Type:
Instructor Manual
Resource:
Financial Accounting
Edition:
8th Edition
Author(s):
William Thomas Wendy M. Tietz Greg Berberich Catherine Seguin
INSTRUCTOR’S RESOURCE MANUAL A. S. Merali McMaster University
Financial Accounting Eighth Canadian Edition C. William (Bill) Thomas Baylor University
Wendy M. Tietz Kent State University
Greg Berberich University of Waterloo
Catherine Seguin University of Toronto
Instructor’s Resource Manual for Thomas et al., Financial Accounting, 8Ce e
CHAPTER 1 The Financial Statements CHAPTER OVERVIEW The chapter begins with an introduction to National Hardware Ltd., a fictional retail company based in Waterloo, Ontario. The topic of financial statements is presented identifying that many decisions come from analyzing these reports. Following this discussion, the text defines accounting as the language of business and identifies the users of accounting information. The chapter next discusses the differences between Financial and Managerial accounting disciplines and describes the different forms of business: proprietorship, partnership, and corporation. The chapter then explores financial standards and the multiple sets of Generally Accepted Accounting Principles (GAAP) for Canada. The section references International Financial Reporting Standards (IFRS) for publicly accountable entities (PAEs) and Accounting Standards for Private Enterprises (ASPE) for Canadian privately held companies. Next the chapter focuses on each of the financial statements: Income Statement, Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows. The respective elements of each statement are discussed including what each reports and/or measures. The various components of owner’s (shareholders’) equity—revenue, expense, net income, net loss, retained earnings, and dividends—are also defined. The relationship between assets, liabilities, and equity known as the accounting equation is introduced in the discussion of the balance sheet. In addition, the classifications such as current assets and current liabilities are introduced. The operating, investing, and financing activities within the statement of cash flows are introduced and discussed relative to cash receipts and payments. The notes to financial statements are also mentioned in this section. Decision Guidelines help explain how people use the financial statements in decision making. Next the chapter discusses the qualitative characteristics of the accounting conceptual framework: relevance, faithful representation, comparability, verifiability, timeliness, and understandability and the underlying assumptions of the framework including: the going-concern assumption, the separate-entity assumption, the historical-cost assumption, and the stable-monetary-unit assumption The chapter continues with a section on fraud as it relates to the financial statements and possible reasons for its occurrence. Examples are given, which leads into an introduction to the topic of ethics in accounting and ethical behaviour of accountants, and decision guidelines for making ethical judgments. The chapter concludes with a section on the benefits and risks of tools and technologies used in accounting and business, including spreadsheets, data analytics, artificial intelligence and machine learning, and robotic process automation. At the end of the chapter, a summary problem reviews the income statement, statement of retained earnings, balance sheet, and statement of cash flows, and requires the student to assess the company’s performance and financial position.
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Instructor’s Resource Manual for Thomas et al., Financial Accounting, 8Ce e
LEARNING OBJECTIVES After studying Chapter 1, students should be able to: 1. Explain why accounting is the language of business. 2. Describe the purpose and explain the elements of each financial statement. 3. Prepare financial statements and analyze the relationships among them. 4. Explain and apply underlying accounting concepts, assumptions, and principles. 5. Ethically evaluate business decisions. 6. Identify tools and technologies used in accounting and business.
SUGGESTED PRIORITY OF CHAPTER TOPICS MUST COVER Multiple sets of GAAP (generally accepted accounting principles) Relevance, faithful representation, comparability, verifiability, timeliness, understandability characteristics; cost constraint, separate entity assumption, historical-cost assumption, goingconcern assumption, and stable-monetary-unit assumption Financial Statements: Income statement, Statement of Retained Earnings, and Balance Sheet Accounting equation Ethical considerations in accounting and business
RECOMMENDED Types of business organizations Statement of Cash Flows and types of cash flows Tools and technologies used in accounting and business
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Instructor’s Resource Manual for Thomas et al., Financial Accounting, 8Ce e
CHAPTER OUTLINE OBJECTIVE 1: Explain why accounting is the language of business A. Accounting is an information system that measures business activities, processes data into reports, and reports results to decision makers. Exhibit 1-1 illustrates the flow of information in an accounting system. Financial statements report this information to users. B. Accounting information is used by 1. Managers to set goals, evaluate those goals, and take corrective action. 2. Investors to decide whether to invest in a business or evaluate an investment. 3. Creditors to evaluate a borrower’s ability to make required payments. 4. Government and regulatory bodies such as Canada Revenue Agency (CRA) to ensure organizations pay the correct amount of taxes. 5. Individuals to make investment decisions and/or manage a bank account. 6. Not-for-profit organizations, which use accounting information in virtually the same way as for-profit organizations. C. Accounting information can be classified into two categories: 1. Financial accounting provides information for managers inside the business and for decision makers outside the organization, such as investor and creditors. 2. Management accounting generates inside information for internal use by management. D. Forms of business organizations (summarized in Exhibit 1-2): 1. Proprietorship—an unincorporated business with a single owner. The owner has unlimited liability, which means that the owner assumes personal responsibility for the debts of the business. 2. Partnership—an unincorporated business with two or more owners. Each partner has unlimited liability. 3. Corporation—an incorporated business owned by shareholders whose ownership is evidenced by the number of shares held. Shareholders elect the members of the board of directors, which sets policy for the corporation and appoints officers. A shareholder has limited liability. A corporation is distinct from its owners and has many of the rights entitled to a person.
OBJECTIVE 2: Describe the purpose and explain the elements of each financial statement A. Generally accepted accounting principles (or GAAP) are the professional guidelines that govern how accountants record, measure, and report financial information. 1. The Accounting Standards Board in association with Chartered Professional Accountants of Canada (CPAC) establishes GAAP. 2. There are multiple sets of GAAP and each is applicable according to the type of entity or organization. a. Publicly accountable enterprises (PAEs) must apply International Financial Reporting Standards (IFRS), which are standards set by the International Accounting Standards Board (IASB) to enhance the comparability of financial information reported by public enterprises around the world. IFRS was effective January 1, 2011, for Canadian public companies. b. Private enterprises apply the Accounting Standards for Private Enterprises (ASPE). However, private enterprises have the option of using IFRS or ASPE. .. Pearson Canada Inc
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Instructor’s Resource Manual for Thomas et al., Financial Accounting, 8Ce
c. Other sets of GAAPe are applicable to not-for-profit organizations, pension plans, and government entities. 3. A summary of IFRS-ASPE differences is presented at the end of the chapter. 4. The financial statements provide a company’s financial results for users to make decisions. The income statement for National Hardware Ltd. is presented in Exhibit 14. B. The financial statements provide answers to four basic questions. The financial statements that would be used to answer these questions are summarized in Exhibit 1-3. 1. How well did the company perform during the year? (The answer is found on the income statement) 2. Why did the company’s retained earnings change during the year? (The answer is found on the statement of retained earnings.) 3. What is the company’s financial position at the end of the year? (The answer is found on the balance sheet.) 4. How much cash did the company generate and spend during the year? (The answer is found on the statement of cash flows.) C. The income statement (or statement of profit or loss, or statement of earnings, or statement of net earnings) reports the revenues, expenses, and net income or net loss of a company for a specified period of time. (The Consolidated Statements of Income for National Hardware Ltd. is illustrated in Exhibit 1-4.) 1. Companies can choose a fiscal year ending at a different time to the calendar year. Companies are not obligated to choose December 31 for a year end. 2. National Hardware Ltd. reports operating results for two fiscal years for comparability purposes enabling users to detect any trends. 3. The income statement has two main elements: income and expenses. a. Income includes revenue earned through the sale of goods and services and gains. b. Gains reflect an increase in the economic benefits to a company usually due to a transaction outside of the company’s ordinary business activities. An example is the sale of a long-lived asset that exceeds the carrying amount on a company’s books. c. Expenses consist of costs incurred to purchase goods and services to run a business, and losses. d. Losses are the opposite of gains and reflect a decrease in the economic benefits to a company usually due to a transaction outside of the company’s ordinary business activities. An example is the sale of a long-lived asset that does not exceed the carrying amount on a company’s books. 4. The major expense for National Hardware Ltd. is called Cost of Goods Sold (called cost of producing revenue by National Hardware Ltd.), which represents the cost of the goods National Hardware Ltd. sold to its customers. 5. The income statement reports net income or net loss that is equal to total revenues and gains less total expenses and losses, or the amount of income or loss that is left after total expenses have been deducted from total income. 6. Net income is sometimes known as net earnings or net profit. D. The statement of retained earnings reports the changes in a company’s retained earnings during a specified period and reflects the accumulated net income of the company since it started business. After accounting for reductions in 2022 and 2021 (these reductions result from transactions covered in upper-level accounting courses), National Hardware Ltd. had an overall surplus both years. (The Consolidated Statements of Retained Earnings for National Hardware Ltd. is illustrated in Exhibit 1-5.) 1. The net income reported on the income statement is added to the opening balance of retained earnings. .. Pearson Canada Inc
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Instructor’s Resource Manual for Thomas et al., Financial Accounting, 8Ce e income, the board of directors must decide whether to retain 2. After a company earns net the income for use in the business or to pay dividends. Dividends reduce retained earnings. National Hardware Ltd. declared dividends of $154 million in 2022 and $120.2 million in 2021.
E. The balance sheet (or statement of financial position under IFRS) reports a company’s financial position at a moment in time. (The Consolidated Balance Sheets of National Hardware Ltd. is illustrated in Exhibit 1-6.) 1. The balance sheet is dated as of the last day of the period. The amount of assets reported is the amount of assets National Hardware Ltd. owned as of the last day of the accounting period. The other financial statements cover a period of time. 2. The balance sheet reports three main categories: Assets, Liabilities, and Shareholders’ Equity. The relationship between these categories is known as the accounting equation, where assets always equal the sum of liabilities and owners’ equity: A = L + OE. Exhibit 1-7 illustrates the accounting equation using the 2022 figures from the balance sheet of National Hardware Ltd. Teaching Tip Beginning assets and shareholders’ equity are $120,000 and $30,000, respectively. Liabilities increased $15,000 during the year, and the ending assets are $145,000. What was the ending shareholders’ equity? Assets = Liabilities + Shareholders’ Equity Beginning of year $120,000 = X + $30,000 X = $90,000 End of year $145,000 = ($90,000 + $15,000) + Y Y = $40,000 3. Assets are economic resources owned by a business that are expected to be of benefit in the future. Assets are divided into two categories: current and non-current (long-term) assets. a. Current assets are those assets that the company expects to convert to cash, sell, or consume during the next 12 months or within the business’s normal operating cycle if longer than a year. i. The operating cycle is the time span during which (a) cash is used to acquire goods and services, and (b) these goods and services are sold to customers, from whom the business collects cash. ii. Examples of current assets are: Cash. Receivables—the amount that a company expects to collect from its customers who bought merchandise on credit. Inventory—the merchandise National Hardware Ltd. sells to its customers. Prepaid expenses—the amount of advertising, rent, insurance, and/or supplies that National Hardware Ltd. has already paid for but has not yet used. b. Non-current assets (or long-term assets) consist mainly of property, plant, and equipment. These assets are partially used, or depreciated (or amortized). While National Hardware Ltd. does not, some companies report goodwill and intangible assets. Intangible assets are assets with no physical form, such as patents and trademarks. Other non-current assets is a category for assets not reported elsewhere on the balance sheet.
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