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MGT224H5 (1)
Chapter All

MGT224H5 Chapter All: Rapid Review

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Peter Thomas

RapidReview.ndd Page 1 2/316 12:54 AM userr /208WBB017116_R1/9781119048534/bmmmaterrext_s 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 Financial Statements 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- • Informationshouldbefreefrommanagementbiasandallstakeholders 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. FUNDAMENTAL ENHANCING 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 faithfulness measurement of transactions and eventually produces fi nancial (information is statements. complete, neutral, and free from material error) Basic 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 2 • 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 follows: appropriately captured. • 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. Presentation 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 OCI: Adjustments to fair value of Income Statement and Statement of Comprehensive Income certain investments • Net income is revenues and gains less expenses and losses from through Other 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 prepared. 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 P ERFORMANCE 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 Financial reporting bias. income RaapdRReview..ndd Pagge 3 2/3/16 12:54 AMM userr /208/WBB001716__R1/9788111900485344bmmmaatterrext_s 3 • 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; possible. 2. solvency – an enterprise’s abilitygements and estimates are used to pay its debts and related in determining many of the items. interest; and 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 unexpected needs. 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 Cash Pool 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 financial activities. 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 balances. 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 • What are the trends in net cash flow over time? they introduce measurement uncertainty. RaapidRevvew..ndddPaage 4 22/3166 12:54 AMM usserr /208/WBB0017166_R11/978111190488534/bmmmaatterrext_s 4 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). Asset-Liability Approach 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 obligation. 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 approach. 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- of-Completion Method • 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 service. measured by comparing costs incurred to date with the most recent RaapdReeview.nddd Page 5 2/3/16 12254 AMM userr /208/WBB011716_R11/978111990485344bmmmaaterrexx_s_ 5 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 uncollectible amount. 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- sales reported. 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
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