Power Point Slides - Week 2 (Canvas) - 2
Power Point Slides - Week 2 (Canvas) - 2
Power Point Slides - Week 2 (Canvas) - 2
Chapter 2
Accounting Standards
IFRS = International Financial Reporting Standards
Required for public companies
International standards
How “international” are they?
ASPE = Accounting Standards for Private Enterprises
Can be used by private companies only
Easier to implement / more cost-effective
IFRS Conceptual Framework
What’s the purpose of a conceptual framework?
Purpose is to provide a structure for creating new accounting
standards and
To assist preparers of financial statements when there are no
standards for guidance
Characteristics of Useful Information
5
Cash vs. Accrual Basis
of Accounting
Key Characteristics and Differences
Cash vs Accrual Basis of Accounting
Under the Cash Basis:
Revenues are recorded when the cash is received
Expenses are recorded when cash is paid
Under the Accrual Basis:
Revenues are recorded when they are earned in accordance
with the revenue recognition criteria
Expenses are recorded when they are incurred
7
Accounting methods
Cash Accrual
Revenue Expense Revenue Expense
Analyzing Transactions
“Template” Approach
The Accounting Equation
=
Liabilities Amounts owed
+
Shareholders’ Shareholder investments
Equity
Transactions and the Accounting Equation
Every transaction affects at least two accounts
Each line must balance
Assets = Liabilities + Shareholder’s Equity
A = L + SE
Retained earnings will be affected by changes in
revenues, expenses and/or dividends
15
Shareholder’s Equity
A = L + SE
A = L + SE
Accounts Accounts Common Retained
Cash Equipment
Receivable Payable Shares Earnings
Example #2
A = L + SE
Prepaid Loan Common Retained
Cash Inventory
expenses payable Shares Earnings
Example #3
A = L + SE
Accounts
Accounts Common Retained
Cash Receivabl Inventory
Payable Shares Earnings
e
Example #4
A = L + SE
Accounts
Accts Common Retained
Cash Receivabl Inventory
Payable Shares Earnings
e
Example #5
A = L + SE
Prepaid Accounts Common Retained
Cash Inventory
expenses Payable Shares Earnings
Example #6
A = L + SE
Accounts
Accounts Common Retained
Cash Receivabl Equipment
Payable Shares Earnings
e
Depreciation of Assets
o When an asset is used up over time, some of the cost
of the asset should be shown as an expense in each
period in which it is used
o The amount shown as an expense in any period is
called the Depreciation of the asset
25
Depreciation of Assets
26
Depreciation of Assets
o Our equipment has a 10-year lifespan and a residual value
of $6,000
o What is our monthly straight-line depreciation expense?
27
Example #7
A = L + SE
Accounts
Accounts Common Retained
Cash Receivabl Equipment
Payable Shares Earnings
e
Example #8
A = L + SE
Prepaid Accounts Common Retained
Cash Inventory
Expenses Payable Shares Earnings
Prepaid Expenses
o An amount paid in advance of the coverage period is
recorded as an asset (a prepaid expense)
o As time passes, the coverage is “consumed” and is then
recognized as an expense
30
Example #9
A = L + SE
Prepaid Accounts Common Retained
Cash Inventory
Expenses Payable Shares Earnings
Accounting Equation Template
32
Financial Statements
33
Statement of Income
o The Income Statement reports the amount of revenues less
expenses for a specific period of time.
o This is also referred to as profit or net income
o Dividends
o Are not expenses
o Are distributions of earnings to shareholders
34
Statement of Changes in Equity
• The Statement of Changes in Equity reports the way that net
income and the distribution of dividends affected the financial
position of the company during a period of time.
35
Classified Statement of Financial Position
o The Statement of Financial Position (balance sheet)
reports the amount of assets, liabilities, and
shareholders’ equity of a business at a point in time.
o Current assets and liabilities are distinguished from
noncurrent assets and non current liabilities
36
Cash Flow Statement
o Measures the net cash position as a result of cash inflows and
outflows in the following three categories of business
activities:
o Operating Activities
o Investing Activities
o Financing Activities
37