders’ equity at a specific point in time
   4.statement of cash flows
   -shows how the business obtained cash and how that cash was used for a period of time

Question 6

order of preparation of statements

Answer 6

1. income statement
2. statement of changes in equity
3. statement of financial position
4. statement of cash flows

Question 7

income statement

Answer 7

revenues
-arise from sales of products or services
-results in an increase in assets (or decrease in liabilities)
expenses
-costs of assets consumed or services used to generate revenues
-result in a decrease in assets (or increase in liabilities
profit (or loss, if negative)

revenue - expenses = profit

Question 8

statement of changes in equity

Answer 8

shows the changes in each component of shareholders equity during the period

share capital
-amounts contributed by shareholders
-may include common and preferred shares

retained earnings (or deficit, if negative)
-cumulative profits and losses retained in the company
-dividends paid to shareholders are deducted

Question 9

statement of changes in equity (cont)

Answer 9

changes in shares (eg, common shares)

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

Question 10

statement of financial position

Answer 10

assets
-resourcs owned or controlled by the business that are expected to provide future economic benefits
liabilities
-claims of lenders and other creditors against the business
shareholders equity
-claims of shareholders against the business

accounting equation:
assets = liabilities + shareholders equity

Question 11

statement of cash flows

Answer 11

reports the effects on cash of the company’s:
-operating activities
-investing activities
-financing activities

shows the net increase or decrease in cash for the period, and where it occurred

Question 12

relationships between statements

Answer 12

examples
-the profit from the IS is reported in the SCE
-the SCE details the changes in the balances of the shareholders equity accounts, which are shown on the SFP
-the SCF details the changes in the cash balance as a result of the previous three statements

Question 13

statements vs annual reports

Answer 13

-financial statements are made up of 6 parts
-an assurance report (eg, an auditor’s report)
-the 4 statements
notes to the statements (extra details and information)

-if public, also need extra info sometimes contained in an annual report (or a 10k). at a minimum an AR will also include a management discussion and analysis (MD&A) where a specific set of questions are answered to provide info for investors