ACC 100 Study Guide - Final Guide: Current Asset, Current Liability, Deferral
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Understanding Basic Financial Statements
During the accounting cycle, the accounting system is used to track, organize and record the financial
transactions of an organization. At the close of each period, the information is used to prepare the
financial statements, which are usually composed of a balance sheet (statement of financial position);
income statement (statement of income and expenses); statement of retained earnings (owners’
equity); and a statement of cash flow.
A sample set of financial statements) is shown below.
Financial statements prepared by a Chartered Accountant with a Review Engagement Report or
Audit Opinion attached, are prepared (unless noted otherwise) according to "Canadian generally
accepted accounting principles", or GAAP. Financial statements that are only compiled or that have a
"Notice to Reader" attached, are not necessarily prepared according to GAAP.
The balance sheet is based on the equation: assets = liabilities + owners' equity. It indicates
everything the company owns (assets), everything the company owes to creditors (liabilities) and the
value of the ownership stake in the company (shareholders' equity, or capital). The balance sheet
date is the ending date of the period or year, and is a continuation of the amounts recorded since the
inception of the company or organization. The balance sheet is a "snapshot" of the financial position
of the company at the balance sheet date and shows the accumulated balance of the accounts.
Assets and liabilities are separated between current and long-term, where current items are those
items, which will be realized or paid, within one year of the balance sheet date. Typical current assets
are cash, prepaid expenses, accounts receivable and inventory.
An income statement is a type of summary flow report that lists and categorizes the various revenues
and expenses that result from operations during a given period - a year, a quarter or a month. The
difference between revenues and expenses represents a company's net income or net loss. The
amounts shown in the income statement are the amounts recorded for the given period - a year, a
quarter or a month. The next period’s income statement will start over with all amounts reset to zero.
While the balance sheet shows accumulated balances since inception, the income statement only
shows the amounts earned or expensed during the period in question.
Statement of Retained Earnings
The statement of retained earnings shows the amount of accumulated earnings that have been
retained within the company since its inception. At the end of each fiscal year-end, the amount of net
income or loss is added to the opening amount of retained earnings to arrive at the closing retained
earnings. Retained earnings can be decreased by such items as dividends paid to shareholders. On
the sample financial statements shown below, the statement of retained earnings is combined with
the income statement presentation.
Statement of Cash Flow
The statement of cash flow shows all sources and uses of a company's cash during the accounting
period. Sources of cash listed on the statement include revenues, long-term financing, sales of non-
current assets, an increase in any current liability account or a decrease in any current asset account.
Uses of cash include operating losses, debt repayment, equipment purchases and increases in
current asset accounts.
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XYZ COMPANY LIMITE
JUNE 30, 2002
UNAUDITED - See "Notice to Reader
Cash $ 11,552 $ --
Accounts receivable 42,970 50,595
Deposits and prepaid expenses 2,942 2,688
Inventory 159,144 156,657
PROPERTY, PLANT AND EQUIPMENT (Note 2) 59,890 76,318
INVESTMENTS -- 45,001
$ 276,498 $ 331,259
Bank overdraft $ -- $ 9,474
Bank loan -- 60,000
Accounts payable and accrued liabilities 82,053 91,343
Long-term debt - current portion 25,200 --
Income tax payable 14,387 --
DUE TO SHAREHOLDER (Note 3) 51,591 231,791
LONG-TERM DEBT (Note 4) 86,100 --
STATED CAPITAL (Note 5) 1 1
RETAINED EARNINGS (DEFICIT) 17,166 (61,350)
$ 276,498 $ 331,259
The accompanying summary of significant accounting policies and notes are an integral part of these financial statements.
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