1 Overview of Corporate Financial Reporting 1-1
Dollar Store Business Is No Small Change 1-1
Introduction to Financial Accounting 1-3
What Is Financial Accounting? 1-3
Users and Uses of Financial Accounting 1-4
Who Needs an Understanding of Financial Accounting and Why? 1-4
Forms of Busine...
Contents
1 Overview of Corporate Financial Accrual Versus Cash Basis of Accounting 2-8
What Is the Difference between the Cash Basis of
Reporting 1-1 Accounting and the Accrual Basis of Accounting? 2-9
The Accounting Equation Template Approach 2-10
Dollar Store Business Is No Small Change 1-1 What Is the Accounting Equation Template Approach
Introduction to Financial Accounting 1-3 to Recording Transactions? 2-10
What Is Financial Accounting? 1-3 Using the Accounting Equation Template Approach
Users and Uses of Financial Accounting 1-4 to Analyze and Record Transactions 2-12
Who Needs an Understanding of How Is the Accounting Equation Used to Analyze
Financial Accounting and Why? 1-4 and Record Transactions? 2-12
Forms of Business Organization 1-9 What Are the Limitations of the Accounting
What Is a Corporation? 1-9 Equation Template Approach? 2-24
What Differentiates a Corporation from Other Forms of Financial Statements 2-26
Business? 1-10 How Do We Know if the Company Was
Activities of a Business 1-10 Profitable during the Accounting Period? 2-26
What Are the Three Categories of Business How Can We Tell if the Equity Position of Shareholders
Activities? 1-10 Changed during the Accounting Period? 2-27
What Are Examples of Financing Activities? 1-11 How Do We Determine the Company’s Financial
What Are Examples of Investing Activities? 1-12 Position at the End of the Accounting Period? 2-27
What Are Examples of Operating Activities? 1-12 How Can We Tell if the Company’s Cash Position
Financial Reporting 1-13 Changed during the Accounting Period? 2-28
What Information Is Included in a Set of Financial Using Ratios to Analyze Financial Statements 2-30
Statements? 1-13 How Do We Determine the Company’s Profit Margin? 2-31
What Is the Reporting Objective of the Statement of How Do We Determine How Effective the Company
Income? What Does It Include? 1-14 Has Been at Generating a Return on
What Is the Reporting Objective of the Statement of Shareholders’ Equity? 2-31
Changes in Equity? What Does It Include? 1-17 How Do We Determine How Effective the Company Has
What Is the Reporting Objective of the Statement of Been at Generating Profits Using Its Assets? 2-32
Financial Position? What Does It Include? 1-18
What Is the Reporting Objective of the Statement
of Cash Flows? What Does It Include? 1-22
3 Double-Entry Accounting and the
What Type of Information Is in the Notes to a Company’s Accounting Cycle 3-1
Financial Statements? 1-24
Balancing the Books When Bartering 3-1
2 Analyzing Transactions and The Double-Entry System 3-3
How Does the Double-Entry Accounting System Work
Their Effects on Financial and How Does It Overcome the Limitations of the
Statements 2-1 Template Method? 3-3
The Normal Balance Concept 3-4
A Growing Appetite for Financial Transparency 2-1 What Is the Normal Balance Concept and How
Introduction 2-3 Is It Used? 3-4
Accounting Standards 2-3 Understanding the Accounting Cycle 3-7
What Are Accounting Standards? 2-3 What Are the Steps in the Accounting Cycle? 3-7
Do All Canadian Companies Use the Same The Chart of Accounts 3-8
Accounting Standards? 2-3 What Is the Chart of Accounts? 3-8
Who Sets the Accounting Standards Used in Can Companies Change Their Chart of Accounts
Canada? 2-4 and What Are the Implications If They Do? 3-10
Qualitative Characteristics of Financial Information 2-5 Opening Balances 3-10
How Do the Standard Setters Determine What Is the Difference between Permanent
What Constitutes Useful Financial Information? 2-5 and Temporary Accounts? 3-10
, CONTENTS xiii
Transaction Analysis and Recording 3-11 How Does the Statement of Cash Flows Differ from the
How Are Transactions Identified? 3-11 Statement of Income? 5-5
How Are Transactions Recorded in the General Understanding the Statement of Cash Flows 5-7
Journal? 3-11 What Are the Categories of Cash Flows Presented in
Why Are Transactions Also Recorded in the General the Statement of Cash Flows and What Are Typical
Ledger? 3-18 Transactions Included in Each Category? 5-7
What Is the Purpose of Preparing a Trial Balance? 3-19 Why Is So Much Significance Placed on Cash Flows
Adjusting Entries 3-21 from Operating Activities? 5-8
What Are Adjusting Entries and Why Are They What Is the Difference between the Direct and Indirect
Necessary? 3-21 Methods of Preparing Cash Flows from Operating
What Is the Purpose of Preparing an Adjusted Trial Activities? 5-9
Balance? 3-26 What Are the Options for Classifying Cash Flows Related
Preparing Financial Statements and Closing Entries 3-26 to Interest and Dividends Paid and Received? 5-10
What Are Closing Entries and Why Are They Are There Investing and Financing Activities That Do Not
Necessary? 3-26 Appear on the Statement of Cash Flows? 5-11
Preparing the Statement of Cash Flows Using
4 Revenue Recognition and the the Indirect Method 5-12
How Is a Statement of Cash Flows Prepared Using the
Statement of Income 4-1
Indirect Method for Operating Activities? 5-12
Preparing the Statement of Cash Flows Using
Expanding the Cast to Bring in the Cash 4-1
the Direct Method 5-22
Revenue and Its Significance 4-2
How Is a Statement of Cash Flows Prepared Using the
What Is Revenue and Why Is It of Significance to Users? 4-3
Direct Method for Operating Activities? 5-22
Why Is Understanding How a Company
Interpreting Cash Flow Information 5-25
Recognizes Revenue of Significance to Users? 4-4
How Can the Information Presented in a Statement
Revenue Recognition 4-4
of Cash Flows Be Used to Manage a Company? 5-25
When Are Revenues Recognized? 4-5
What Can Cash Flow Patterns Tell Us? 5-27
Other Revenue Recognition Issues 4-13
Financial Statement Analysis 5-29
How Do the Right of Returns, Warranties, Consignment,
How Do We Determine What Portion of a Company’s
and Third-Party Sale Arrangements Affect
Liabilities Could Be Met with Cash Flows from
Revenue Recognition? 4-13
Operating Activities? 5-29
Statement of Income Formats 4-15
How Do We Determine How Much Net Free
How Does a Single-Step Statement of Income Differ
Cash Flow a Company Generates? 5-30
from a Multi-Step Statement of Income? 4-16
Statement of Comprehensive Income 4-18
What Is Comprehensive Income and How Does 6 Cash and Accounts Receivable 6-1
It Differ from Net Income? 4-18
Presentation of Expenses by Nature or by Function 4-19 Will That Be Cash or Credit? 6-1
How Does a Statement of Income Presenting Expenses Introduction 6-3
by Function Differ from One Presenting Expenses by Why Are Cash and Accounts Receivable of Significance
Nature of the Items? 4-19 to Users? 6-3
Financial Statement Analysis 4-21 Cash 6-4
What Is Meant by Earnings per Share, and How Is It What Is Included in the Definition of “Cash”? 6-4
Calculated? 4-22 At What Amount Is Cash Reflected on the Statement
of Financial Position? 6-4
5 The Statement of Cash Flows 5-1 Internal Control 6-4
Who Is Responsible for an Organization’s
The Dash for Cash 5-1 Internal Controls? 6-4
Introduction 5-3 What Are the Main Principles of Internal Control? 6-5
How Is “Cash” Defined? 5-3 What Are the Limitations of Internal Control? 6-7
Why Is the Statement of Cash Flows Bank Reconciliation 6-7
of Significance to Users? 5-4 What Is the Purpose of a Bank Reconciliation and Why
Differences between the Statement of Cash Flows Must It Be Prepared? 6-7
and the Statement of Income 5-5 How Is a Bank Reconciliation Prepared? 6-8
,xiv CONTENTS
Accounts Receivable 6-12 At What Value Is Inventory Reflected on the Statement of
What Are Accounts Receivable? 6-12 Financial Position? 7-20
Why Do Companies Sell on Account? 6-12 How Is the Lower of Cost or Net Realizable Value
Are There Any Additional Costs from Selling on Applied to Inventory? 7-21
Account? 6-13 What Types of Inventory Valuation Errors Can Happen
Bad Debts 6-14 and What Impact Do They Have on the Financial
At What Amount Are Accounts Receivable Reflected Statements? 7-21
on the Statement of Financial Position? 6-14 Gross Margin 7-22
The Allowance Method 6-16 What Is Gross Margin and Why Is It a Key Measure? 7-22
What Is the Allowance Method of Internal Controls and Inventory 7-23
Accounting for Bad Debts? 6-16 What Principles of Internal Control Can Be Applied to
Estimating Bad Debts under the Allowance Method 6-19 Inventory? 7-24
How Are Bad Debts Estimated under Financial Statement Analysis 7-25
the Allowance Method? 6-19 How Often Does the Company Sell through Its
The Direct Writeoff Method 6-23 Inventory? 7-25
What Is the Direct Writeoff Method and How Many Days Did It Take to Sell through the
When Is It Acceptable to Use It? 6-23 Company’s Inventory? 7-26
Cash-to-Cash Cycle 6-24 How Can Inventory Amounts Be Estimated? 7-27
How Do Companies Shorten Their Cash-to-Cash Appendix: Inventory Cost Formulas under
Cycle? 6-24 the Periodic Inventory System 7-28
Financial Statement Analysis 6-26 How Are Cost of Goods Sold and Ending Inventory
What Is Liquidity and How Is It Assessed? 6-26 Determined Using the Specific Identification, Weighted-
How Effective Has the Company Been at Average, and First-In, First-Out Cost Formulas under a
Collecting Its Accounts Receivable? 6-28 Periodic Inventory System? 7-28
7 Inventory 7-1 8 Long-Term Assets 8-1
Mini Cars; Maxi Inventories 7-1 A Canadian Icon’s Long-Term Assets 8-1
Introduction 7-3 Introduction 8-3
What Is Inventory? 7-3 What Are the Various Types of Long-Term Assets? 8-3
Why Is Inventory of Significance to Users? 7-4 Why Are Long-Term Assets of Significance to Users? 8-4
Types of Inventory 7-5 Valuation of Property, Plant, and Equipment 8-5
What Are the Major Classifications of Inventory? 7-5 At What Amount Are Property, Plant, and Equipment
What Goods Are Included in a Company’s Reflected on the Statement of Financial Position? 8-5
Inventory? 7-6 What Is Included in “Cost”? 8-6
Inventory Systems 7-7 What Happens When a Company Purchases
What Is a Periodic Inventory System? 7-8 Multiple Assets for a Single Price? 8-6
What Is a Perpetual Inventory System? 7-9 How Do We Account for Costs Subsequent to
What Are the Key Distinctions between Purchase? 8-7
Periodic and Perpetual Inventory Systems? 7-11 Can a Company Carry Property, Plant, and
How Does Management Decide Which Inventory Equipment at Their Fair Values? 8-8
System to Use? 7-11 Depreciation 8-8
Cost Formulas 7-13 Why Do We Depreciate Property, Plant, and
What Costs Are Included in Inventory? 7-13 Equipment? 8-8
What Are Cost Formulas and Why Are They Depreciation Methods 8-9
Necessary? 7-13 What Are the Methods Used to Depreciate Property,
How Are Cost of Goods Sold and Ending Inventory Plant, and Equipment? 8-9
Determined Using the Specific Identification, How Do We Choose a Depreciation Method? 8-16
Weighted-Average, and First-In, First-Out Cost How Do We Record Depreciation Expense? 8-16
Formulas under a Perpetual Inventory System? 7-16 Does an Asset’s Carrying Amount Tell Me What
How Do Companies Determine Which Cost It Is Worth? 8-17
Formula to Use? 7-18 How Do We Determine Depreciation for
Inventory Valuation 7-19 Partial Periods? 8-17
, CONTENTS xv
Is Depreciation Expense Recorded Every Period How Are Unearned Revenues Accounted for? 9-9
for Each PP&E Asset? 8-18 How Are the Liabilities Related to Gift Cards
Does the Choice of Depreciation Method Affect Accounted for? 9-11
Corporate Income Taxes? 8-18 How Are the Liabilities Related to Loyalty
Changes in Depreciation Methods 8-19 Programs Accounted for? 9-12
Can We Change Depreciation Estimates and How Are Warranties Accounted for? 9-14
Methods? 8-19 Current Liabilities Arising from Transactions
Impairment 8-22 with Employees 9-16
What Does It Mean If an Asset Is Impaired? 8-22 What Current Liabilities Arise from Transactions
Disposal of Property, Plant, and Equipment 8-23 with Employees? 9-16
How Do We Account for Disposals of Property, How Are Payroll Costs Accounted for? 9-17
Plant, and Equipment? 8-23 Why Are a Company’s Wage Costs Greater
Intangible Assets 8-25 Than What It Pays Its Employees? 9-19
What Are Intangible Assets? 8-25 Current Liabilities Arising from Transactions
At What Amount Are Intangible Assets Reflected on the with the Government 9-20
Statement of Financial Position? 8-27 What Current Liabilities Arise from Transactions
How Is Accounting for Intangible Assets Different from with Government? 9-20
Accounting for Property, Plant, and Equipment? 8-28 When Are a Company’s Taxes Due? 9-20
Goodwill 8-28 Current Liabilities Arising from Transactions
What Is Goodwill? 8-28 with Shareholders 9-21
At What Amount Is Goodwill Reflected on What Current Liabilities Arise from Transactions
the Statement of Financial Position? 8-30 with Shareholders? 9-21
How Is Goodwill Treated Differently Financial Statement Analysis 9-21
from Other Long-Term Assets? 8-30 How Do We Determine How Long a Company
Financial Statement Analysis 8-31 Takes to Pay Its Suppliers? 9-22
How Do We Determine the Relative Age of the
Company’s Long-Term Assets? 8-31
How Do We Assess How Effectively the Company 10 Long-Term Liabilities 10-1
Has Used Its Long-Term Assets? 8-32
Avoiding Pension Turbulence 10-1
Introduction 10-3
9 Current Liabilities 9-1 Why Are Long-Term Liabilities of Significance to
Users? 10-3
Customer Loyalty Is in the Books 9-1 Long-Term Liabilities Arising from
Introduction 9-3 Transactions with Lenders 10-4
Why Is the Distinction between Current and What Long-Term Liabilities Arise from
Non-Current Liabilities of Significance to Users? 9-3 Transactions with Lenders? 10-4
Valuation Methods 9-4 How Are Long-Term Loans and Mortgages
At What Amount Are Current Liabilities Reflected on the Accounted for? 10-4
Statement of Financial Position? 9-4 What Are Bonds and How Do They Differ from
Current Liabilities Arising from Transactions with Long-Term Loans? 10-8
Lenders 9-4 How Are Bonds Priced in the Marketplace? 10-10
What Current Liabilities Arise from Transactions How Does the Pricing of Bonds Affect a Company’s
with Lenders? 9-5 Interest Expense? 10-12
Current Liabilities Arising from Transactions with Long-Term Liabilities Arising from Transactions
Suppliers 9-8 with Other Creditors 10-14
What Current Liabilities Arise from Transactions What Long-Term Liabilities Arise from Transactions
with Suppliers? 9-8 with Other Creditors? 10-14
Why Are Accounts Payable Sometimes Considered Why Do Companies Lease Capital Assets? 10-14
“Free Debt”? 9-8 How Are Leases Accounted for? 10-15
Current Liabilities Arising from Transactions Long-Term Liabilities Arising from Transactions
with Customers 9-9 with Employees 10-16
What Current Liabilities Arise from Transactions What Long-Term Liabilities Arise from
with Customers? 9-9 Transactions with Employees? 10-16
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