Intermediate Accounting

Intermediate Accounting Spiceland / Sepe / Tomassini/ Brooks 1st Canadian Edition

Chapter 1 Canadian Environment and Theoretical Structure of Financial Accounting

Relevant Financial Information Financial Accounting Environment Providers of Financial Information External User Groups Profit-oriented companies Not-for-profit entities Households Investors Creditors Employees Labor unions Customers Suppliers Government agencies Financial intermediaries

Financial Accounting Environment Relevant financial information is provided primarily through financial statements and related disclosure notes. • Balance Sheet • Income Statement • Cash Flow Statement • Statement of Shareholders’ Equity

Investment-Credit DecisionsA Cash Flow Perspective Corporate shareholders will receive cash from their investments through . . . • Periodic dividend distributions from the corporation. • The ultimate sale of shares held.

Investment-Credit DecisionsA Cash Flow Perspective Accounting information should help investors evaluate the amount, timing, and uncertainty of the enterprise’s future cash flows.

Cash Versus Accrual Accounting Cash Basis Accounting • Revenue is recognized when cash is received. • Expenses are recognized when cash is paid.

Cash Versus Accrual Accounting Cash Basis Accounting Carter Company has sales on account totaling $100,000 per year, and collected as shown on the following slide. The company prepaid $60,000 for three years’ rent in the first year. Utilities are $10,000 per year, but in the first year only $5,000 was paid. Payments to employees are $50,000 per year.Let’s look at the cash flows.

Cash Versus Accrual Accounting Cash Basis Accounting

Cash Versus Accrual Accounting Cash Basis Accounting Cash flows in any one year may not be a predictor of future cash flows.

Cash Versus Accrual Accounting Accrual Accounting • Revenue is recognized when earned. • Expenses are recognized when incurred. Let’s reconsider the Carter Company information..

Cash Versus Accrual Accounting Accrual Accounting • Revenue is recognized when earned. • Expenses are recognized when incurred. Let’s reconsider the Carter Company information.

The Development of Financial Accounting and Reporting Standards Concepts, principles, and procedures were developed to meet the needs of external users (GAAP).

Current Standard Setting - CICAwww.cica.ca • Set by the Accounting Standards Board (AcSB). • Mainly practising Chartered Accountants. • Presents priorities and agenda to the Accounting Standards Oversight Council (AcSOC). • Emerging Issues Committee (EIC) provides guidance on new and emerging issues.

Current Standard Setting - FASBwww.fasb.org • Supported by the Financial Accounting Foundation. • Seven full-time, independent voting members serving for 10 years. • Answerable only to the Financial Accounting Foundation. • Members not required to be CPAs.

Establishment of Accounting StandardsA Political Process – Some Participants AcSB and AcSOC of CICA Certified Management Accountants of Canada GAAP Certified General Accountants of Canada Ontario Securities Commission Canadian Academic Accounting Association Financial Executives Institute of Canada

AcSB’s Standard-Setting Process • Write project proposal. • Appoint a task force. • Develop an exposure draft. • Make revisions. • Issue a re-exposure draft (optional). • AcSB’s approval. • Final approval and issuance. • Published in CICA Handbook.

International Accounting Standards Committee (IASC) • Established in 1973 to narrow the range of differences in accounting standards. • Increase in international trade has motivated the IASC to attempt to eliminate alternative accounting treatments.

Role of the Auditor Independent intermediary to help insure that management has in fact appropriately applied GAAP.

The Conceptual Framework • Maintain consistency among standards. • Resolve new accounting problems. • Provide user benefits.

The Conceptual Framework Objective of Financial Statements (CICA HB 1000.15) Qualitative Characteristics of Accounting Information (CICA HB 1000.18) Elements of Financial Statements (CICA HB 1000.25) Recognition and Measurement Criteria (CICA HB 1000.41) (CICA HB 1000.53) Environment Implementation Implementation assumptions principles constraints

Conceptual Framework Objectives • To provide information: • useful for decisions. • that helps predict cash flows. • about economic resources, claims to resources, and changes in resources and claims. Recognition andMeasurementConcepts Elements QualitativeCharacteristics FinancialStatements Constraints Continued

Objectives Recognition andMeasurementConcepts AssumptionsEconomic entity Going concern Periodicity Monetary unit Principles Historical cost Realization Matching Full disclosure Elements Assets Liabilities Equity Revenues Expenses Gains Losses QualitativeCharacteristics Understandability Primary Relevance Reliability Secondary Comparability Consistency Financial Statements Balance sheet Income statement Cash Flow Statement Statement of retained earnings Notes and schedules Constraints Cost effectiveness Materiality Conservatism

Relevance Reliability PredictiveValue Feedback Value Timeliness Verifiability Neutrality RepresentationalFaithfulness Comparability Consistency Qualitative Characteristics - Understandability Decision Usefulness

Practical Constraints to Achieving Desired Qualitative Characteristics Conservatism CostEffectiveness Materiality

CICA HB 1000.29Assets… Assets: “Assets are economic resources controlled by an entity as a result of past transactions or events and from which future economic benefits may be obtained.”

CICA HB 1000.32Liabilities… Liabilities: “are obligations of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.”

CICA HB1000.35Equity… “Equity is the ownership interest in the assets of a profit oriented enterprise after deducting its liabilities. While equity of a profit oriented enterprise in total is a residual, it includes specific categories of items, for example, types of share capital, contributed surplus and retained earnings.”

CICA HB 1000.37Revenues are… “increases in economic resources, either by ways of inflows or enhancements of assets or reductions of liabilities, resulting from the ordinary activities of an entity.”

CICA HB 1000.39Gains… Gains: “are increases in equity / net assets from peripheral or incidental transactions and events affecting an entity and from all other transactions, events and circumstances affecting the entity except those that result from revenues or equity / net assets contributions.”

CICA HB 1000.38Expenses are… “decreases in economic resources, either by way of outflows or reductions of assets or incurrences of liabilities, resulting from an entity’s ordinary revenue generating or service delivery activities.”

CICA HB 1000.40Losses… Losses: “are decreases in equity / net assets from peripheral or incidental transactions and events affecting an entity and from all other transactions, events and circumstances affecting the entity except those that result from expenses or distributions of equity / net assets.”

CICA 1000.44Recognition… Recognition: “ is the process of including an item in the financial statements of an entity. Recognition consists of the addition of the amount involved into statement totals together with a narrative description of the item (e.g., “ inventory”, “sales” or “donations”) in a statement.”

CICA HB 1000.53Measurement… “Measurement is the process of determining the amount at which an item is recognized in the financial statements. There are a number of bases on which an amount can be measured.”

Recognition and Measurement Concepts

Reasonable Assurance of Collection Substantial Completion of Transaction Revenue Recognition Principle Two conditions must be met if the realization principle is to be satisfied.

Question The function of financial accounting is to identify, measure and communicate financial information about economic entities to interested parties. a. True b. False

Question Accrual accounting provides a better indication of ability to generate cash flows than does information limited to the financial effects of cash receipts and cash payments. a. True b. False

Question The primary objective of accrual basis accounting is the measurement of income. a. True b. False

Question Generally accepted accounting principles include both standards set by various rule making bodies and certain accounting practices that have evolved over time. a. True b. False

Question The major financial accounting standard setting body in Canada is the a. Accounting Principles Board b. Securities and Exchange Commission c. CICA d. American Institute of CPAs

Question The CICA issues which of the following types of pronouncements? a. Accounting Standards b. Assurance Standards c. Public Sector Accounting Standards d. Accounting and Assurance Guidelines e. All of the above

Question The Canadian Institute of Chartered Accountants develops accounting and reporting standards independent of public, business and political pressures. a. True b. False

Intermediate Accounting