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Kieso, Weygandt, Warfi eld, Young, Wiecek, McConomy
INTERMEDIATE ACCOUNTING: RAPID REVIEW
Eleventh Canadian Edition, Volume 1: Chapters 1–12
CHAPTER 1 T HE C ANADIAN FINANCIAL Elements of Financial Statements
R EPORTING E NVIRONMENT Assets: Represent economic benefit to the entity; entity controls the
benefit; benefit results from past transaction or event
Liabilities: Represent a present duty; the entity cannot avoid it; results
and Financial Reporting from a past transaction or event
Equity: Residual interest in assets after deducting liabilities, also de-
Accounting identifies, measures, and communicates financial infoscribed as net worth
tion about economic entities to users of financial statements.
Revenues: Increases in economic resources from ordinary business
Objective of Financial Reporting activities
• To provide information to stakeholders so they can make relevantpenses: Decreases in economic resources from ordinary revenue-
generating activities of the business
decisions in allocating resources. Gains/Losses: Increases/decreases in equity from peripheral or inci-
should have equal access to all relevant information. dental transactions
Comprehensive Income: Net income and all other changes in equity
Standard Setting except for owners’ investments and distributions
• A common set of standards and procedures is called generally
accepted accounting principles (GAAP).
• GAAP for Canadian private companies is referred to as AccountiFoundational Principles
Standards for Private Enterprises (ASPE).
• International GAAP is referred to as International Financial
RECOGNITION/ PRESENTATION AND
Reporting Standards (IFRS). DERECOGNITION MEASUREMENT DISCLOSURE
1. Economic entity 5. Periodicity 10. Full disclosure
Challenges Facing Financial Reporting Are: 2. Control 6. Monetary unit
• impact of government regulation on capital markets 3. Revenue recognition Going concern
• the principles versus rules debate regarding GAAP and realization 8. Historical cost
• impact of technology 4. Matching 9. Fair value
• standard setting in a political environment
• increasing importance of ethics and ethical behaviour
• developing an integrated framework for business reporting
• tradeoffs may exist
• the costs of providing information must be weighed againtsefiCHAPTER 3 T HE A CCOUNTING INFORMATION
S YSTEM AND M EASUREMENT ISSUES
CHAPTER 2 C ONCEPTUAL F RAMEWORK
U NDERLYING F INANCIAL R EPORTING • FinancialAccounting idenes,records,classifi es,andinterpretstrans-
actions related to an enterprise.
• Debits and credits are used to describe where entries are made.
OBJECTIVES CHARACTERISTICS CHARACTERISTICS • The equality of debits and credits is the basis for the double entry
system of recording transactions.
Useful information for:elevance • Comparability • The following equations illustrate how entries are made.
• Resource allocation (information has • Verifiability
(including assessingpredictive value • Timeliness
management and feedback/ • Understandability Accounting Cycle
stewardship) confirmatory value)
• Representational • The accounting cycle begins with the identifi cation and
measurement of transactions and eventually produces fi nancial
(information is statements.
and free from
Equation Assets = Liabilities+ Shareholders’ Equity
Expanded Common Retained
Basic Equation Assets = Liabilities+ Shares + – + –arnings Dividends Revenues Expenses
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Debit/Credit + – – + – + – + + – – + + –
Rules RaapdReeview.ndddPaage 2 2/3/16 12:54 AM uuserr 2088WBB001716_RR1/978111190485534/bmmaatterrex_ss
• In accordance with the revenue recognition principle and the
High-quality earnings have the following characteristics:
matching principle, entries are made to adjust the accounts so that
revenue and expenses are matched in the period in which they 1. Content
occur. • Unbiased, as numbers are not manipulated, and objectively
determined. Consider the need to estimate, the accounting choices,
• Adjusting entries can be classifi ed as prepayments, accruals, and the use of professional judgement.
or estimated items. Each of these classes has subcategories as • Reflect the economic reality as all transactions and events are
• Reflect primarily the earnings generated from ongoing core business
activities instead of earnings from one-time gains or losses.
• Closely correlate with cash flows from operations.Earnings that convert
PREPAYMENTS ACCRUALS ESTIMATED ITEMS to cash more quickly provide a better measure of real earnings as
1. Prepaid Expenses: 3. Accrued Revenues: 5. Bad debts:
there is little or no uncertainty about whether they will be realized.
Expenses paid in Revenues earned Expenses for • Based on sound business strategy and busines. onsider
cash and recorded but not yet impaired accounts the riskiness of the business, business strategy, industry, and the
as assets before received in cash receivable. economic and political environments. Identify the effect of these on
they are used or or recorded. 6. Unrealized Holding earnings stability, volatility, and sustainability.
consumed. 4. Accrued Expenses: Gain or Loss:
2. Unearned Revenues: Expenses incurred Adjustments to fair • Transparent, as no attempt is made to disguise or mislead. It reflects
Revenues but not yet paid in value of certain the underlying business fundamentals.
received in cash cash or recorded. investments –
and recorded as through Net • Understandable
liabilities before Income.
they are earned. 7. Unrealized Holding
Gain or Loss – Format of the Income Statement
to fair value of Income Statement and Statement of Comprehensive Income
certain investments • Net income is revenues and gains less expenses and losses from
Comprehensive continuing and discontinued operations. Comprehensive income
Income. is net income plus/minus other comprehensive income.
• Material, unusual gains and losses are disclosed separately.
• Single Step Income Statements show only two main groups: reve-
nues and expenses.
• Adjusting entries are required every time financial statements are • Multiple Step Income Statements separate the company’s operating
activities from its non-operating activities. It is more informative
• Financial Statements are prepared from the adjusted trial balance. and more useful.
• Closing entries are prepared to reduce temporary account balances • Earnings Per Share is an important calculation that sums up the result
to zero in preparation for next year’s transactions.A post-closing trial
of the company’s operations. It is a key indicator of the company’s
balance is taken. performance and is calculated as follows:
Measuring Financial Statement Elements Net Income – Preferred Dividends
Weighted Average Number of Common Shares Outstanding
• We have a mixed-attribute measurement model (items may
be measured based on historical cost or fair value, or they fall in
between). • Statement of Retained Earnings is required under ASPE but not
under IFRS.A Statement of Changes in Equity,showing changes in all
equity accounts and not just retained earnings is required under IFRS.
CHAPTER 4 R EPORTING FINANCIAL
CHAPTER 5 F INANCIAL P OSITIONS
AND C ASH F LOWS
The Income Statement helps financial statement users decide where Classifications Within the Statement
to invest their resources and evaluate how well management is using a
company’s resources. of Financial Position:
LIABILITIES AND SHAREHOLDERS’
USEFULNESS LIMITATIONS ASSETS EQUITY
Evaluate past performance and Items that cannot be reliably Current assets Current liabilities
profitability. measured are not reported. Non-current investments Long-term debt and liabilities
Property, plant, and equipment Shareholders’ equity
Provide a basis for predicting Income numbers affected by
future performance. accounting methods used. Intangible assets Capital shares
Other assets Contributed surplus
Help assess risk or uncertainty oIncome measurement involves use Retained earnings
achieving future net cash inflowsof estimates. Accumulated other comprehensive
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• Accounts are classified so that similar items are grouped together. Uses and Limitations of the Balance Sheet
Parts and subsections of the balance sheet can be more informative
than the whole. USEFULNESS LIMITATIONS
• In presenting the balance sheet, the parts and subsections can give
users information in a clear and understandable format. Analysis of Most financial assets and liabilities
1. liquidity – the amount of time are stated at historical cost, which
• Where necessary, additional information is reported as disclo- until an asset is realized or acan be less relevant than fair value.
sures to the statements. Disclosures should be as complete as liability has to be paid;
2. solvency – an enterprise’s abilitygements and estimates are used
to pay its debts and related in determining many of the items.
Many items are omitted because
3. financial flexibility– the ability
to take action to alter the they cannot be measured
amounts and timings of cash objectively.
flows so an enterprise can
respond to opportunities and
Statement of Cash Flows
The cash flow statement presents a detailed summary of all the cash infl ows and outfl ows, or the sources and uses of cash during the period.
Cash flows are classifi ed as operating,investing,or fi nancing activities.
Operating Activities Investing Activities Financing Activities
• Net income (NI) and • Sale of property, plant, and equipment • Issuance of equity
adjustments to reconcile • Sale of debt or equity securities of securities
NI (or loss) to cash ﬂow other entities • Issuance of debt
from operations • Collection of loans to other entities (bonds and notes)
Inﬂows of Cash Inﬂows of Cash
Outﬂows of Cash Outﬂows of Cash
Operating Activities Investing Activities Financing Activities
• Net loss and adjustments • Purchase of property, plant, and • Redemption of debt
to reconcile net loss equipment • Reacquisition of
(or income) to cash ﬂow • Purchase of debt and equity securities capital stock
from operations of other entities
• Loans to other entities
The value of the cash flow statement is that it helps users evaluate CHAPTER 6 R EVENUE R ECOGNITION
liquidity, solvency, and financial flexibility.
Sales Transactions from a Business Perspective
Steps to Preparing a Statement of Cash Flows
• Sale of goods normally coincides with the transfer of risks and re-
1. Determine cash provided by or used in operating, investing, and wards as indicated by possession and legal title, whereas the sale of
2. Determine the change in cash during the period. services often spans more than one period and therefore revenue
must be allocated between periods.
3. Reconcile the change in cash with the beginning and ending cash • Many contracts involve the sale of both goods and services (referred
to as multiple deliverables or bundled sales).
Usefulness of the Statement of Cash Flows • Consideration is what the entity receives in return for the provision
of goods and services.
Measurement of cash provided by operating activities can answer the
• Barter or nonmonetary transactions occur where few or no mone-
following questions: tary assets are received as consideration. Generally, a barter trans-
• What are the reasons for positive or negative cash situation? action is seen as a sale if the transaction has commercial substance.
• What is the sustainability of cash portion over time? • Concessionary or abnormal terms may complicate the accounting as
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Legalities of Sales Transactions • IFRS has recently adopted the asset-liability approach, which
recognizes and measures revenue based on changes in assets and
• Contracts create rights and obligations under law that must be con- liabilities.
sidered when accounting for sales transactions.
• ASPE continues to follow the earnings approach.
• The contract establishes the point in time when legal title passes
(often indicated by the F.O.B. shipping terms).
Recognition and Measurement
The asset-liability approach follows a fi ve-step process that companies
There are two approaches to recognizing revenue:
should use to ensure that revenue is measured and reported correctly,
1. The asset-liability (contract-based) approach as described in the following chart:
2. The earnings approach
Step in Process Description Implementation
1. Identify the A contract is an agreement that A company applies the revenue
contract with creates enforceable rights or guidance to contracts with
customers. obligations. customers and must determine if new
performance obligations are created by
a contract modification.
2. Identify the A performance obligation is A contract may be composed of
separate a promise in a contract to multiple performance obligations.
performance provide a product or service The accounting for multiple
obligations in to a customer. A performance performance obligations is based
the contract. obligation exists if the customer can on evaluation of whether the
benefit from the good or service on product or service is distinct
its own or together with other readily within the contract. If each of
available resources. the goods or services is distinct,
but is interdependent and interrelated,
these goods and services are combined
and reported as one performance
3. Determine the The transaction price is the In determining the transaction
transaction price. amount of consideration that price, companies must consider
a company expects to receive the following factors: (1) variable
from a customer in exchange consideration, (2) time value of
for transferring goods and money, (3) noncash consideration,
services. and (4) consideration paid or
payable to the customer.
4. Allocate the If more than one performance The best measure of fair value is
transaction price obligation exists, allocate the what the good or service could be
to the separate transaction price based on sold for on a stand-alone basis
performance relative fair values. (the stand-alone selling price).
obligations. Estimates of stand-alone selling price
can be based on (1) adjusted market
assessment, (2) expected cost plus
a margin approach, or (3) a residual
5. Recognize A company satisfies its performance Companies satisfy performance
revenue when obligation when the customer obligations either at a point
each performance obtains control of the good in time or over a period of time.
obligation or service. Companies recognize revenue over
is satisfied. a period of time if (1) the customer
controls the asset as it is created or
(2) the company does not have an
alternative use for the asset.
Earnings Approach Long-Term Contracts and Percentage-
• Revenues for sale of goods are recognized when the risks and re-
wards of ownership are transferred to the customer, the company The percentage-of-completion method recognizes revenue, costs, and
has no continuing involvement in the goods sold, the costs and
gross profit on a long-term contract if certain criteria are met and the
revenues can be reliably measured, and collectability is probable. company is able to estimate progress toward completion.
• When services are provided, the focus is on performance of the Under the cost-to-cost basis, the percentage of completion is
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estimate of the total costs to complete the contract.The formula for this
is shown here: 1. Direct Write-off Record bad debt Dr. Bad Debt Expense
Method expense in the year itCr. Accounts
is determined the itemReceivable
will not be collected.
Costs incurred to date
= Percent complete 2. Allowance Analyse the Accounts Dr./Cr Bad Debt
Most recent estimate of total costs Procedure Only Receivable balances atExpense
the end of every monthCr./Dr. Allowance for
and estimate and Doubtful Accounts
The percentage of costs incurred out of total estimated costs is
then applied to the total revenue or the estimated total gross profit on assess the estimated
the contract to arrive at the revenue or the gross profit amounts to be 3. Mix of Procedures At the end of every Dr. Bad Debt Expense
recognized to date.The formula is shown here:
month, management Cr. Allowance for
estimates the Doubtful Accounts
company’s bad debt
Percent × Estimated = Revenue expense for that month.
complete total revenue (or gross profit) This estimate is based
(or gross profit) to be recognized to date
on the percentage-of-
To find the amount of revenue and gross profit that will be recog-
nized in each period, subtract the total revenue or gross profit that has A note receivable is similar to an account receivable; however, it is
supported by a promissory note, always has an interest element, and is
been recognized in prior periods, as shown here: enforceable.
Revenue Revenue Current period • Recognition of notes receivable and loans receivable are similar to
– = that of an account receivable.
(or gross profit) (or gross profit) revenue • The main difference between short-term and long-term notes and
to be recognized in (or gross profit)
recognized prior periods loans is the length of time to maturity and the importance of interest
to date associated with the asset.
• With a non-interest-bearing note, interest is the difference between
the cash borrowed and the maturity value of the note.
Journal entries for the percentage-of completion-method differ de-• Use the effective interest method to recognize interest revenue from
pending on whether the earnings approach or contract-based approach a non-interest-bearing note