COMM 111 Introduction to Financial Accounting

Patrick Legresley, CPA, CA

September 9, 2013

Agenda
Course information Toolkit, format, grading, support and objectives Introduction to accounting What is accounting? Characteristics of accounting information Accounting principles Forms of organizations Accounting standards Financial statements & accounting equation Relationship between the financial statements

Comm 111 Tool Kit

Syllabus Course description, objective, format, resources, grading scheme, tentative schedule.

Textbook Financial Accounting (Fourth Canadian Edition). 2011. Harrison, Horngren, Lemon, Seguin and Lemon. Pearson Canada.
Course Website https://qsblearning.ca Slides, class problem solutions, announcements, forums, course information Homework Website - MyAccountingLab Online homework assignments http://www.MyAccountinglab.com

Calculator Your calculator needs to be approved by the Commerce Office. They will add a sticker to it.

Class format
Typical Quiz Days Quiz (50 min) Lecture (80 min) Lecture (30 min) Break (15 min) Practice Problems (80 min) Break (15 min) Lecture/Practice Problems (80 min)

Course grading
Homework assignments (best 5 of 6) In-class quizzes (3) Midterm exam Final exam 10% 15% 25% 50%

Support
In-class questions My office hours (Rm 436) Tuesdays 9:00 10:30 By appointment only send me an email Tutorial sessions Wednesday 5:30 7:00 Rm 141 Wednesday 7:00 8:30 Rm 141 Thursday 1:00- 2:30 Rm 305 TA office hours (Rm 436) Wednesday 12:00 1:30pm Thursdays 12:30 2:00pm Your classmates

COMM 111 Objectives

Understand financial accounting terminology Understand accounting principles Learn to record transactions

Prepare financial statements

Interpret financial statements for decision making

What is Accounting?
Accounting is the language we use to communicate financial information for decision making

Financial Accounting

Management Accounting

External focus: investors, creditors

Report on entire organization, aggregate Historical Standards based: IFRS/GAAP

Internal focus: management, employees

Inform local decisions, pieces of the organization Current, future oriented

Ex. Financial Statements

Ex. Departmental Budget, Scenario analysis

Course focus

Characteristics of accounting information

Understandable Relevant Useful to the decision maker Timely Reliable Representational Faithfulness Verifiable Conservative Comparable

Accounting Principles
COST: assets and liabilities measured at their cost when acquired CONSERVATISM: when doubt exists, choose the value that results in lower income and/or assets -- avoid overstatement CONSISTENCY: use the same accounting policies & choices each period MATCHING: link revenues and expenses together each period GOING CONCERN: assume firm will exist for many years MATERIALITY: report only significant items FULL DISCLOSURE: tell it all

Forms of organizations
Proprietorship No separation of management and ownership Unlimited liability Taxed at personal level Partnership No separation of management and ownership Unlimited liability for general partners Taxed at personal level Ex. Accounting Firm Course focus Corporation Separation of management and ownership Limited liability Taxed at the corporate and personal level Private or public Ex. WestJet

Accounting standards
Different standards depending on geographical location Canadian GAAP US GAAP UK GAAP Different standard depending on type of organization (in Canada)

GAAP for private companies (ASPE) GAAP for public sector (MUSH) GAAP for not-for-profits (Charities) IFRS for public companies (PAEs)

International financial reporting standards A common language Allows for comparability regardless of geography In Canada, required for public companies after January 1, 2011

Course Focus
Financial accounting
for

Public companies
Reporting under

IFRS

Financial Statements
(International Accounting Standard (IAS) 1)
The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to wide range of users in making economic decisions. Types of users: investors, creditors, managers, educators, donors, etc. Complete set of financial statements: Statement of Financial Position (aka Balance Sheet) Statement of Comprehensive income (Income Statement + other comprehensive income) Statement of Cash Flows Statement of Changes in Equity (including former statement of retained earnings) Notes to the financial statements

Statement of Financial Position

Reports the Assets, Liabilities and Equity of a company at a point in time
Assets

Resources controlled by a company from which future economic benefit may be obtained contributes to cash flow Presented as current (< 1 year) and long-term (> 1 year) Ex. cash, account receivable, inventory, investments, equipment

Liabilities Obligations of the company Presented as current and long-term Ex. accounts payables, accrued liabilities, current and long term debt

Equity

Ownership of assets less liabilities Ex. common shares, preferred shares, retained earnings

The Accounting Equation

Assets = Liabilities + Equity
The equation must remain in balance The Statement of Financial Position must remain in balance

Income Statement
Reports the revenue, expenses, gains and losses of a company for a period of time

Net Income (loss) = Revenue Expenses

Revenue

Amounts earned by a company from the sale of goods or provision of services Revenue is not the same as cash receipts We record revenue when it is EARNED. Not when cash is collected

Expenses Resources used in the production of revenue Expenses are not the same as cash payments We record expensed when they are INCURRED. Not when they are paid. Ex. Cost of goods sold, administrative expenses, interest, depreciation, salaries Statement of Comprehensive Income (chapter 11)

Statement of Changes in Equity

Reports the changes in equity between the beginning and the end of the reporting period The components of equity include:

Common shares Preferred shares Contributed surplus Accumulated other comprehensive income Retained earnings

Note that retained earnings is

A component of equity; and A separate column in the statement of changes in equity

Statement of Cash Flows (IAS 7)

Provides users of financial statements with a basis to assess the ability of the company to generate cash and the needs of the company to utilize those cash flows Cash flows reported under three types of business activities: 1. Operating activities (ex. cash from customers) 2. Investing activities (ex. purchase of land) 3. Financing activities (ex. repayment of debt)

Relationship Between Statements

Income Statement
Revenue Expenses Net income(loss) XXX XXX XXX

Statement of Changes in Equity

Common Shares XXX XXX XXX Retained Earnings XXX XXX XXX

Beginning balance Common shares issued Net income (loss) Ending balance

Statement of Financial Position

Cash Other assets Total assets Liabilities Equity Common shares Retained earnings Total liabilities & equity XXX XXX XXX XXX XXX XXX XXX

Statement of Cash Flows

Cash from operations Cash from investing Cash from financing Net increase in cash Beginning cash balance Ending cash balance XXX XXX XXX XXX XXX XXX

Notes to the Financial Statements (IAS 1)

Primary purpose is to enhance the understanding of the information in the financial statements for the users.

Inform the user of the accounting policy choices used by the company. Provide the user with more information that is not presented elsewhere in the financial statements, but is relevant to their understanding.