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Adm 1340: Everything you need

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Marc Tasse

Chapter 2: Financial Accounting A Further Look At Financial Statements Study Objectives 1. Identify the sections of a classified statement of financial position. 2. Identify and calculate ratios for analyzing a company’s liquidity, solvency, and profitability. 3. Describe the framework for the preparation and presentation of financial statements. Classified Statement of Financial Position A classified statement of financial position generally contains the following standard classifications: Assets -Current assets, Investments, Property Plant and equipment, Intangible Assets, Goodwill. Liabilities and shareholder's equity -Current Liabilities, Non-current Liabilities, shareholder's equity, Share Capital, Retained earnings. Discussion Question The statement of financial position is sometimes listed in order of liquidity, and sometimes order of reverse liquidity. Does the ordering of these items affect the objective of financial reporting? Current Assets • Assets expected to be converted to cash or used in the business within one year or one operating cycle: – Operating cycle is the average time it takes to go from cash to cash in producing revenue • Usually listed in order of liquidity: – Reverse order of liquidity also possible Current Assets (continued) • Examples include cash, short-term (trading) investments, accounts receivable, merchandise inventory, and prepaid expenses Non-Current Assets • Assets not expected to be converted to cash or used in the business within one year or one operating cycle • All assets not considered current • Examples: – Long-term investments – Property, plant, and equipment – Intangible assets and goodwill – Other assets Long-Term Investments • Investments in: – Debt securities: loans, notes, bonds, mortgages – Equity securities: shares of other companies • These assets are normally not intended to be sold within the next year Property, Plant, and Equipment • Tangible assets with relatively long useful lives • Used in operating the business • Examples: – Land – Buildings – Equipment • Usually listed in order of permanency Depreciation • Allocation of the purchase price of property, plant, and equipment over their estimated useful lives: – Companies systematically assign a portion of the cost of an asset to expense each year – Under IFRS, this allocation is referred to as depreciation for property, plant, and equipment, and amortization for intangible assets – Under ASPE, amortization is often used instead of depreciation Depreciation (continued) • The cost of long-lived assets with indefinite lives is not depreciated (e.g. land) • Accumulated depreciation account shows the total amount of depreciation taken to date • The difference between the cost of the asset and its accumulated depreciation is referred to as the carrying amount of the asset. Intangible Assets • Non-current assets that do not have physical substance and represent a privilege or a right held by the company • Examples: – Patents, copyrights, trademarks, licenses – Goodwill: excess price paid on acquisition of another company • Generate a future value to the company Current Liabilities • Obligations that are to be paid within the coming year or one operating cycle • Examples: – Bank indebtedness – Accounts payable – Accrued liabilities – Bank loan/notes payable – Current maturities of long-term debt Non-Current Liabilities • Debts expected to be paid or settled after one year • Examples: – Bank loan/notes payable – Lease obligations – Pension and benefit obligations – Deferred income tax liabilities • Usually accompanied by extensive notes to the financial statements Shareholder’s Equity • Share capital: – Investment of cash (or other assets) in the company by shareholders in exchange for preferred or common shares • Retained earnings: – Cumulative profits kept for use in the company Discussion Question • What do you think would be the main asset, liability, and equity items for a Tim Horton's franchise? Using the Financial Statements • Specific tools can be used to analyze the financial statements • Ratio analysis expresses the relationships between sele
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