Chapter 2 Essays

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FINANCIAL ACCOUNTING
Tools for Business Decision-Making

KIMMEL  WEYGANDT  KIESO  TRENHOLM  IRVINE

CHAPTER 2:
A FURTHER LOOK AT FINANCIAL STATEMENTS

STUDY OBJECTIVES
SO 1: Identify the sections of a classified statement of financial position.
SO 2: Identify and calculate ratios for analyzing a company’s liquidity, solvency, and profitability.
SO 3: Describe the framework for the preparation and presentation of financial statements.

Classified Statement of Financial Position
• A classified statement of financial position generally contains the following standard classifications: Assets
- Current assets

Liabilities and Shareholders’ Equity
- Current liabilities

- Investments

- Non-current liabilities

- Property, plant & equipment

- Shareholder’s equity

- Intangible assets

- Share capital

- Goodwill

- Retained earnings

Current Assets
• Assets expected to be converted to cash or used in the business within one year or one operating cycle, whichever is longer
– Operating cycle is the average time it takes to go from cash to cash in producing revenue

• Usually listed in order of liquidity:
– Reverse order of liquidity also possible

• Examples include cash, short-term (trading) investments, accounts receivable, merchandise inventory, and prepaid expenses

Non-Current Assets
• Assets not expected to be converted to cash or used in the business within one year or one operating cycle
• All assets not considered current
• Examples:
– Investments
– Property, plant, and equipment
– Intangible assets and goodwill
– Other assets

Long-Term Investments
• Multi-year investments in:
– Debt securities: loans, notes, bonds, mortgages
– Equity securities: shares of other companies

• These assets are normally not intended to be sold (and converted to cash) within one year

Property, Plant, and Equipment
• Tangible assets with relatively long useful lives
• Used in operating the business
• Examples:
– Land
– Buildings
– Equipment
– Furniture

• Usually listed in order of permanency

Depreciation
• Allocation of the cost of property, plant, and equipment over their estimated useful lives:
– Companies systematically assign a portion of the cost of an asset to expense each year
– Under IFRS, this allocation is referred to as depreciation for property, plant, and equipment, and amortization for intangible assets
– Under ASPE, amortization is often used instead of depreciation Depreciation (continued)
• The cost of long-lived assets with indefinite lives is not depreciated (e.g. land)
• Accumulated depreciation account shows the total amount of depreciation taken to date
• The difference between the cost of the asset and its accumulated depreciation is referred to as the carrying amount of the asset

Intangible Assets
• Non-current assets that do not have physical substance and represent a privilege or a right held by the company
• Examples:
– Patents, copyrights, trademarks, licenses
– Goodwill: excess price paid on acquisition of another company

• Generate a future value to the company
• Amortized if they do not have an indefinite life

Current Liabilities
• Obligations that are to be paid within the
(longer of the) coming year or one operating cycle • Examples:
– Bank indebtedness
– Accounts payable
– Unearned revenue
– Bank loan/notes payable
– Current maturities of long-term debt

Non-Current Liabilities
• Debts expected to be paid or settled after one year • Examples:
– Bank loan/notes payable
– Lease obligations
– Pension and benefit obligations
– Deferred income tax liabilities

• Usually accompanied by extensive notes to the financial statements

Shareholder’s Equity
• Share capital:
– Investment of cash (or other assets) in the company by shareholders in exchange for preferred or common shares

• Retained earnings:
– Cumulative profits kept for use in the company

Discussion Question
What do you think would be the main asset, liability, and equity items for a Tim Hortons franchise? Using the Financial
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