Financial accounting tools for business decision making ( PDFDrive com )

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A personalized, adaptive learning experience WileyPLUS with ORION delivers easy-to-use analytics that help educators and students see strengths and weaknesses to give learners the best chance of succeeding in the course Photo credit: Monkey Business Images/Shutterstock Identify which students are struggling early in the semester Help students organize their learning and get the practice they need Measure outcomes to promote continuous improvement Educators assess the real-time engagement and performance of each student to inform teaching decisions Students always know what they need to work on With ORION’s adaptive practice, students quickly understand what they know and don’t know They can then decide to study or SUDFWLFHEDVHGRQWKHLUSURȴFLHQF\ With visual reports, it’s easy for both students and educators to gauge problem areas and act on what’s most important www.ORION.wileyplus.com Applied Skills Videos Applied skills videos cover general accounting concepts and provide an opportunity for students to get familiar with more challenging topics Improved Homework Aids WileyPLUS has a new look for all end-of-chapter homework questions The design features a clean sheet of paper effect with a larger field to input accounts so that nothing gets cut off Hovering over a particular row highlights the entire line, so that students don’t lose their space in the question and have a more comfortable homework experience The debit and credit entry fields are also more mobile friendly, allowing students to complete homework on their mobile devices Accounting Cycle Review The Accounting Cycle Review helps students practise accounting fundamentals by integrating concepts from multiple chapters and steps from various parts of the accounting cycle FINANCIAL ACCOUNTING Tools for Business Decision-Making SEVENTH CANADIAN EDITION Paul D Kimmel Ph.D., CPA University of Wisconsin—Milwaukee, Wisconsin Jerry J Weygandt Ph.D., CPA University of Wisconsin—Madison, Wisconsin Donald E Kieso Ph.D., CPA Northern Illinois University—DeKalb, Illinois Barbara Trenholm FCPA, FCA, ICD.D University of New Brunswick—Fredericton, New Brunswick Wayne Irvine CPA, CA, CFA University of Calgary—Calgary, Alberta Christopher D Burnley FCPA, FCA Vancouver Island University—Nanaimo, British Columbia Dedicated to our students—past, present, and future Copyright © 2017 John Wiley & Sons Canada, Ltd Copyright © 2016 John Wiley & Sons Inc All rights reserved No part of this work covered by the copyrights herein may be reproduced, transmitted, or used in any form or by any means—graphic, electronic, or mechanical—without the prior written permission of the publisher Any request for photocopying, recording, taping, or inclusion in information storage and retrieval systems of any part of this book shall be directed to the Canadian copyright licensing agency, Access Copyright For an Access Copyright licence, visit www.accesscopyright.ca or call toll-free, 1-800-893-5777 Care has been taken to trace ownership of copyright material contained in this text The publishers will gladly receive any information that will enable them to rectify any erroneous reference or credit line in subsequent editions Library and Archives Canada Cataloguing in Publication Kimmel, Paul D., author Financial accounting : tools for business decision-making / Paul D Kimmel, Ph.D., CPA, University of Wisconsin—Milwaukee, Wisconsin; Jerry J Weygandt, Ph.D., CPA, University of Wisconsin—Madison, Wisconsin; Donald E Kieso, Ph.D., CPA, Northern Illinois University—DeKalb, Illinois; Barbara Trenholm, FCPA, FCA, ICD.D, University of New Brunswick—Fredericton, New Brunswick; Wayne Irvine, CPA, CA, CFA; University of Calgary—Calgary, Alberta; Christopher D Burnley, CPA, CA, Vancouver Island University—British Columbia.—Seventh Canadian edition Includes index Issued in print and electronic formats ISBN 978-1-119-21158-7.—ISBN 978-1-119-21157-0 (looseleaf).—ISBN 978-1-119-32062-3 (EPUB) Accounting—Textbooks I Weygandt, Jerry J., author II Kieso, Donald E., author III Trenholm, Barbara, author IV Irvine, Wayne, author V Burnley, Christopher D., 1966- VI Title HF5636.K55 2016 657’.044 C2016-906102-7 C2016-906103-5 Production Credits Director, Accounting and Finance, Global Education: Michael McDonald Executive Editor: Zoë Craig Senior Marketing Manager: Anita Osborne Product Designer: Matt Origoni Senior Manager, Learning Design and Content Development: Karen Staudinger Developmental Editor: Daleara Jamasji Hirjikaka Senior Content Manager: Dorothy Sinclair Production Editor: Meaghan MacDonald Media Editor: Elena Saccaro Senior Photo Editor: Mary Ann Price Typesetting: Aptara Corporation Project Manager: Denise Showers (Aptara Corp.) Interior Design: Joanna Vierra Cover: Joanna Vierra/Wiley Cover Photography: Front © Mimadeo/Getty; Back © Monkey Business Images/Shutterstock Printing and Binding: LSC Communications, Inc The inside back cover will contain printing identification and country of origin if omitted from this page In addition, if the ISBN on the back cover differs from the ISBN on this page, the one on the back cover is correct Printed and bound in the United States of America LSC 20 19 18 17 16 John Wiley & Sons Canada, Ltd 90 Eglinton Avenue East, Suite 300 Toronto, ON, M4P 2Y3 Canada Visit our website at: www.wiley.ca A BOUT THE AUTHORS Barbara Trenholm, FCPA, FCA, ICD.D, is a professor emerita at the University of New Brunswick, for which she continues to teach on a part-time basis Her teaching and educational leadership has been widely recognized with numerous local, national, and international teaching awards She also served a threeyear term as a Teaching Scholar at the University of New Brunswick Barbara is a member of the boards of several public, Crown, and private corporations, including Plazacorp Retail REIT, NB Power, and the International Development Research Centre She is a past board member of Atomic Energy of Canada Limited, the Canadian Institute of Chartered Accountants (now known as CPA Canada), and the Atlantic School of Chartered Accountancy (now known as CPA Atlantic School of Business), and past president of the New Brunswick Institute of Chartered Accountants (now known as CPA New Brunswick) She has extensive service as chair and a member of a wide range of committees at the provincial, national, and international levels of the accounting profession In addition to her involvement with her profession, she has also served in leadership roles at the university and in the community She has presented at many conferences and published widely in the field of accounting education and standard setting in journals, including Accounting Horizons, Journal of the Academy of Business Education, CAmagazine, CGA Magazine, and CMA Magazine She is also part of the Canadian author team of Weygandt, Kieso, Kimmel, Trenholm, Warren, and Novak, Accounting Principles, published by John Wiley & Sons Canada, Ltd Wayne Irvine, CPA, CA, CFA, teaches accounting at the Haskayne School of Business, University of Calgary Prior to his full-time academic career, Wayne worked for 12 years at Price Waterhouse in the audit group and as manager of the Calgary office’s continuing education program Wayne has over 25 years of teaching experience with several professional accounting programs, most recently as a session leader for CPA Western School of Business in its Professional Education Program Wayne has, in addition to other publishing projects, authored a number of case exams for CPA legacy programs and published a case in Accounting Perspectives Wayne is a four-time recipient of the University of Calgary’s Students’ Union Teaching Excellence Award and is the only member of his faculty to have been awarded a Hall of Fame Teaching award from that organization He has also received over a dozen other teaching and service awards from other student organizations and from the CPA profession Chris Burnley, FCPA, FCA, is a professor in the Accounting Department at Vancouver Island University Prior to his full-time academic career, Chris worked for 12 years in public practice and also audited government departments and United Nations agencies with the Office of the Auditor General of Canada Chris also teaches in the CPA Professional Education Program for the CPA Western School of Business Chris has also taught in the Master of Professional Accounting Program at the Edwards School of Business, where he was recognized by the University of Saskatchewan with the Chartered Professional Accountants of Alberta teaching excellence award He is active internationally, teaching and delivering guest lectures at Vancouver Island University’s partner institutions in Europe, Asia, and the South Pacific Chris has been awarded numerous internal and external grants in support of his academic work and has presented at national conferences Chris has been awarded a number of prizes by the Canadian Academic Accounting Association as a result of his academic work, including awards for case authoring and developing innovative ideas in accounting education Chris is active in the accounting profession, and chairs the board of the Chartered Professional Accountants of British Columbia’s Education Foundation He is a past recipient of the Ritchie W McCloy Award for CA Volunteerism Chris is also the author of the textbook Understanding Financial Accounting, published by John Wiley & Sons Canada, Ltd vi About the Authors Paul D Kimmel, Ph.D., CPA, received his bachelor’s degree from the University of Minnesota and his doctorate in accounting from the University of Wisconsin He is an Associate Professor at the University of Wisconsin—Milwaukee, and has public accounting experience with Deloitte & Touche (Minneapolis) He was the recipient of the UWM School of Business Advisory Council Teaching Award, the Reggie Taite Excellence in Teaching Award, and a three-time winner of the Outstanding Teaching Assistant Award at the University of Wisconsin He is also a recipient of the Elijah Watts Sells Award for Honorary Distinction for his results on the CPA exam He is a member of the American Accounting Association and the Institute of Management Accountants and has published articles in Accounting Review, Accounting Horizons, Advances in Management Accounting, Managerial Finance, Issues in Accounting Education, and Journal of Accounting Education, as well as other journals His research interests include accounting for financial instruments and innovation in accounting education He has published papers and given numerous talks on incorporating critical thinking into accounting education, and helped prepare a catalogue of critical thinking resources for the Federated Schools of Accountancy Jerry J Weygandt, Ph.D., CPA, is the Arthur Andersen Alumni Emeritus Professor of Accounting at the University of Wisconsin—Madison He holds a Ph.D in accounting from the University of Illinois Articles by Professor Weygandt have appeared in Accounting Review, Journal of Accounting Research, Accounting Horizons, Journal of Accountancy, and other academic and professional journals Professor Weygandt is author of other accounting and financial reporting books and is a member of the American Accounting Association, the American Institute of Certified Public Accountants, and the Wisconsin Society of Certified Public Accountants He has served on numerous committees of the American Accounting Association and as a member of the editorial board of Accounting Review; he has also served as President and Secretary-Treasurer of the American Accounting Association In addition, he has been actively involved with the American Institute of Certified Public Accountants and has been a member of the Accounting Standards Executive Committee of that organization He served on the FASB task force that examined the reporting issues related to accounting for income taxes and as a trustee of the Financial Accounting Foundation Professor Weygandt has received the Chancellor’s Award for Excellence in Teaching and the Beta Gamma Sigma Dean’s Teaching Award He is on the board of directors of M&I Bank of Southern Wisconsin He is the recipient of the Wisconsin Institute of CPAs’ Outstanding Educator’s Award and the Lifetime Achievement Award In 2001, he received the American Accounting Association’s Outstanding Accounting Educator Award Donald E Kieso, Ph.D., CPA, received his bachelor’s degree from Aurora University and his doctorate in accounting from the University of Illinois He has served as chairman of the Department of Accountancy and is currently the KPMG Emeritus Professor of Accounting at Northern Illinois University He has public accounting experience with Price Waterhouse & Co and Arthur Andersen & Co and research experience with the Research Division of the American Institute of Certified Public Accountants He is a recipient of NIU’s Teaching Excellence Award and four Golden Apple Teaching Awards Professor Kieso is a member of the American Accounting Association, the American Institute of Certified Public Accountants, and the Illinois CPA Society He has served as a member of the Board of Directors of the Illinois CPA Society, the AACSB’s Accounting Accreditation Committees, and the State of Illinois Comptroller’s Commission; as Secretary-Treasurer of the Federation of Schools of Accountancy; and as Secretary-Treasurer of the American Accounting Association Professor Kieso is currently serving on the Board of Trustees and Executive Committee of Aurora University, and is a member of various other boards From 1989 to 1993, he served as a charter member of the national Accounting Education Change Commission He is the recipient of the Outstanding Accounting Educator Award from the Illinois CPA Society, the FSA’s Joseph A Silvoso Award of Merit, the NIU Foundation’s Humanitarian Award for Service to Higher Education, the Distinguished Service Award from the Illinois CPA Society, and in 2003 an honorary doctorate from Aurora University WH AT’S NEW? Helping Students Learn Accounting Concepts We have carefully scrutinized all chapter material to find new ways to engage students and help them learn accounting concepts A new learning objective structure helps students learn concepts in more manageable “chunks,” with 20% more Do It! exercises added to help students test their understanding before moving on to the next topic Of these, more than 60% are new or updated As well, we added and/or revised a significant number of explanations, examples, illustrations, and summaries throughout the text to better facilitate student learning Real-World Context One of the goals of the financial accounting course is to orient students to the application of accounting principles and techniques in practice Accordingly, we have expanded our practice of using current examples from real companies throughout the textbook by adding more high-interest companies that we hope will increase student engagement This edition includes more than 300 references to real-world companies of interest to students Nearly a quarter of the chapter-opening feature stories were replaced with new stories, while the remainder were updated New feature companies for this edition are The North West Company and Sobeys, two well-known companies in the grocery industry References to these companies have been included throughout the textbook in a variety of ways—in simplified financial statements in the chapter material, ratio analyses, Using the Decision Toolkit, end-of-chapter cases, and financial statements in Appendices A and B at the end of the textbook In addition, our author team is active in delivering the CPA Professional Education Program and incorporated this real-world perspective as each chapter, including the end-of-chapter material, was written International Financial Reporting Standards (IFRS) and Accounting Standards for Private Enterprises (ASPE) were also revised to reflect current and pending changes to standards Focus on the Accounting Cycle For many students, success in an introductory accounting course hinges on developing a sound understanding of the accounting cycle and seeing how the material they are working with in a particular chapter fits in the accounting cycle To help students improve their understanding, we have added new, recurring illustrations that show students the big picture of the accounting cycle and doubled the number of comprehensive cases that incorporate the accounting cycle All of these changes provide students with more opportunities to learn and retain accounting fundamentals integrated across multiple chapters Review and Practice A new review and practice section added to each chapter includes, in one place, an overview of the learning objectives, key terms, differences (if any) between IFRS and ASPE, and decision tools in addition to practice opportunities using the Decision Toolkit and a comprehensive Do It! The review and practice section also includes objective-format questions that allow students to self-assess their understanding of the topics in each chapter These questions are comprehensive in their coverage, with detailed feedback provided at the end of the chapter to assist students in analyzing their results Additional practice objective-format questions are available in the test bank for instructor use End-of-Chapter Material The end-of-chapter material underwent a comprehensive updating to ensure that it continues to be relevant and fresh Well over half of the questions, brief exercises, exercises, problems, and cases in the end-of-chapter material are either new or significantly updated The cases in the Expand Your Critical Thinking section of each chapter have been reorganized into new categories, including financial reporting, financial analysis, ethics, student view, professional judgement, and serial cases The serial case, which has been an important continuing feature in each chapter in past editions, has been completely revised in this edition to follow the evolution of a computer consulting company from a small private company to a large publicly traded company Key Features of Each Chapter Chapter 1: The Purpose and Use of Financial Statements • Feature story is about The North West Company and how accounting aids decision-making • Identifies the users and uses of financial accounting information and forms of business organization— proprietorship, partnership, private corporation, and public corporation • Describes the business activities—financing, investing, and operating activities—that affect companies • Explains the content, purpose, and interrelationships of each of the financial statements—income statement, statement of changes in equity, statement of financial position, and statement of cash flows • Uses financial statements of a hypothetical company (to keep it simple), followed by those for a real company, The North West Company (to make it relevant) • Key changes: Clarified concept of internal users of financial information Added discussion on why ASPE exists and why a private company may choose to use IFRS Switched order of discussion of debt and equity financing and added context viii What’s New? to discussion of dividends Revised discussion of investing activities related to investments in shares and debt securities and added information about asset disposals Content added related to management discussion and analysis Chapter 2: A Further Look at Financial Statements • Feature story is about CT Real Estate Investment Trust, its users, and use of accounting standards • Presents the classified statement of financial position and the items typically found in each section • Explains how ratio analysis is used to analyze a company’s liquidity, solvency, and profitability • Applies ratio analysis to CT REIT, Choice Properties REIT, and their industry (working capital, current debt to total assets, basic earnings per share, and price-earnings ratios) • Describes the conceptual framework of accounting • Key changes: Updated terminology relating to current value and income Added explanation of future economic benefits Added illustration of operating cycle Expanded illustration of statement of financial position classifications Expanded discussion of using price-earnings ratio to assess the price of a company’s shares relative to the company’s earnings Added material on acceptance of IFRS-based financial statements by U.S securities regulators Included management stewardship of assets in objectives of financial reporting Added discussion of users identified in conceptual framework and explanation of the difference between fundamental and enhancing qualitative characteristics Revised conceptual framework illustration Chapter 3: The Accounting Information System • Feature story is about BeaverTails’ experiences with an accounting information system • Covers transaction analysis, explaining how accounts, debits, and credits are used to record transactions • Explains the first four steps in the accounting cycle, including analyzing, journalizing, and posting transactions and preparing the trial balance • Key changes: Updated receivable transactions in the Sierra Corporation accounting cycle example Expanded the discussion of when to record and not to record transactions in reference to the elements of financial statements Clarified a number of concepts incorporated in this chapter, including the use of negatives in the accounting equation, the use of the chart of accounts, and the distinction between formal general ledger accounts and T accounts Reformatted the accounting equation analysis to the same format used in Chapter so that students can more easily compare information in different parts of the accounting cycle from one chapter to the next Added a section on how opening balances affect accounting equation analyses Repositioned the discussion of normal balances earlier in the chapter Added a review of financial statement relationships to help students better understand the directional impact of shareholders’ equity and how the statements fit together Expanded the discussion about the preparation of a trial balance, including how to find errors Chapter 4: Accrual Accounting Concepts • Feature story is about Western University’s application of accrual accounting • Explains revenue and expense recognition • Emphasizes the difference between cash and accrual accounting • Completes the accounting cycle, from adjusting entries to the closing process • Key changes: Updated the revenue recognition section to incorporate new criteria consistent with anticipated changes to the revenue recognition standard and conceptual framework Clarified and reordered discussion of accrued revenues and expenses Added original transaction entries throughout adjusting entry section Reorganized summary tables and added effects on net income and shareholders’ equity Expanded discussion and illustration of closing entries, using same format employed in Chapters and Chapter 5: Merchandising Operations • Feature story is about Loblaw Companies Limited’s initiatives to improve its process of getting products from its suppliers to its shelves • Identifies the key differences between service and merchandising companies • Introduces inventory systems using perpetual inventory system (the periodic inventory system is presented in an appendix) • Explains how to record purchases and sales of merchandise • Presents single-step and multiple-step income statements • Applies ratio analysis to Loblaw, Metro, and their industry (gross profit margin and profit margin) • Key changes: Restructured multiple illustrations throughout the chapter, including income measurements, flow of costs, freight terms, cost of goods purchased, cost of goods available for sale, cost of goods sold, and net sales Added table outlining the advantages of each type of inventory system Included discussion on professional judgement required when classifying expenses by function Chapter 6: Reporting and Analyzing Inventory • Feature story is about lululemon athletica inc.’s inventory management • Explains how inventory quantities and ownership are determined • Covers cost formulas and their financial statement effects using perpetual inventory system (the periodic inventory system is presented in an appendix) • Discusses effects of inventory errors on financial statements • Outlines how to value and record inventory at the lower of cost and net realizable value • Applies ratio analysis to lululemon, Limited Brands, and their industry (inventory turnover and days in inventory) • Key changes: Deleted section on detailed inventory count procedures Revised discussion of errors to focus on two types of errors: errors made when determining the cost of inventory and errors made recording goods in transit Expanded discussion of goods in transit and clarified Glossary of the bond’s carrying amount Amortization is calculated as the difference between the interest expense and the interest paid (p 546) Elements of financial statements A set of broad categories or classes used to group financial information for presentation in the financial statements, such as assets, liabilities, equity, income, and expenses (p 76) Employee benefits Payments made by an employer for pension, insurance, health, and/or other benefits paid on behalf of its employees (p 528) Equity investments Investments in the share capital (common and/or preferred shares) of other corporations (p 648) Equity method An accounting method in which the investment in common shares is initially recorded at cost The investment account is then adjusted (increased for the investor’s share of the investee’s net income and decreased for dividends received) to show the investor’s equity in the investee (p 655) Expense recognition The process of recording an expense when there is a decrease in future economic benefits related to a decrease in an asset or an increase in a liability in the course of ordinary activities Expense recognition is linked to revenue recognition in that expenses are recognized in the period in which a company makes efforts to generate revenues (p 172) Expenses The decreases in economic benefits that result from the costs of assets consumed or services used in ongoing operations to generate revenue (p 12) External users Users of accounting information that are not involved in managing the organization and not have access to accounting information other than that which is publicly available, including investors, lenders, and other creditors (p 5) Fair value through other comprehensive income (OCI) model A fair value model for non-strategic investments that can be used only with an election under IFRS (not used under ASPE) It allows investors to record realized and unrealized gains and losses in other comprehensive income rather than in net income (p 651) Fair value through profit or loss model A valuation method that reports non-strategic debt or equity investments that are held for trading at their fair values, resulting in the recording of unrealized gains and losses in the income statement (p 650) Faithful representation A fundamental qualitative characteristic describing information that represents economic reality It must be complete, neutral, and free from material error (p 74) Finance lease (also known as a capital lease) A long-term agreement allowing one party (the lessee) to use the asset of another party (the lessor) The arrangement is accounted for as a purchase because the risks and rewards of owning the asset have been transferred to the lessee (p 467) Financial assets Receivables and investments that have a contractual right to receive cash or another financial asset (p 414) Financial liability A form of financial instrument, represented by a contractual obligation to pay cash in the future (p 524) Financing activities Activities that report the cash effects of debt or equity financing These include (1) borrowing or repaying cash from (to) lenders, and (2) issuing or reacquiring shares or paying dividends to investors (p 13) First-in, first-out (FIFO) cost formula An inventory cost formula that assumes that the costs of the earliest (oldest) goods acquired are the first to be recognized as the cost of goods sold The costs of the latest goods acquired are assumed to remain in ending inventory (p 306) Fiscal year An accounting period that is one year long (p 14) FOB (free on board) destination Freight terms indicating that the seller will pay for the shipping costs of the goods and is responsible for the goods until they arrive at their destination (normally the buyer’s place of business) (p 245) FOB (free on board) shipping point Freight terms indicating that the seller is responsible for the goods only until they reach their shipping point (normally the seller’s place of business) The buyer will pay for the shipping costs of the goods from the shipping point until they arrive at their destination and is responsible for them once they have left the shipping point (p 245) Franchise A contractual arrangement under which the franchisor grants the franchisee the right to sell certain products, to render specific services, or to use certain trademarks or trade names, usually within a designated geographic area (p 486) Fraud Intentional misappropriation of assets or misstatement of financial information (p 361) Free cash flow A cash-based measure used to evaluate solvency It is calculated by deducting net capital expenditures and cash dividends from net cash provided (used) by operating activities (p 723) Function A method of organizing expenses on the income statement by way of the activity (business function) for which they were incurred (such as cost of goods sold, administrative, and selling) (p 254) General journal The book of original entry in which transactions are recorded in chronological (date) order (p 122) General ledger The book of accounts that contains a company’s asset, liability, and shareholders’ equity (common shares, retained earnings, revenue, expense, and dividends declared) accounts (p 123) Generally accepted accounting principles (GAAP) A general guide, having substantial authoritative support, that describes how economic events should be recorded and reported for financial reporting purposes (p 8) Going concern assumption The assumption that the business will remain in operation for the foreseeable future (p 76) Goodwill The value of favourable, unidentifiable attributes related to a company as a whole It is calculated when one business acquires another and pays more than the fair value of the company's net identifiable assets (p 486) G-3 Gross pay The total compensation (such as salaries or wages) earned by an employee (p 527) Gross profit (also known as gross margin) Sales revenue less cost of goods sold (p 241) Gross profit margin Gross profit expressed as a percentage of sales It is calculated by dividing gross profit by net sales (p 258) Gross sales Total sales before deducting any sales returns and allowances and sales discounts (p 252) Held for trading investments Investments in debt securities or equity securities of other companies that are bought with the intention of selling them after a short period of time in order to earn income from their price fluctuations (p 57) Historical cost basis of accounting Measurement basis that states that assets and liabilities should be recorded at their cost at the time of acquisition (p 77) Honoured note A note that is paid in full at maturity (p 427) Horizontal analysis (also known as trend analysis) A technique for evaluating a series of financial statement data over a period of time to determine the increase (decrease) that has taken place This increase (decrease) is expressed as either an amount or a percentage (p 768) Horizontal percentage change for the period (also known as the horizontal percentage change between periods) A percentage measuring the change from one year (or period) to the next year (or period) It is calculated by dividing the dollar amount of the change between the specific year (or period) under analysis and the prior year (or period) by the prior-year amount (p 769) Horizontal percentage of a base-period amount A percentage measuring the change since a base year (or period), normally involving more than one year (or period) It is calculated by dividing the amount for the specific year (or period) under analysis by the base-year (period) amount (p 768) Impairment loss The amount by which the carrying amount of an asset exceeds its recoverable amount (p 476) Income (also known as revenue) The increase in economic benefits that result from the normal operating activities of a business, such as the sale of a product or provision of a service (p 12) Income available to common shareholders Net income less the annual preferred dividend for cumulative preferred shares The dividend is deducted for noncumulative preferred shares only if declared (p 611) Income from operations The results of a company’s normal operating activities It is calculated as gross profit less operating expenses (p 256) Income statement (also known as statement of earnings or statement of profit and loss) A financial statement that presents the revenues and expenses and resulting net income or loss of a company for a specific period of time (p 15) Income summary A temporary account used in closing revenue and expense accounts The balance in each individual revenue and expense account is credited or debited and summarized in the Income Summary account before being closed G-4 Glossary to retained earnings (via the Income Summary account) (p 198) Indirect method A method of determining net cash provided (used) by operating activities on the statement of cash flows in which net income is adjusted for items that not affect cash (p 702) Initial public offering (IPO) The initial offering of a corporation’s shares to the public (p 588) Intangible assets Assets of a long-lived nature that not have physical substance but represent a privilege or a right granted to, or held by, a company (p 59) Internal controls Systems designed to help an organization achieve reliable financial reporting, effective and efficient operations, and compliance with relevant laws and regulations (p 304) Internal users Users of accounting information who have access to an organization’s internal accounting information, including company officers, managers, and directors (p 4) Inventory (p 57) Goods held for sale to customers Inventory turnover A liquidity measure of the number of times, on average, that inventory is sold (“turned over”) during the period It is calculated by dividing the cost of goods sold by the average inventory Average inventory is calculated by adding the beginning and ending inventory balances and dividing the result by (p 320) Investee The corporation that issues (sells) the debt or equity securities (p 654) Investing activities Activities that report the cash effects of purchasing and disposing of longlived assets such as property, plant, and equipment and investments not held for trading (p 13) Investors Users of accounting information that have an ownership interest (owns debt or equity securities) in the organization (p 5) Issued shares The portion of authorized shares that has been sold (p 589) Legal capital The amount per share that must be retained in the business for the protection of corporate creditors Equal to the proceeds received from the issue of most shares (p 590) Lenders Users of accounting information, including bankers, that extend credit to borrowers (p 5) Liabilities The debts and obligations of a business Liabilities are claims of lenders and other creditors on the assets of a business (p 10) Licences Operating rights to use an asset that are granted by a government agency or other organization (p 486) Liquidity ratios Measures of a company’s shortterm ability to pay its maturing obligations (usually current liabilities) and to meet unexpected needs for cash These include working capital and the current, receivables turnover, average collection period, inventory turnover, and days in inventory ratios (p 67) Long-term investments (also known as investments) Investments in debt securities intended to be held for many years to earn interest, and (2) equity securities of other companies held to generate investment revenue or held for strategic reasons (p 58) Loss (also known as net loss) The amount by which expenses are more than revenues The opposite of net income (p 13) Lower of cost and net realizable value (LCNRV) A basis for stating inventory at the lower of its original cost and its net realizable value at the end of the period (p 317) Market capitalization A measure of the fair value of a company’s equity It is calculated by multiplying the number of shares by the share price at any given date (p 590) Market interest rate (also known as the effective interest rate) The rate that investors demand for lending funds to a corporation (p 545) Multiple-step income statement An income statement that shows several steps to determine net income or loss by separately reporting net sales, gross profit, income from operations, income before income tax, and net income (p 255) Nature A method of organizing expenses on the income statement by way of their natural classification (such as salaries, transportation, depreciation, and advertising) (p 254) Net income (also known as profit or net earnings) The amount by which revenues exceed expenses (p 12) Net pay Gross pay less payroll deductions (p 527) Net purchases Purchases less purchase returns and allowances and purchase discounts (p 262) Net realizable value (NRV) The selling price of an inventory item, less any costs required to make the item saleable (p 317) Net sales Gross sales less sales returns and allowances and sales discounts (p 252) Noncumulative Preferred shares that are entitled to the current dividend, if declared, but not to any undeclared and unpaid amounts from prior years (p 595) Non-current assets (also known as long-term assets) Assets that are not expected to be converted into cash, sold, or used up by the business within one year of the financial statement date (p 58) Non-current liabilities (also known as long-term liabilities) Obligations that are not expected to be paid or settled within one year of the financial statement date (p 62) Non-GAAP measures Management-defined measures of financial performance (p 797) Non-strategic investment A debt or equity investment that is purchased mainly to generate investment income (p 648) Nontrade receivables Receivables (such as interest receivable, loans to company officers, and income tax receivable) that not result from the operations of the business (p 414) Normal balance The side of an account used to increase the account Asset accounts have a normal debit balance Liabilities and shareholders’ equity accounts have a normal credit balance Individual components that make up shareholders’ equity have normal balances as follows: common shares, retained earnings, and revenue accounts have normal credit balances Expense and dividends declared accounts have normal debit balances, as they reduce retained earnings (p 116) Normal course issuer bid The reacquisition of a specified percentage of a company’s own shares from the general public for a predetermined price and period, subject to regulatory approval (p 592) Notes payable (also known as loans payable) Amounts owed to suppliers, banks, or others that are normally interest-bearing and supported by a written promise to repay (p 61) Notes receivable (also known as loans receivable) Amounts owed by customers or others that are normally interest-bearing and supported by a written promise to repay (p 57) NSF (not sufficient funds) cheque (also known as a returned cheque) A cheque that has been deposited but is returned by a bank because there are insufficient funds in the bank account of the customer who wrote the cheque (p 372) Objective of financial reporting The provision of financial information about a company that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the company (p 73) Operating activities Activities that result from day-to-day operations They report the cash effects of transactions that create revenues and expenses (p 13) Operating cycle Average period of time it takes for a business to pay cash to obtain products or services and then receive cash from customers for these products or services (p 56) Operating expenditures Expenditures that benefit only the current period They are immediately charged against revenues as an expense (p 464) Operating expenses Expenses incurred in the process of earning sales revenue They are deducted from gross profit to arrive at income from operations (p 241) Operating lease An arrangement allowing one party (the lessee) to use the asset of another party (the lessor) The arrangement is accounted for as a rental because the risks and rewards of owning the asset have been retained by the lessor (p 467) Operating line of credit (also known as a credit facility) A pre-arranged agreement to borrow money at a bank, up to an agreed-upon amount (p 524) Other comprehensive income (OCI) Gains and losses that affect shareholders’ equity but are not shown in net income or loss They relate to complex transactions such as certain types of gains and losses on investments (p 604) Outstanding cheques Cheques issued (written and distributed) and recorded by a company that have not yet been paid (cleared) by the bank (p 373) Parent company A company that controls (usually owns more than 50% of) the common shares of another company (p 655) Glossary Partnership A business owned by more than one person (p 7) Patent An exclusive right issued by the federal government that enables the recipient to manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the application (p 484) margin, return on assets, return on common shareholders’ equity, earnings per share, price-earnings, payout, and dividend yield ratios (p 70) Payment (distribution) date The date dividends are paid or distributed to shareholders (p 598) Property, plant, and equipment Tangible assets, such as land, buildings, and equipment, with relatively long useful lives that are being used to operate the business (p 59) Payout ratio A measure of the percentage of the net income distributed in the form of cash dividends to common shareholders It is calculated by dividing cash dividends by net income (p 608) Payroll deductions Deductions from gross pay to determine the amount of a paycheque (p 527) Percentage of receivables method A method of determining bad debts expense using a percentage of accounts receivable that are likely to be uncollectible (p 419) Periodic inventory system An inventory system in which detailed records are not maintained and the ending inventory and cost of goods sold are determined only at the end of the accounting period after a physical inventory count has been completed (p 243) Permanent accounts Statement of financial position accounts whose balances are carried forward to the next accounting period (p 197) Perpetual inventory system An inventory system in which the quantity and cost of each inventory item is maintained The records continuously show the inventory that should be on hand and the cost of the items sold (p 241) Post-closing trial balance A list of permanent accounts and their balances after closing entries have been journalized and posted (p 203) Posting The procedure of transferring journal entries to the general ledger accounts (p 124) Preferred shares Share capital that has contractual preferences over common shares in certain areas (p 594) Premium The difference between the issue price and the face value of a bond when a bond is sold for more than its face value This occurs when the market interest rate is lower than the coupon interest rate (p 545) Prepaid expenses Costs paid in advance of use that benefit more than one accounting period They are initially recorded as assets and become expenses only when they are used or consumed and no longer have future benefit (p 57) Price-earnings (P-E) ratio A profitability measure of the ratio of the market price of each common share to the earnings per share It reflects investors’ beliefs about a company’s future income potential (p 71) Private corporation A corporation whose shares are not traded on a public stock exchange (p 8) Profit margin Net income expressed as a percentage of net sales It is calculated by dividing net income by net sales (p 259) Profitability ratios Measures of a company’s operating success for a specific period of time These include the gross profit margin, profit Promissory note A written promise to pay a specified amount of money on demand or at a fixed date in the future (p 425) Proprietorship A business owned by one person (p 6) Provisions Liabilities of uncertain timing or amount They are recorded in the accounts based on reasonable and probable estimates (p 533) Public corporation A corporation whose shares are publicly traded on a stock exchange (p 8) Purchase discount A price reduction, based on the invoice price less any returns and allowances, to encourage customers to make an early payment of a credit purchase (p 247) Purchase returns and allowances A return of goods for cash or credit, or a deduction granted by the seller on the selling price of unsatisfactory merchandise (p 246) Quantity discount A price reduction that reduces the invoice price and is given to the buyer for volume purchases Quantity discounts are not separately recorded (p 251) Realized gain or loss The difference between fair value and cost (carrying amount) when an investment is actually sold (p 650) Receivables turnover A measure of the liquidity of receivables It is calculated by dividing net credit sales by the average gross accounts receivable and is expressed as the number of times per year that the accounts receivable are collected (p 431) Record date The date when ownership of shares is determined for dividend purposes (p 598) Relevance A fundamental qualitative characteristic describing information that makes a difference in a user’s decision It should have predictive value, confirmatory value, or both, and be material (p 74) Reporting entity concept The concept that economic activity that can be identified with a particular company must be kept separate and distinct from the activities of the owner(s) and of all other economic entities (p 6) Research expenses Expenditures on an original planned investigation that is done to gain new knowledge and understanding These costs are expensed because criteria for recording them as assets have not been met (p 485) Residual value An estimate of the amount that a company would obtain from the disposal of an asset at the end of its useful life (p 469) Restricted cash Cash that is not available for general use, but instead is restricted for a particular purpose (p 380) Retained earnings The amount of accumulated net income (less net losses, if any) from the prior and current periods that has been retained and reinvested in the corporation for future use G-5 and not distributed to shareholders as dividends (p 16) Retained earnings restrictions Circumstances that make a portion of retained earnings currently unavailable for dividends (p 604) Return on assets A profitability measure that indicates the amount of net income generated by each dollar invested in assets It is calculated as net income divided by average total assets [(beginning ending total assets) 2] It can also be calculated by multiplying profit margin by asset turnover (p 490) Return on common shareholders’ equity A measure of profitability from the shareholders’ point of view It is calculated by dividing net income minus preferred dividends by average common shareholders’ equity (total shareholders’ equity minus preferred shares) (p 612) Revaluation model A model of accounting for a long-lived asset that carries the asset at its current value less accumulated depreciation or amortization (p 476) Revenue (also known as income) The increase in economic benefits that result from the operating activities of a business, such as the sale of a product or provision of a service (p 12) Revenue recognition The process of recording revenue when there is an inflow of future economic benefits that result from an increase in an asset or a decrease in a liability in the course of ordinary activities In addition, five conditions must be met: a contract must exist, performance obligations identified, the transaction price determined, the transaction price allocated to the performance obligations, and revenue recognized when the performance obligation is satisfied (p 170) Sales discount A price reduction that is based on the invoice price less any returns and allowances and is given by a seller for early payment of a credit sale (p 251) Sales returns and allowances A return of goods or reduction in price due to unsatisfactory merchandise (p 250) Sales revenue The main source of revenue in a merchandising company (p 241) Share capital Shares representing the ownership interest in a corporation If only one class of shares exists, it is known as common shares (p 10) Shareholders’ equity The shareholders’ claim on total assets, represented by the investments of the shareholders (share capital) and undistributed earnings (retained earnings) generated by the company (p 16) Significant influence An investor’s ability to influence decisions made by an investee, which is assumed to exist when more than 20% but less than 50% of an investee’s shares are owned (p 654) Single-step income statement An income statement that shows only one step (revenues less expenses) in determining income before income tax, after which income tax expense is deducted to determine net income (loss) (p 253) Solvency ratios Measures of a company’s ability to survive over a long period of time by having enough assets to settle its liabilities as they fall due G-6 Glossary These include the debt to total assets and times interest earned ratios and free cash flow (p 69) Specific identification cost formula An inventory cost formula used when goods are unique, identifiable items and not ordinarily interchangeable It follows the actual physical flow of goods, and individual items are specifically costed to arrive at the cost of goods sold and cost of the ending inventory (p 305) Statement of cash flows A financial statement that provides information about the cash inflows (receipts) and cash outflows (payments) for a specific period of time (p 19) Statement of changes in equity A financial statement that summarizes the changes in total shareholders’ equity, as well as each component of shareholders’ equity, for a specific period of time (p 16) Statement of comprehensive income A financial statement that presents net income (loss) and other comprehensive income (loss) for a specific period of time Other comprehensive income items, such as realized and unrealized gains and losses from investments accounted for using the fair value through OCI model, are not reported on the income statement because they are not considered critical to the evaluation of management’s performance, but are included in comprehensive income (p 660) Statement of financial position (also known as balance sheet) A financial statement that reports the assets, liabilities, and shareholders’ equity at a specific date (p 17) Statement of retained earnings A statement that summarizes the changes in the Retained Earnings account during the period This statement is issued only by private companies reporting using ASPE (p 606) Stock dividend A pro rata (proportional) distribution of the corporation’s own shares to shareholders (p 599) Stock split The issue of additional shares to shareholders accompanied by a reduction in the legal capital per share (p 600) Straight-line method A depreciation method in which depreciation expense is calculated by dividing the depreciable amount of a long-lived asset, such as buildings or equipment, by its useful life (p 470) Strategic investment An equity investment that is purchased to influence or control another company (p 648) Subsidiary company A company whose common shares are controlled (usually more than 50% of the common shares are owned) by another company (p 655) Subsidiary ledger A ledger that is used to manage the detailed information that would be difficult to track in a general ledger account A control account in the general ledger summarizes the information in the subsidiary ledger (p 415) Supplies Consumable items used in running a business, such as office and cleaning supplies (p 57) T account (also known as a general ledger account) The basic form of an account, with a debit (left) side and a credit (right) side showing the effect of transactions on the account (p 116) Temporary accounts Revenue, expense, and dividends declared accounts whose balances are transferred to Retained Earnings at the end of an accounting period (p 197) Timeliness An enhancing qualitative characteristic of useful information that means that information is available to decision makers in time to be capable of influencing their decisions (p 75) Times interest earned A measure of a company’s solvency, calculated by dividing net income (earnings) before interest expense and income tax expense (EBIT) by interest expense (p 542) Trade receivables Accounts and notes receivable that result from sales transactions (p 414) Trademark (trade name) A word, phrase, jingle, or symbol that distinguishes or identifies a particular business or product (p 485) Trial balance A list of general ledger accounts and their balances at a specific time, usually at the end of the accounting period There are three different kinds of trial balances: unadjusted trial balances (before adjusting entries are made), adjusted trial balances (after adjusting entries are made), and post-closing trial balances (after closing entries are made) (p 132) Unadjusted trial balance A list of accounts and their balances before adjusting journal entries have been made (p 175) Understandability An enhancing qualitative characteristic of useful information that means that information is clearly and concisely classified, characterized, and presented (p 75) Unearned revenue Cash received when a customer pays in advance of being provided with a service or product It is received before revenue is earned and is therefore recorded as a liability until it is earned (p 61) Units-of-production method A depreciation method in which the useful life is expressed in terms of the total units of production or total use expected from the asset Depreciation expense is calculated by multiplying the depreciable amount by the actual activity during the year divided by the estimated total activity The method will produce an expense that will vary each period depending on the amount of activity (p 473) Unrealized gain or loss The difference between the fair value and cost (carrying amount) of an investment still held (owned) by the investor (p 650) Useful life The length of service of a depreciable asset (p 179) Verifiability An enhancing qualitative characteristic of useful information that means that different knowledgeable and independent users could reach a consensus that the information is faithfully represented (p 75) Vertical analysis (also known as common size analysis) A technique for evaluating financial statement data that expresses each item in a financial statement as a percentage of a base amount The base amount is usually net sales in the income statement and total assets in the statement of financial position (p 772) Vertical percentage of a base amount A percentage measuring the proportion of an amount in a financial statement within a year (or period) It is calculated by dividing the financial statement amount under analysis by the base amount for that particular financial statement (such as net sales for the income statement or total assets for the statement of financial position) (p 772) Weighted average number of common shares A weighted average of the number of common shares issued during the year Shares issued or repurchased during the year are weighted by the fraction of the year for which they have been issued (p 611) Weighted average unit cost The average cost of inventory weighted by the number of units purchased at each unit cost It is calculated as the cost of goods available for sale divided by the number of units available for sale (p 309) Working capital A measure of liquidity used to evaluate a company’s short-term debt-paying ability It is calculated by subtracting current liabilities from current assets (p 67) Company Index A The A Leon Company, 585 AC Value Centers, Accounting Standards Board, 73 Adidas AG, 448, 627 Air Canada, 182, 490, 490f, 491, 491f, 492, 495 Air Transat, 495 Alibaba Group, 589 Alimentation Couche-Tard Inc., 8, 86, 571 Amazon.com Inc., 806 Anheuser-Busch In Bev SA/NV, 804 Apple Inc., 259, 367, 482, 485, 739, 758, 786 Atlantic Grocery Distributors Ltd., 275 B Bank of Canada, 367, 534, 535 Bank of Montreal, 806 Bank of Nova Scotia (Scotiabank), 108f, 126f, 373, 636, 647, 650, 659–661, 659f, 660f, 661f, 663, 664, 664f Bâton Rouge, 406 Baytex Energy Corp., 574 BCE (Bell Canada Enterprises), 609f, 652, 652f, 653, 653f BeaverTails Canada Inc., 105, 106, 121 Bell Canada Enterprises See BCE (Bell Canada Enterprises) Berkshire Hathaway, 72 Best Buy, 278 Big Rock Brewery Inc., 88 Bitcoin, 367 BlackBerry Limited, 58, 58f Blue Jays, 485 BMTC Group Inc., 608, 608f, 609, 609f, 611, 612–613, 613f Boardwalk REIT, 404 Bombardier, 8, 240 Boston Pizza International, Boston Pizza Royalties Income Fund, 638 Brault & Martineau, 608 Brick Brewing Company Ltd., 812, 813 The Brick Ltd., 585 Brookfield Asset Management Inc., 679 Burger King, 44 Byward Market, 105 C Calgary Stampeders, 359 Cameco Corporation, 90, 681 Canada Post Corporation, 523, 525, 532, 533, 539, 539f, 540, 541, 541f, 542, 542f, 543, 555, 556 Canada Post Group of Companies, 523 Canada Revenue Agency (CRA), 5, 113, 170, 475 Canadian Accounting Standards Board, Canadian Football League (CFL), 359 Canadian Intellectual Property Office, 484, 485 Canadian National Railway Company (CN), 444, 624 Canadian Oil Sands Ltd., 655 Canadian Pacific Railway Limited, 586, 587, 624, 649, 819–820 Canadian Payments Association, 368 Canadian Tire Corporation, Limited, 14, 40, 55, 67, 80–82, 81f, 101, 273, 311, 333, 413, 415, 421, 428–429, 429f, 430, 431–432, 431f, 434, 438, 647, 739, 794–795 Canfor Corporation, 284, 441 Cavendish Farms, 795, 804 CBC, 485 Cencosud, 647 Chicago Mercantile Exchange, 319 Choice Properties REIT, 66, 67–71, 67f, 69f, 70f, 71f, 72, 89 CIBC, 85, 627, 804 Cineplex Inc., 632 Clearwater Seafoods Incorporated, 737 CN See Canadian National Railway Company (CN) The Coca-Cola Company, 342, 482, 501, 622 Columbia Sportswear Company, 739 Columbia University, 72 Confederation Minerals, 601 Cost-U-Less, Costco Wholesale Corporation, 97, 268, 504, 609f CRA See Canada Revenue Agency (CRA) Crombie REIT, 89 CT Real Estate Investment Trust (CT REIT), 54, 55, 56, 59, 65, 66, 67–71, 67f, 68f, 69f, 70f, 71f, 72, 77, 89 CT REIT See CT Real Estate Investment Trust (CT REIT) D Dana Holdings Inc., 347 DAVIDs TEA, 589, 803 Desjardins Group, Dollarama Inc., 8, 304, 511, 564, 621, 774–776, 775f, 777–780, 777f, 778f, 779f, 780f, 781, 782–784, 782f, 783f, 786, 786f, 787–792, 787f, 788f, 789f, 790f, 791f, 795 Dominion Bond Rating Service (DBRS), 543 Equifax, 430 Ethan Allen Interiors Inc., 618 F Facebook, Inc., 34, 242, 422, 597 Fasken Martineau LLP, 275 FGL Sports Ltd., 413 Financial Consumer Agency of Canada, 422 Finning Equipment, 311 Finning International Inc., 443 First Capital Realty Inc., 230 Freeport-McMoRan Inc., 723–724, 723f French’s, 242 G Galeria Holdings, 767, 768, 769–771, 773–774, 778, 780, 782, 784, 788 Ganong Bros., 39 George Weston Ltd., 8, 676 Giant Tiger, Gildan Activewear Inc., 337, 501, 636 Gilt Groupe, 767 GlaxoSmithKline, 43 Goldcorp, 317 Google Canada, Google Inc., 482, 485, 755, 786 H HBC See Hudson’s Bay Company (HBC) Heinz, 242 High Liner Foods Incorporated, 39, 152, 439 Home Outfitters, 767 Honda, 486 Hudson’s Bay Company (HBC), 3, 63, 63f, 511, 587, 767, 768–771, 768f, 770f, 771f, 772–774, 773f, 774f, 775–776, 775f, 777–780, 777f, 778f, 779f, 780f, 781, 782–784, 782f, 783f, 786, 786f, 787–792, 787f, 788f, 789f, 790f, 791f, 793, 795, 796, 796f, 797 Hydro One Limited, 589, 622 I IASB See International Accounting Standards Board (IASB) IHS, 259 Imvescor Restaurant Group Inc., 406 Indigo Books & Music Inc., 39, 86 Industry Canada, 484 Innovapost Inc., 523 International Accounting Standards Board (IASB), 9, 73–74, 467 Irving Group of Companies, 8, 795 J E Empire Company Limited, 8, 43, 58, 655 Encana Corporation, 464 Jean Coutu, 14, 311 The Jim Pattison Group, 8, 272 Joe Fresh, 239 JPMorgan Chase Bank, 647 L La Senza, 320 Le Château Inc., 93, 750 Leon’s Furniture Limited, 87, 562, 585, 586, 588, 589–590, 594, 598, 604–606, 605f, 608–609, 608f, 609f, 611–612, 612–613, 613f Limited Brands Inc., 320, 320f, 321 Linamar Corporation, 798 Lions Gate Entertainment, 14 Lisa’s Chop Shop, 125 Live Nation Entertainment, Inc., 90–91 Loblaw Companies Limited, 8, 66, 239, 241, 242, 245, 258, 259, 259f, 273, 311, 565, 676 Lord & Taylor, 767, 768 L’Oréal Group SA, 94 lululemon athletica inc., 14, 301, 303–304, 317, 319–320, 320f, 321, 326, 609f, 610, 621, 818–819 M Maclean’s Magazine, 212 Magna International Inc., 311, 347, 804 Manulife Financial, Maple Leaf Foods Inc., 37, 212, 311, 441 Maple Leaf Sports & Entertainment, 43 Maritime Bus, Mark’s, 55, 413 MasterCard, 367 McCain Foods Limited, 8, 98, 795, 804 McDonald’s Corporation, 342, 755 McMahon Stadium, 359 Metro Inc., 258, 259, 259f, 624, 810 Microsoft Corp., 72, 755 Mikes, 406 Morris Formal Wear, 474 Mountain Equipment Co-op, 39 N National Bank of Canada, 632 National Hockey League (NHL), 4, 107, 486 Netflix, 601 New Flyer Industries Inc., 806 New York Stock Exchange, 587, 589 NHL See National Hockey League (NHL) Nick’s Steakhouse and Pizza, 359, 362, 364, 367–368, 380, 406 Nike, Inc., 448, 485, 627 No Frills, 66, 239 Norbord Inc., 652, 652f Nordstrom, 767 The North West Company Inc., 3, 7, 8, 10, 11, 12, 13, 15, 22, 23f, 24, 25, 28, 46–47, 57, 98, 157, 229–230, 240, 272, 293, 350, 365, 406, 419, 454, 513, 573, 638, 689, 756–757, 827 I-2 Subject Index Northern, NorthMart, O Open Text Corporation, 564–565 Ottawa Senators, 486 Overwaitea Food Group, 272–273 P Parcelforce, 555 PayPal, 367 PepsiCo, Inc., 347, 501, 622 Pizza Pizza Limited, 406, 638 Poseidon Concepts Corp., 75, 713 Potash Corporation of Saskatchewan Inc., 444, 804 Power Corporation of Canada, Province of Manitoba, 565 Purolator Holdings Ltd., 523, 555 Purolator Inc., 541 Q Quickstop, R RBC Financial Group, 212 Real Canadian Superstore, 239 Reitmans (Canada) Limited, 37, 59, 59f, 93, 148, 504, 750 Restaurant Brands International, 44 Richelieu Hardware Ltd., 623 Rogers Centre, 212 Rogers Communications Inc., 452, 485, 486 Royal Bank of Canada, 8, 39, 590, 609f, 621, 649 Royal Canadian Mint, 367 Royal Mail Holdings plc, 555, 555f, 556 S SAB Miller plc, 804 Sage Accounting, 125 Saks Inc., 767, 768, 769, 771, 788, 792 Saks Off Fifth, 767 Samsung, 786 Saputo Inc., 88, 143–144, 311, 319, 501, 568 Save-On-Foods, 273 SCI Group Inc., 523 Scores, 406 Scotiabank See Bank of Nova Scotia (Scotiabank) Sears, 212, 431–432, 431f, 434 Sears Canada Inc., 40, 61, 62f, 311, 647 The Second Cup Ltd., 750 Shaw Communications Inc., 14, 60, 60f, 452, 499 Shoppers’ Drug Mart, 239, 676 Skyline Group of Companies, 230 Snap-On Incorporated, 628 Sobeys Inc., 8, 9, 28, 28f–29f, 47, 89, 98, 157, 272, 293, 350, 406, 454, 573, 655, 689, 827 Sony/ATV Music Publishing, 484 Sony Corp, 484 Sport Chek, 55, 413 Sports Experts, 413 Stanley Black & Decker, Inc., 628 Stantec Inc., 732, 732f–733f Starbucks Corporation, 44, 750 Sun Life, 589 Suncor Energy Inc., 8, 504, 655, 699 Superstore, 66 Syncrude Canada Ltd., 655 System for Electronic Document Analysis and Retrieval (SEDAR), United Parcel Service (UPS), 541, 541f, 542, 542f Universal Music Publishing Group, 484 University of Calgary Students’ Union, 43 UPS See United Parcel Service (UPS) Urban Fare, 273 T Vale Canada, Visa, 367 Vivendi SA, 484 Volvo Group, 290 Target Corporation, 508, 767, 800 TD Bank, 85 Teck Resources, 699, 723–724, 723f TELUS Corporation, 62–63, 62f, 88 Thomson Reuters Corporation, 485, 806 Tim Hortons, 3, 44, 482, 486 Toronto Blue Jays, 212 Toronto Maple Leafs, Toronto Raptors, Toronto Stock Exchanges (TSX), 3, 8, 10, 55, 75, 585, 587, 589 Total E&P Canada, 699 Toys “R” Us, Inc., 275 Transat A.T Inc., 495, 495f TransUnion, 430 TWC Enterprises Limited, 811 Twitter, 422 V W Walmart Stores, Inc., 97, 242, 434, 508, 795, 800 Wendy’s/Arby’s Group, Inc., 755 The Wendy’s Company, 342 Western University, 169, 170, 173, 182, 186 WestJet Airlines Ltd., 43, 91, 212, 463, 467, 469, 475, 484, 488, 488f, 489, 489f, 490, 490f, 491, 491f, 492, 495, 563, 609f Weston, Winnipeg Stock Exchange, 3, 10 U Uber Technologies Inc., 157 Under Armour, Inc., 326 Z Accounting Standards for Private Enterprises (ASPE), amortization, 60, 179, 483 balance sheet, 17 basic earnings per share, 80, 789 business activities, 701 capital lease, 467 classification of activities, 732 comprehensive income, 799 conceptual framework, 73, 80 consolidation, 671 contingent liabilities, 533 cost model, 468, 671 direct method, 712 equity method, 671 expenses, 254, 268 impairment loss, 476 intangible assets, and reversals, 483 inventory, reporting, 320 inventory cost formulas, 305 investments, 662–663, 663f investments in associates, 671 long-lived assets, 488 other comprehensive income, 604, 660, 671, 796 policy choices, 795 revaluation model, 476 revenue recognition, 170, 206 segment disclosure, 795, 799 share issue, 592 shareholders’ equity, 602 statement of retained earnings, 27, 606 accounting time periods, 170 accounting transaction, 106 see also analysis of transactions accounts payable, 12, 61, 530 changes in, 710–711 partial payment of, 111, 129 accounts receivable, 12, 57, 414 see also accounts receivable management accrued revenues, 189f aging of accounts receivable method, 419 bad debts expense, recognition of, 418 carrying amount, 419 changes in, 708–709 interest revenue, 416–417 partial collection, 112, 130 percentage of receivables method, 419 recording accounts receivable, 414–415 Zellers, 767, 786, 796, 797 Subject Index A accelerated depreciation methods, 472 account, 115 accounting, accounting cycle, 106, 134, 135f, 204f, 240 adjusted trial balance, 193–194 adjusting entries See adjusting entries analysis of transactions, 106–115 closing entries, 197–202 journalizing, 121–123 post-closing trial balance, 203, 203f posting, 123–125 preparation of financial statements, 194–195 trial balance, 132–134 accounting equation, 17, 107, 116 analysis of transactions, 106–115 assets, 117–118 debit and credit rules, 119, 119f expanded accounting equation, 107, 107f, 119, 119f liabilities, 118 accounting information ethics, external users, 5, 18 internal users, 4–5, 18–19 qualitative characteristics, 74–76 accounting information system, 106 accounts, 115–121 analysis of transactions, 106–115 computerized accounting systems, 121, 125 debits and credits, 115–121 general journal, 121–123 general ledger, 123–125 recording process, illustration of, 126–132 trial balance, 132–134 accounting policies, accounting principles, see also generally accepted accounting principles (GAAP) accounting standards, 8, 27 see also Accounting Standards for Private Enterprises (ASPE); International Financial Reporting Standards (IFRS) I-3 Subject Index social media, and debt collectors, 422 subsidiary ledger, 415–416 accounts receivable management, 430–432 and cash, 432 credit, extension of, 430 liquidity of receivables, 431–432 monitoring collections, 430 payment period, 430 accrual basis accounting, 74, 172–174, 173f, 195–196, 469 accruals, 175, 184–191 accrued expenses, 175, 185–188, 191f interest, 185–186, 186f salaries, 186–188 accrued payables, 61, 185 see also accrued expenses accrued receivables, 189 see also accrued revenues accrued revenues, 57, 175, 189–190, 191f accumulated depreciation, 468–469, 488, 716 Accumulated Depreciation account, 180–181, 468 accumulated other comprehensive income (AOCI), 24, 604, 607, 664–665, 719 additional contributed capital, 591 see also contributed surplus adjusted EBITDA, 797 adjusted trial balance, 193–194, 194f, 199f adjusting entries, 174–176 accruals, 175, 184–185, 184–191 accrued expenses, 185–188, 191f accrued revenues, 189–190, 191f basic relationships, summary of, 191, 191f illustration, 191–193 periodic inventory system, 264 prepaid expenses, 177–181, 191f preparation of, 175 prepayments, 175, 176–184, 191f unearned revenues, 182–184, 191f adjustments, 706, 706f administrative expenses, 12 aging of accounts receivable method, 419 aging schedule, 419, 420f, 430 aging the accounts receivable, 419 allowance entry, 424 Allowance for Doubtful Accounts, 418, 419 allowance method, 418, 422, 424–426 alternative accounting policies and estimates, 795 amortizable amount, 483 amortizable cost, 469 amortization, 60, 179, 483, 547, 547f amortization tables, 548f amortized cost model, 651, 659f, 662f, 663f analysis of transactions, 106–115 basic analysis, 108 equation analysis, 108, 113f, 114–115, 114f illustration of, 108–115 opening balances, 114–115, 114f transaction identification, 106 annual rate of interest, 426 annual report, 25, 364 AOCI See accumulated other comprehensive income (AOCI) ASPE See Accounting Standards for Private Enterprises (ASPE) asset accounts, 117 asset retirement costs, 464 asset turnover, 490–491, 491f, 787–788, 792f assets, 11, 12, 56, 76, 76f see also specific types of assets in accounting equation, 117–118 capital assets, 59 see also property, plant, and equipment cost as asset, 177 current assets, 56–58, 58f depreciable assets, 179, 467 financial assets, 414 fixed assets, 59 see also property, plant, and equipment intangible assets See intangible assets long-lived assets See long-lived assets non-current assets, 58–60 property, plant, and equipment See property, plant, and equipment on statement of financial position, 17, 56–60 in T account, 117–118 assignment of responsibility, 360–361, 362, 368 associate, 654, 656–657, 659f authorized shares, 588 available-for-sale securities, 664 average collection period, 431, 431f, 779, 780f average cost formula, 309–310, 311–314, 323–324, 324f B bad debt recovery, 423 bad debts accounting for, 417–425 aging of accounts receivable method, 419 allowance entry, 424 allowance method, 418, 422, 424–426 bad debts expense, 418, 420–421 collecting uncollectible accounts, 423 effects of mismatching bad debts, 418f estimated uncollectible accounts, 419–421 percentage of receivables method, 419 recovery entries, 424 write-off entry, 424 writing off uncollectible accounts, 421–422, 424 balance sheet, 17 see also statement of financial position bank charges expense, 378 bank errors, 373, 375, 377 bank indebtedness, 11, 61, 117, 380, 525 bank loan, 108–109, 126, 718 bank loan payable, 11 bank overdrafts, 380 bank reconciliations, 370–379 amounts added to bank account (credits), 373 amounts deducted from bank account (debits), 372 bank statements, 371–373, 371f errors, 373 illustration, 377 journal entries, 378–379 reconciliation procedures, 374, 375f reconciling items on the book side, 376, 377 reconciling items per bank, 374–375, 377 timing differences, 373 bank statements, 371–373, 371f bases, 77 basic analysis, 108 basic earnings per share (EPS), 70–71, 70f, 80, 610–612, 610f, 789, 793f beginning inventory, 241 Bieber, Justin, 484 Bitcoin, 367 blended principal plus interest, 536–537, 537f, 538f bond, 544, 549 bond discount amortization schedule, 548f bond interest accrual entries, 548f bond interest expense, 546–549 bond interest payment entries, 547f bond investment, for the investor, 666–668 bond issues, 545–546 bond prices, 545, 546f, 549–553 bonds payable, 11, 62, 544–553, 668 callable bonds, 549 carrying amount, 546–547 discounts, 666 effective-interest method, 546, 547f issue price, 549–553 premiums, 666 retirements, 549 zero-interest bonds, 549 book errors, 376, 378 bounced cheque, 372 see also NSF (not sufficient funds) cheque bribe, 361 Buffett, Warren, 72 buildings, 464, 465, 714–715 business activities See financing activities; investing activities; operating activities business organization, forms of corporations, 7–8 partnerships, proprietorships, 6–7 C calculation errors, 323 callable bonds, 549 callable preferred shares, 596 Canada Business Corporations Act, 597 Canada Pension Plan (CPP), 527, 528 Canadian Intellectual Property Office, 484, 485 capital, 10 capital assets, 59 see also property, plant, and equipment capital cost allowance (CCA), 467, 475 capital expenditures, 166, 464, 477 capital lease, 467, 542–543 capital stock, 63 see also share capital capitalizing retained earnings, 599 carrying amount, 59, 181, 418, 419f, 475, 478, 546–547 cash, 358, 367 see also cash flows bank overdrafts, 380 cash management, 381–382, 382f and debt, 543 idle cash, 382 investment, by shareholders, 108, 126 net cash, 469 payments See cash payments and poor receivables management, 432 receipt, in advance from client, 111, 128 receipts See cash receipts reporting cash, 380–381 restricted cash, 380 and statement of cash flows, 20 statement of financial position, 380 T account, 117f theft, by employees, 374 I-4 Subject Index cash basis accounting, 172–173, 173f, 195–196 cash budget, 382 cash dividend, 597–599, 599f, 601–602, 718–719 cash equivalents, 58, 380, 700 cash flow statement See statement of cash flows cash flows see also statement of cash flows classification of cash flows, 700–702 and corporate life cycle, 722–723 free cash flow, 723–725, 783–784 and inventory cost formulas, 314 cash management, 381–382, 382f cash payments, 701f, 725f, 726–729 control activities over, 369–371, 370f employees, 728 income tax, 728–729 interest, 728 operating expenses, 727–728 to suppliers, 726–727 cash purchases, 244 cash receipts, 701f, 725–726, 725f cheque receipts, 368–369 from customers, 725–726 electronic receipts, 368 from interest, 726 internal controls, 367–369, 369f over-the-counter receipts, 367–368 cash sales, 240 CCA See capital cost allowance (CCA) certain liabilities, 524, 533 change in accounting estimate, 477 chart of accounts, 124, 124f cheque receipts, 368–369 cheques, 362, 369–370 Chief Executive Officer (CEO), 364 Chief Financial Officer (CFO), 364 classified statement of financial position, 56–63, 56f, 64f closing entries, 197–202 closing process, 198f other comprehensive income (OCI), 661 temporary accounts, 198–202 closing process, 198f closing the books, 202 collateral, 524, 534 collusion, 366 common shares, 10, 63, 118, 588, 591–594 increases in, 118 issue of, 591–592 reacquisition of, 592–594 weighted average number of common shares, 611 common size analysis, 772 see also vertical analysis communication, 360 company errors, 377 company name, comparability, 75 comparative analysis, 768–777 horizontal analysis, 768–771, 768f, 770f, 771f vertical analysis, 772–776 comparative statement of financial position, 703 comparative statements, 22 compensating balance, 381 complete, 74–75 compound entry, 123 comprehensive income (loss), 604, 604f computerized accounting systems, 121, 125 conceptual framework, 73, 78f ASPE, 73, 80 cost constraint, 76 elements of financial statements, 76–77, 76f going concern assumption, 76 IFRS, 73, 80 objective of financial reporting, 73–74 qualitative characteristics, 74–76 summary of, 77–78 condensed statements, 22 confirmatory value, 74 consigned goods, 303 consignee, 303 consignor, 303 consolidated financial statements, 22, 655, 671 consolidation, 662f, 663f, 671 contingent liabilities, 533–535 continuous life, 587 contra accounts, 59, 180, 250–251, 261, 418 contra asset account, 59, 180 contra expense account, 261 contra revenue account, 250–251 contract, 171, 172 contractual interest rate, 545 see also coupon interest rate contributed capital, 591, 603 contributed surplus, 591, 593, 603, 607 control, 662f control account, 415 control activities, 360–365 assignment of responsibility, 360–361, 362, 368 cash payments, 369–371, 370f cash receipts, 367–369, 369f documentation, 362–363 physical controls, 363–364, 363f, 367–368 reconciliation, 364–365 reviews, 364–365 segregation of duties, 361–362, 374 control environment, 360 conversion privilege, 595 Copeland, Devin, 484 copyright, 484–485 corporate life cycle, 722–723 corporations, 7–8, 586 ability to acquire capital, 587 characteristics of, 586–588 continuous life, 587 government regulations, 587 income tax, 587–588 indefinite life, investments, 649ff limited liability, 586 management, 587 name, private corporations, 8, 27, 586 see also Accounting Standards for Private Enterprises (ASPE) public corporations, 8, 27, 586 see also International Financial Reporting Standards (IFRS) separate legal entity, separate legal existence, 586 share issue considerations, 588–590 transferable ownership rights, 586–587 cost amortizable cost, 469 as asset, 177 asset retirement costs, 464 current cost, 77 see also fair value Development Costs, 485 as expense, 177 finance costs, 12, 530 see also interest expense flow of costs, 242 freight costs, 245–246, 250, 261, 262 future benefits, 177 historical cost, 77 iPhone, 259 research and development (R&D) costs, 485 unit cost, 305 cost/benefit considerations, and internal controls, 365–366 cost constraint, 76 cost formulas See inventory cost formulas cost method See cost model cost model, 468, 651, 657–659, 659f, 663f cost of goods available for sale, 241, 243, 264, 309 cost of goods purchased, 241, 244, 261, 263, 726 cost of goods sold, 12, 241, 263–264, 264, 323 periodic inventory system, 243, 243f, 263–264 perpetual inventory system, 242 coupon interest rate, 545, 547 covenant, 604 CPP See Canada Pension Plan (CPP) credit, 115–116, 373 credit, extension of, 430 bank account, 372, 373 common shares, increases in, 118 debit–credit analysis, 122 equal debit and credit amounts, 123 liability accounts, increases in, 118 retained earnings, increases in, 118 revenue accounts, increases in, 118 credit card debt, 417 credit card transactions, 368 credit effects, 116–120 credit facilities, 380 credit ratings, 543 credit (right-side) balances, 118 credit risk, 430 credit term period, 416 credit terms, 247, 414 creditors, see also lenders creditors’ claims on total assets, 524 see also liabilities cumulative, 595 current asset accounts, 708–710 current assets, 56–58, 58f current cost, 77 see also fair value current liabilities, 61–62, 62f, 524 accounting for, 524–532 operating line of credit, 524–525 payroll, 527–530 presentation of, 539, 539f property taxes, 526–527 sales taxes, 525–526 short-term notes payable, 530–532 current liability accounts, 708, 710–712 current maturities of long-term debt, 11, 61 current maturities of non-current debt, 532 current portion of long-term debt, 61 current ratio, 68, 68f, 321, 777–778, 780f current value, 77 see also fair value current value basis of accounting, 77 customers, cash receipts from, 725–726 D days in inventory, 320–321, 320f, 779–780, 780f debit, 115–116, 372 asset accounts, increases in, 117 debit–credit analysis, 122 dividends declared accounts, increases in, 119 equal debit and credit amounts, 123 expense accounts, increases in, 119 I-5 Subject Index debit card transactions, 368 debit effects, 116–120 debit (left-side) balances, 117, 118 debit–credit analysis, 122 debt covenants, 543 debt financing, 10, 534 debt investments, 648 debt to total assets, 69, 69f, 541–542, 541f, 782–783, 784f declaration date, 598 declining-balance method, 471 see also diminishing-balance method deferrals, 176 see also prepayments deferred income tax, 60 deferred income tax assets, 60 deferred income tax liabilities, 62 deferred revenues, 182 see also unearned revenues deficit, 16 depletion, 474 deposits, 376 deposits in transit, 373, 375, 377 depreciable amount, 469 depreciable assets, 179, 467 depreciation, 59, 179–181, 180f, 468 see also amortization accumulated depreciation, 468–469, 488, 716 calculation of, 179–181 capital cost allowance (CCA), 467, 475 depreciation expense, 469 depreciation methods, 469–475 IFRS, 60 impairments, 475–476 and income tax, 475 periodic depreciation, 477–478 prorating, 471 revaluation model, 476–477 significant components, 475 statement presentation, 181 straight-line method See straight-line method depreciation methods, 469–475 accelerated depreciation methods, 472 comparison of, 474–475 diminishing-balance method, 469, 471–473, 472f, 474–475 double-diminishing-balance method, 471 straight-line method, 179–180, 180f, 469, 470–471, 470f, 474–475 units-of-production method, 469, 473–474, 473f derecognized, 427–428, 478 development costs, 485 digital cash, 367 diluted earnings per share, 612 diminishing-balance method, 469, 471–473, 472f, 474–475 direct deposits, 373 direct method, 702, 724–729, 730f disclosure contingent liabilities, 533 inventory, 319–320 long-lived assets, 488 non-current debt, 540 segment disclosure, 795, 799 discontinued business gain or loss, 797 discontinued operations, 796–797, 796f discount, 545, 548f, 666 discounts, 246–248, 251–252 dishonoured note, 427–428 diversification, 794–795 dividend revenue, 658, 659f dividend yield, 590, 609, 609f, 791–792, 793f dividends, 10, 597 cash dividends, 597–599, 599f, 601–602, 718–719 cumulative dividend, 595 declaration, 112, 129 distribution of earnings, 598 dividend record, 608–610 dividends in arrears, 595 dividends paid, 723 noncumulative dividend, 595 payment, 112, 129 payment (distribution) date, 598 preference (preferred shares), 594–595 record date, 598 recording dividend revenue, 658 stock dividends, 599–600, 601–602 dividends declared accounts, 119, 199, 202 dividends in arrears, 595 dividends payable, 12 documentation, 244, 362–363 double-diminishing-balance depreciation schedule, 472f double-diminishing-balance method, 471 double-entry accounting system, 119–120 E earnings per share (EPS) basic earnings per share See basic earnings per share (EPS) diluted earnings per share, 612 earnings performance, 610–614 EBIT (earnings before interest and tax), 542, 783 economic benefits, 477 effective-interest method, 546, 547f effective interest rate, 545 EFT See electronic funds transfer (EFT) electronic cash, 367 electronic funds transfer (EFT), 368, 369, 373, 376, 377 electronic receipts, 368 electronic receipts on account, 378 elements of financial statements, 76–77, 76f embezzlement, 374 employee benefits, 528 employees cash payments to, 728 hiring new employees, 110, 127 salaries, payment of, 112, 129 theft, 374 employment insurance (EI), 527, 528 end-of-period cash balance, 703 ending inventory, 241, 319 enhancing qualitative characteristics, 75–76 equal periodic amounts, 535, 536 equation analysis, 108, 113f, 114–115, 114f equipment, 108–109, 126, 166, 464, 466, 715–716 equity, 76, 76f equity financing, 10 equity investments, 648 equity method, 655–657, 657f, 659f, 662f, 663f, 671 equity transactions, 602 errors bank errors, 373, 375, 377 book errors, 376, 378 calculation errors, 323 company errors, 377 free from error, 74–75 goods in transit, recording, 316 human error, 366 inventory errors, 315–316, 315f reconciling the bank account, 373 transposition error, 134 vs fraud, 134 estimated useful life, 477 estimates, 723 ethics and accounting information, fraud, 134 Excel, 121 excess cash, 648 expanded accounting equation, 107, 107f, 119, 119f expense accounts, 119, 199, 200–201 expense recognition, 172 expenses, 12, 76, 76f see also specific expenses accrued expenses, 175, 185–188, 191f classification of, 254, 268 cost as expense, 177 function, 254 on income statement, 120 nature, 254 non-operating expenses, 256–257 noncash expenses, 706–707 prepaid expenses, 57, 175, 177–181, 191f, 710 extension of credit, 430 external auditors, 365 external review, 365 external users, 5, 18 F face value, 545, 547 fair value, 77, 550, 589–590, 599 fair value models, 652–655 fair value through other comprehensive income (OCI) model, 651, 653–655, 662f, 671 fair value through profit or loss model, 650, 652–653, 657f, 659f, 662f, 663f faithful representation, 74 FIFO See first-in, first-out (FIFO) cost formula finance costs, 12, 530 see also interest expense finance income, 12 see also interest revenue finance lease, 467, 542–543 finance lease obligations, 11 financial activities, 10–11 financial analysis comparative analysis, 768–777 limitations, 794–797 ratio analysis See ratio analysis financial assets, 414 financial liability, 524 financial reporting, objective of, 73–74 financial statements see also specific financial statements comparative statements, 22 conceptual framework, 72–78 condensed statements, 22 consolidated financial statements, 22, 655, 671 elements of financial statements, 76–77, 76f interim financial statements, 14 inventory cost formulas, effect of, 312–314 inventory errors, effects of, 315–316 liabilities, 538–540 long-lived assets, presentation of, 487–489 misstatements in, 134 notes to the financial statements See notes to the financial statements objective of financial reporting, 73–74 order of preparation, 194 preparation of, 194–195 quarterly financial statements, 14 receivables, presentation of, 428–429 relationships between the statements, 21, 120, 120f, 665f shareholders’ equity, 602–607 titles, 22 financing activities, 10–11, 13, 19, 20, 700, 701, 703f, 717–719, 722 I-6 Subject Index finished goods, 240 finite (limited) life, 483, 484–485 first-in, first-out (FIFO) cost formula, 306–309, 311–314, 322–323, 322f fiscal year, 14, 170 fiscal year ends, 14 fixed assets, 59 see also property, plant, and equipment fixed interest rate, 530 fixed principal payments plus interest, 535–536, 536f fixed principal plus interest, 537f fixed rate, 426 fixed-reset preferred shares, 596 floating, 524 floating (variable) rate, 426 FOB (free on board) destination, 245, 250, 302–303 FOB (free on board) shipping point, 245–246, 250, 302–303 forms of business organization See business organization, forms of franchise, 486 fraud, 134, 361 free cash flow, 723–725, 783–784, 784f free from error, 74–75 freight costs, 245–246, 250, 261, 262 function, 254 fundamental qualitative characteristics, 74–75 future benefits, 177 future income tax, 60 future value, 550, 552 G GAAP See generally accepted accounting principles (GAAP) gain on disposal, 478–480 gains, 76, 170, 650, 707–708 Gates, Bill, 72 general journal, 122–124, 131f general ledger, 123–125, 131–132f general ledger account, 116 generally accepted accounting principles (GAAP), 8–9, 77 going concern assumption, 76, 77 Goods and Services Tax (GST), 245, 250, 525 goods in transit, 302–303, 316 goodwill, 60, 60f, 486–487 government regulations, 587 Graham, Benjamin, 72 gross margin, 241 see also gross profit gross pay, 527 gross profit, 241, 255–256, 786 gross profit margin, 258–259, 259f, 786, 792f gross sales, 252 GST See Goods and Services Tax (GST) H Harmonized Sales Tax (HST), 245, 250, 525 held for trading investments, 57, 648, 662f, 663f hiring new employees, 110, 127 historical cost basis of accounting, 77 honoured note, 427 Hooker, Grant, 105 horizontal analysis, 768–771, 768f, 770f, 771f horizontal percentage change for the period, 769, 769f horizontal percentage of a baseperiod amount, 768, 768f HST See Harmonized Sales Tax (HST) human error, 366 I IASB See International Accounting Standards Board (IASB) idle cash, 382 IFRS See International Financial Reporting Standards (IFRS) impairment loss, 476, 477 impairments, 475–476 income, 12, 76, 76f, 170 see also revenue accumulated other comprehensive income (AOCI) See accumulated other comprehensive income (AOCI) from associates, 656–657, 659f measurement process, merchandising company, 241, 241f net income See net income other comprehensive income (OCI) See other comprehensive income (OCI) other income, 256 income available to common shareholders, 611 income from operations, 256 income statement, 14, 15–16, 15f, 70f date, 18 discontinued operations, 796–797, 796f expenses, 120 horizontal analysis, 771, 771f inventory cost formulas, effect of, 312–314, 312f inventory errors, effects of, 315f investments, 659, 659f liabilities, 539 long-lived assets, 489 multiple-step income statement See multiple-step income statement order of preparation, 194 periodic inventory system, 265–266 preparation of, 194 purpose of, 69–71 receivables, 429 revenues, 120 single-step income statement, 253–254, 254f, 265 statement interrelationships, 21, 665f statement of cash flows, preparation of, 703 vertical analysis, 774, 774f income summary, 198–202 income tax, 113, 130, 475, 587–588, 728–729 income tax expense, 12 income tax payable, 12, 711–712 indefinite (unlimited) life, 7, 483, 485–486 indefinite useful life, 60 indirect method, 702, 706–713, 720–721, 720f, 730f industry average comparisons, 66 information, 360 initial public offering (IPO), 588–589 instalment loans, 535 instalment notes payable, 534–538 blended principal plus interest, 536–537, 537f, 538f current and non-current portions, 538 fixed principal payments plus interest, 535–536, 536f, 537f instalment payment schedule, 537, 537f instalments, 535 insurance, 177–178, 178f insurance policy, purchase of, 109, 127 intangible assets, 11, 59–60, 60f, 487 see also long-lived assets accounting for, 482–486 copyrights, 484–485 finite lives, 483, 484–485 franchises, 486 goodwill See goodwill indefinite lives, 483, 485–486 licences, 486 patents, 484 recording at cost, 483 research and development (R&D) costs, 485 trademark (trade name), 485–486 The Intelligent Investor (Graham), 72 intercompany comparisons, 66, 774–776, 775f interest, 185–186, 186f, 376, 377, 531, 535, 726, 728 interest calculation, 185, 185f interest charges, 376 interest coverage, 783 interest expense, 12 interest payable, 12 interest rates, 426, 531f, 546f see also specific interest rates interest revenue, 12, 416–417, 426, 659f interim financial statements, 14 interim periods, 170 internal auditors, 364 internal controls, 304, 360 assignment of responsibility, 360–361, 362, 368 bank reconciliations, 370–379 cash payments, 369–371, 370f cash receipts, 367–369, 369f collusion, 366 components of good internal control systems, 360 control activities, 360 cost/benefit considerations, 365–366 documentation, 362–363 human error, 366 inventory counts, 304 limitations of, 365–366 management override, 366 physical controls, 363–364, 363f, 367–368 reasonable assurance, 365 reconciliation, 364–365 reviews, 364–365 segregation of duties, 361–362, 374 internal reviews, 364 internal users, 4–5, 18–19 International Accounting Standards Board (IASB), 73, 467 International Financial Reporting Standards (IFRS), 8–9, 55 accumulated other comprehensive income, 604 basic earnings per share, 80, 789 business activities, 701 classification of activities, 732 comprehensive income, 799 conceptual framework, 73, 80 consolidation, 671 cost model, 468 depreciation, 60 direct method, 712 equity method, 671 expenses, classification of, 254, 268 fair value through other comprehensive income, 671 impairment loss, 476 intangible assets, and reversals, 483 inventory, reporting, 320 inventory cost formulas, 305 investments, 646 investments in associates, 671 long-lived assets, 488 non-strategic investment, 662 other comprehensive income, 796 policy choices, 795 provisions, 533 revaluation model, 476, 488 revenue recognition, 170–171, 206 reverse order of liquidity, 380 segment disclosure, 799 shareholders’ equity, 602 statement of changes in equity, 27, 605–606 strategic investment, 662f intracompany comparisons, 66 I-7 Subject Index inventory, 12, 57 changes in, 709–710 cost, 246, 304–314 see also specific cost formulas determination of inventory quantities, 302–304 disclosure, 319–320 ending inventory, 319 food producers, challenges for, 319 inventory errors, 315–316 inventory systems, 241 see also periodic inventory system; perpetual inventory system low inventory levels, 382 lower of cost and net realizable value (LCNRV), 317–318 ownership of goods, 302–303 physical inventory, 302, 303–305 reporting inventory, 319–321 inventory cost formulas, 304–314 advantages, summary of, 313 under ASPE, 305 average cost formula, 309–310, 311–314 and cash flow, 314 choice of cost formula, 311–312 comparative effects, 312f financial statement effects, 312–314 first-in, first-out (FIFO) cost formula, 306–309, 311–314 under IFRS, 305 income statement effects, 312–313 rising prices, 313–314 specific identification cost formula, 305–306, 311, 313–314 statement of financial position effects, 313 inventory counts, 304 inventory errors, 315–316, 315f inventory systems, 241 see also periodic inventory system; perpetual inventory system inventory turnover, 320–321, 320f, 779–780, 780f investee, 654 investing activities, 10, 11, 13, 19, 20, 700, 703f, 714–717, 722 investments, 11, 58 under ASPE, statement of financial position, 662–663, 663f in associates, 671 bond investment, for the investor, 666–668 of cash, by shareholders, 108, 126 debt investments, 648 equity investments, 648 held for trading investments, 57, 648, 662f, 663f under IFRS, and statement of financial position, 661–662, 662f IFRS 9, 646 income statement, 659, 659f investing activities, 716–717 long-term investments, 58, 58f, 648, 662f, 663f, 664, 664f non-strategic investment, 648, 650–653, 651f ratios, and investment decisions, 72 reporting, 659–665 short-term investments, 648, 663, 664f statement of changes in equity, 660–661, 661f statement of comprehensive income, 660, 660f statement of financial position, 661–665 statement presentation, 659–665 strategic investment, 648, 649–650, 654–658 why corporations invest, 649ff investors, 5, 654 see also shareholders invoices, 362 IPO See initial public offering (IPO) issue price, 550 issued shares, 589 J journal entry, 122–123 journalizing closing entries, 197–202 generally, 121–123 just-in-time approach, 321 K kickback, 361 L land, 60, 464, 465, 714 land improvements, 464, 465 LCNRV See lower of cost and net realizable value (LCNRV) lease obligations, 62 lease vs buy decision, 467–469 leasehold improvements, 467 legal capital, 590 legal title, 302 lenders, see also creditors lessee, 467 lessor, 467 liabilities, 10–11, 61, 76, 76f see also specific types of liabilities in accounting equation, 118 analysis, 540–543 contingent liabilities, 533–535 current liabilities See current liabilities delayed payment, 382 financial liabilities, 524 long-term liabilities, 62, 524 see also non-current liabilities non-current liabilities See non-current liabilities provisions, 533–535 on statement of financial position, 17, 61–63 statement presentation, 538–540 in T account, 118 uncertain liabilities, 533 liability accounts, 118 licences, 486 limited liability, 586 lines of credit, 380 liquidation, 595 liquidity of receivables, 431–432 liquidity ratios, 66, 66f, 67–68, 321, 540–541, 777–781, 780f average collection period, 431, 431f, 779, 780f current ratio, 68, 68f, 321, 777–778, 780f days in inventory, 320–321, 320f, 779–780, 780f inventory turnover, 320–321, 320f, 779–780, 780f receivables turnover, 431, 431f, 778–779, 780f summary of, 780–781, 780f working capital, 67–68, 67f, 777, 780f loan payable, 425 see also notes payable loan receivable, 425 see also notes receivable long-lived assets, 707 depreciation, 468–478 disclosure, 488 evaluation of use of, 490–492 goodwill, 60, 60f, 486, 487 income statement, 489 intangible assets See intangible assets notes to the financial statements, 487, 488f property, plant, and equipment See property, plant, and equipment statement of financial position, 487–488, 488f statement presentation, 487–489 long-term (term), 58 long-term debt, 11 long-term investments, 58, 58f, 648, 662f, 663f, 664, 664f see also investments long-term liabilities, 62, 524 see also non-current liabilities long-term notes payable or loans, 534 loss, 13, 76, 650, 707–708 see also net loss and specific types of losses loss on disposal, 478–480 lower of cost and net realizable value (LCNRV), 317–318 M maker, 425 management discussion and analysis (MD&A), 25, 364 management override of internal controls, 366 manufacturers, 240 manufacturing company, 240 market capitalization, 590 market interest rate, 545 market value, 550 matching, 172 materiality, 74 MD&A See management discussion and analysis (MD&A) measurement bases of, 77 current value, 77 of the elements of financial statements, 77 historical cost, 77 performance measurement See performance measurement merchandise inventory, 12, 240 merchandising companies, 171, 240 cash sales, 240 flow of costs, 242 income measurement process, 241, 241f inventory systems See periodic inventory system; perpetual inventory system purchase discounts, 247–248 models, 77 monitoring activities, 360 monitoring collections, 430 mortgage, 535 mortgages payable, 11, 62, 718 moving average cost formula, 309 multiple-step income statement, 253, 255–257, 257f gross profit, 255–256 income from operations, 256 liabilities, 539 net income, 257 net sales, 255 non-operating revenues and expenses, 256–257 periodic inventory system, 265, 266f N nature, 254 net book value, 59 see also carrying amount net capital expenditures, 723 net cash, 469 net cash provided (used), 712 net earnings See net income net income, 12–13, 16, 718 cash vs accrual basis, 196 determination of, 13f multiple-step income statement, 257 net loss, 13, 17 see also loss net pay, 527 net profit See net income I-8 Subject Index net purchases, 262 net realizable value (NRV), 317–318 net sales, 252, 255, 263f, 772 neutral, 74–75 NHL signing bonuses, 107 no par value shares, 590 non-current (term), 58 non-current assets, 58–60 non-current liabilities, 62–63, 62f, 524, 534 current maturities, 532 examples of, 534 instalment notes payable, 534–538 presentation of, 539–540, 539f non-current receivables, 60 non-GAAP measures, 797 non-operating activities, 255 non-operating revenues and expenses, 256–257 non-strategic investment, 648 accounting for, 650–653 amortized cost model, 651 under ASPE, 663f cost model, 651 fair value models, 650–651, 652–655 fair value through other comprehensive income (OCI) model, 651, 653–655 fair value through profit or loss model, 650, 652–653 under IFRS, 662 for individuals, 650 valuation models, 650–651, 651f noncash expenses, 706–707 noncash working capital accounts, 708 noncumulative, 595 nonrecurring items, 797 nontrade receivables, 414 normal balance, 116–120 normal course issuer bid, 592 not sufficient funds See NSF (not sufficient funds) cheque notes payable, 11, 61, 530, 532f instalment notes payable, 534–538 short-term notes payable, 530–532 vs notes receivable, 530 notes receivable, 57, 414, 425, 532f accounting for, 425–428 derecognizing, 427–428 dishonoured note, 427–428 honoured note, 427 interest revenue, 426 recording, 426 uncollectible notes receivable, 426 vs notes payable, 530 notes to the financial statements, 14, 487, 488f, 533 NRV See net realizable value (NRV) NSF (not sufficient funds) cheque, 372, 376, 377, 378 O objective of financial reporting, 73–74 obsolescence, 467 OCI See other comprehensive income (OCI) 100% financing, 467 opening balances, 114–115, 114f operating activities, 10, 11–13, 19, 20, 255, 469, 700, 701, 703, 703f adjustments, 706 current asset accounts, changes in, 708–710 current liability accounts, changes in, 708, 710–712 direct method, 724–725 gains, 707–708 indirect method, 706–713 losses, 707–708 net cash provided (used), 712 noncash expenses, 706–707 positive cash from, 722 statement of cash flows, 706–713 operating cycle, 56–57, 57f, 240 operating expenditures, 166, 464 operating expenses, 241, 727–728 operating leases, 467, 542–543 operating line of credit, 524–525 ordinary activities, 170 ordinary revenue-generating activities, 172 ordinary shares, 63, 588 original documents, 363 other comprehensive income (OCI), 24, 604, 661, 671, 795–796 other income, 256 other receivables, 414 outstanding cheques, 373, 375, 377 over-the-counter receipts, 367–368 overdraft protection, 380 Overton, Mareio, 484 ownership of goods, 302–303 P par value, 545 see also face value parent company, 655 partial collection, 112, 130 partial payment, 111, 129 partnership, 7, 9, 587–588 patent, 484 payee, 425 payment (distribution) date, 598 payment period, 430 payout ratio, 608–609, 608f, 609f, 790–791, 793f payroll, 527–530 payroll deductions, 527, 528f pension and benefit obligations, 62 percentage of receivables method, 419 performance measurement comparative analysis, 768–777 limitations of financial analysis, 794–797 ratio analysis See ratio analysis periodic depreciation, 477–478 periodic inventory system, 241, 243 adjusting entry at period end, 264 advantages, 243 average cost formula, 310, 323–324, 324f cost of goods sold, 243, 243f, 263–264 entries, 265 first-in, first-out (FIFO) cost formula, 309, 322–323, 322f income statement, 265–266 multiple-step income statement, 265, 266f purchase transactions, 260–262 sales transactions, 262–263 single-step income statement, 265 specific identification cost formula, 306 vs perpetual inventory system, 265 permanent accounts, 197, 197f perpetual inventory system, 241–242 advantages, 243 average cost formula, 309–310 changes in inventory, 709 cost of goods sold, 242 entries, 265 first-in, first-out (FIFO) cost formula, 307–309, 308f multiple-step income statement, 253, 255–257, 257f purchase transactions, 244–248 reduction in inventory, 242 sales transactions, 249–252 single-step income statement, 253–254, 254f specific identification cost formula, 305–306 vs periodic inventory system, 265 personal mortgages, 535 Petros, Nick, 359 physical controls, 363–364, 363f, 367–368 physical inventory, 302, 303–305 point-of-sale (POS) software, 368 policies, 77 policy choices, 795 post-closing trial balance, 203, 203f posting closing entries, 197–202 generally, 123–125 posting, 124 predictive value, 74, 256 preferred shares, 588, 594–597 callable preferred shares, 596 conversion privilege, 595 dividend preference, 594–595 fixed-reset preferred shares, 596 issue of, 594 liquidation preference, 595 preferential features, 594–596 rate-preferred shares, 596 redeemable preferred shares, 596 retractable preferred shares, 596 premium, 545–546, 548f, 666 prenumbering, 362 prepaid expenses, 57, 175, 177–181, 191f changes in, 710 depreciation, 179–181 insurance, 177–178, 178f supplies, 178–179, 179f prepayments, 175, 176, 191f adjusting entries for, 176–184 prepaid expenses, 177–181 unearned revenues, 182–184 present value, 550 present value tables, 550–551 price-earnings (P-E) ratio, 71, 71f, 790, 793f principles, 77 private corporation, 8, 27, 586 see also Accounting Standards for Private Enterprises (ASPE) profit gross profit, 241, 255–256, 786 merchandising profit, 255–256 net profit See net income profit margin, 259, 259f, 491–492, 787, 792f profitability measures, 259 profitability ratios, 66, 66f, 70–72, 785–793, 792f asset turnover, 490–491, 491f, 787–788, 792f basic earnings per share (EPS), 70–71, 70f, 80, 610–612, 610f, 789, 793f dividend yield, 590, 609, 609f, 791–792, 793f gross profit margin, 258–259, 259f, 786, 792f payout ratio, 608–609, 608f, 609f, 790–791, 793f price-earnings (P-E) ratio, 71, 71f, 790, 793f profit margin, 259, 259f, 491–492, 787, 792f relationships among, 785f return on assets, 490, 490f, 788, 792f return on common shareholders’ equity, 612–614, 613f, 788–789, 793f summary of, 792–793, 792–793f promissory note, 425 property, plant, and equipment, 11, 59, 59f, 464–465, 487, 707 see also long-lived assets buildings, 464, 465 capital expenditures, 464, 477 carrying amount, 475, 478 classes, 464–465 cost, 464–466 depreciation, 468–478 Subject Index derecognition, 478–482 equipment, 464, 466 expenditures during useful life, 466 land, 464, 465 land improvements, 464, 465 lease vs buy decision, 467–469 retirement of, 481–482 sale of, 478–480 property held for sale, 60 property tax payable, 12 property taxes, 526–527 proprietorship, 6–7, 9, 587–588 Provincial Sales Tax (PST), 245, 525 provisions, 533–535 PST See Provincial Sales Tax (PST) public corporations, 8, 27, 586 see also International Financial Reporting Standards (IFRS) purchase discount, 247, 261–262 purchase returns and allowances, 246, 261 purchase transactions cash purchases, 244 discounts, 246–248 effects, summary of, 248 equipment, 108–109, 126 freight costs, 245–246, 261 insurance policy, 109, 127 periodic inventory system, 260–262 perpetual inventory system, 244–248 purchase discounts, 261–262 purchase returns and allowances, 246, 261 sales taxes, 245 supplies on account, 110, 128 Q qualitative characteristics, 74–76 enhancing qualitative characteristics, 75–76 fundamental qualitative characteristics, 74–75 quantity discount, 247, 251 quarterly financial statements, 14 Quebec Sales Tax (QST), 525 R rate-preferred shares, 596 ratio analysis, 66, 776–777 see also specific ratios liquidity ratios, 777–781 see also liquidity ratios profitability ratios, 785–793 see also profitability ratios solvency ratios, 782–785 see also solvency ratios ratios see also specific ratios classifications, 66f income statement, 69–71 investment decisions and, 72 statement of financial position (balance sheet), 66–69 raw materials, 240 reacquisition of common shares, 592 realized gain or loss, 650, 659f reasonable assurance, 365 receivables accounts receivable See accounts receivable bad debt, accounting for, 417–425 collection, speed of, 381 liquidity of receivables, 431–432 management of, 430–432 nontrade receivables, 414 notes receivable See notes receivable other receivables, 414 short-term receivables, 428 statement presentation, 428–429 trade receivables, 414 types of receivables, 414 receivables turnover, 431, 431f, 778–779, 780f recognition, 77 reconciliation, 364–365 record date, 598 recording process accounts, 115–121 analysis of transactions, 106–115 debits and credits, 115–121 general journal, 121–123 general ledger, 123–125 illustration of, 126–132 recoverable amount, 476 recovery entries, 424 redeemable, 549 redeemable preferred shares, 596 relevance, 74, 77 rent payment, 109, 127 rent revenue, 12 reporting entity concept, 6–7 repurchase, 592 research and development (R&D) costs, 485 research expenses, 485 residual value, 469, 471, 477 restricted cash, 380 retail industry, 242, 301 retailers, 240 retained earnings, 16, 63, 607, 718–719 capitalizing retained earnings, 599 end-of-period balance, 603 increases in, 118 statement of financial position, 603–604 retained earnings account, 199, 201–202 retained earnings restrictions, 604 retirement of property, plant, and equipment, 481–482 retractable preferred shares, 596 return on assets, 490, 490f, 788, 792f return on common shareholders’ equity, 612–614, 613f, 788–789, 793f return on equity, 612–613 revaluation gains, 477 revaluation model, 59, 476–477, 604 revenue, 12, 170 see also income accrued revenues, 57, 175, 189–190, 191f dividend revenue, 658, 659f under equity method, 655 on income statement, 120 interest revenue, 12, 416–417, 426, 659f merchandising companies, 171 non-operating revenues, 256–257 revenue accounts, 118 sales revenue, 12, 241, 249 service company, 171 unearned revenue, 61, 175, 182–184, 191f revenue accounts, 198–199, 200 revenue recognition, 170–172, 171f, 206 reviews, 364–365 rising prices, 313–314 risk assessment, 360 S salaries, 112, 129, 186–188, 527 salaries payable, 12 sale of property, plant, and equipment, 478–480 sales discount, 251, 263 sales invoice, 249 sales returns and allowances, 250–251, 262–263 sales revenue, 12, 241, 249 sales tax payable, 12 sales taxes, 245, 250, 525–526 sales transactions discounts, 251–252 effects, summary of, 252 freight costs, 250, 262 periodic inventory system, 262–263 perpetual inventory system, 249–252 sales discounts, 263 sales returns and allowances, 250–251, 262–263 sales taxes, 250 secured note, 534 security, 524 segment disclosure, 795, 799 segmented information, 795 segregation of duties, 361–362, 374 selling, operating, and administrative expenses, 12 selling price, 550 separate legal entity, separate legal existence, 586 service charges, 376 service companies, 171, 240 service fees, 377 services service revenue, 12 services on account, 110, 128 unearned revenues, 183f share capital, 10, 16, 63, 588, 591, 603, 607, 718 I-9 shareholders, 5, 10 see also investors shareholders’ equity, 16, 17, 63, 63f, 118–119 see also retained earnings; share capital contributed capital, 603 decreases in, 118 increases in, 118 retained earnings See retained earnings statement of changes in equity, 602, 605–606 statement of financial position, 602, 603–605 statement of retained earnings, 602, 606 statement presentation, 602–607 transactions, summary of, 606–607 shares, acquisition of shares, 656, 658 authorized shares, 588 common shares See common shares fair value, 589–590 initial public offering (IPO), 588–589 issue of shares, 588–589 issued shares, 589 legal capital, 590 no par value shares, 590 preferred shares See preferred shares recording share transactions, 591–596 sales of shares, 658 share issue considerations, 588–590 short operating cycle, 240 short-term investments, 648, 663, 664f short-term loan, 380 short-term notes payable, 530–532 short-term receivables, 428 signed contracts, 172 significant components, 475 significant influence, 654–655, 662f single-step income statement, 253–254, 254f, 265 social media, 242, 422 sole proprietorships See proprietorships solvency ratios, 66, 66f, 68–69, 541–543, 782–785, 784f debt to total assets, 69, 69f, 541–542, 541f, 782–783, 784f free cash flow, 723–725, 783–784, 784f summary of solvency ratios, 784–785, 784f times interest earned, 542, 542f, 783, 784f solvency test, 597 source deductions, 527 see also payroll deductions source documents, 171, 363 I-10 Subject Index specific identification cost formula, 305–306, 311, 313–314 standards, 77 stated interest rate, 545 see also coupon interest rate statement of cash flows, 14, 19–20, 19f activities not reported on, 701–702 activities reported on, 700–701 careful analysis of, 723 cash, for debt purposes, 543 completion of, 720–721 date, 18 direct method, 702, 724–729, 730f evaluation of a company, 722–724 financing activities, 717–719 format of, 702–703, 702f indirect method, 702, 706–713, 720–721, 720f, 730f investing activities, 714–717 long-lived assets, 489, 489f North West Company, Inc., 25 operating activities, 706–713, 724–725 preparation of, 703–705, 703f and statement of financial position, 21 statement of changes in equity, 14, 16–17, 17f, 605, 661f date, 18 IFRS, 27 investments, 660–661, 661f order of preparation, 194 preparation of, 194 shareholders’ equity, 602, 605–606 shareholders’ equity items, changes in, 120 statement interrelationships, 21, 665f statement of comprehensive income, 660 investments, 660, 660f statement interrelationships, 665f statement of earnings, 15 see also income statement statement of equity, 605 see also statement of changes in equity statement of financial position, 14, 17–19, 18f, 67f see also balance sheet accumulated other comprehensive income (AOCI), 664–665 assets, 17, 56–60 cash, 380 classification of investments, 663–664 classified statement of financial position, 56–63, 56f, 64f comprehensive illustration, 64–65 condensed statements of financial position, 769 contributed capital, 603 date, 18 depreciation, 181 ending balances, 120 horizontal analysis, 769–770, 770f inventory cost formulas, effect of, 313 investments, under ASPE, 662–663, 663f investments, under IFRS, 661–662, 662f liabilities, 17, 61–63, 539 long-lived assets, 487–488, 488f order of liquidity, 64f order of preparation, 194 preparation of, 194 purpose of, 66–69 receivables, 428–429, 429f retained earnings, 603–604 shareholders’ equity, 17, 63, 63f, 602, 603–605 statement interrelationships, 21, 665f vertical analysis, 772–773, 773f statement of profit and loss, 15 see also income statement statement of retained earnings, 27, 606 shareholders’ equity, 602, 606 statement of shareholders’ equity, 605 see also statement of changes in equity stock, see also shares stock dividend, 599–600, 601–602 stock split, 600–602 straight-line depreciation schedule, 470f straight-line method, 179–180, 180f, 469, 470–471, 470f, 474–475 strategic investment, 648, 649–650 accounting guidelines, 654f acquisition of shares, 656, 658 under ASPE, 663f cost model, 657–659 dividend revenue, 658 equity method, 655–657 under IFRS, 662f income from associates, 656–657 sales of shares, 658 significant influence, 654–655 subledger, 415 see also subsidiary ledger subsidiary company, 655 subsidiary ledger, 415–416 suppliers, 726–727, 727f supplies, 12, 57, 110, 128, 178–179, 179f supply chain operations, 321 System for Electronic Document Analysis and Retrieval (SEDAR), T T account, 115–119, 116 temporary accounts, 197, 197f, 198–202 theft, 374 time value of money, 550 timeliness, 75 times interest earned, 542, 542f, 783, 784f timing differences, 373 timing of major expenditures, 382 total assets, 772 total earnings, 527 trade payables, 530 trade receivables, 414 trademark (trade name), 485–486 transactions analysis See analysis of transactions transferable ownership rights, 586–587 transposition error, 134 trend analysis, 768 see also horizontal analysis trial balance, 132, 132–134, 133f adjusted trial balance, 193–194, 194f, 199f and adjusting entries, 174 limitations of, 134 post-closing trial balance, 203, 203f preparation of, 133–134 unadjusted trial balance, 175, 175f uncollectible accounts bad debt recovery, 423 collecting, 423 estimated, 419–421 measurement, 419–421 recording, 419–421 writing off, 421–422, 424 uncollectible notes receivable, 426 understandability, 75 unearned revenue, 61, 175, 182–184, 191f unit cost, 305 units-of-activity method, 473 see also units-of-production method units-of-production depreciation schedule, 473f units-of-production method, 469, 473–474, 473f unrealized gain or loss, 650, 659f unsecured notes and loans, 534 useful life, 166, 179, 469, 477 V variable interest rate, 524 variable rate, 426 verbal agreement, 172 verifiability, 75 vertical analysis, 772–776, 773f, 774f, 776f vertical percentage of a base amount, 772, 772f W wages, 527 weighted average number of common shares, 611 weighted average unit cost, 309, 309f, 323–324, 323f wholesalers, 240 work in process, 240 working capital, 67–68, 67f, 777, 780f write-off entry, 424 write-ups, 477 writedown, 476 see also impairment loss writing off uncollectible accounts, 421–422, 424 written contracts, 172 Y yield, 545 U unadjusted trial balance, 175, 175f uncertain liabilities, 533 Z zero-interest bonds, 549 WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley’s ebook EULA ... associated with: (a) (b) (c) (d) (e) (f) Ownership: Choose among “one individual,” “two or more individuals,” or “many shareholders” Complexity: Choose among 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Financial Statements • Feature story is about The North West Company and how accounting aids decision- making • Identifies the users and uses of financial accounting information and forms of business

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  • Cover

  • Title Page

  • Copyright

  • About the Authors

  • Acknowledgements

  • Brief Contents

  • Contents

  • 1 The Purpose and Use of Financial Statements

    • Trading on a Long Tradition

    • LO 1: Identify the uses and users of accounting information.

      • Internal Users

      • External Users

      • Ethics and Accounting Information

    • LO 2: Describe the primary forms of business organization.

      • Proprietorships

      • Partnerships

      • Corporations

      • Generally Accepted Accounting Principles for Business Organizations

    • LO 3: Explain the three main types of business activity.

      • Financing Activities

      • Investing Activities

      • Operating Activities

      • Summary of Business Activities

    • LO 4: Describe the purpose and content of each of the financial statements.

      • The Financial Statements

        • Income Statement

        • Statement of Changes in Equity

        • Statement of Financial Position

        • Statement of Cash Flows

        • Relationships between the Statements

      • North West’s Financial Statements

        • Income Statement

        • Statement of Changes in Equity

        • Statement of Financial Position

        • Statement of Cash Flows

      • Elements of an Annual Report

  • 2 A Further Look at Financial Statements

    • Building Value for Investors

    • LO 1: Identify the sections of a classified statement of financial position.

      • Assets

        • Current Assets

        • Non-Current Assets

      • Liabilities

        • Current Liabilities

        • Non-Current Liabilities

      • Shareholders’ Equity

        • Share Capital

        • Retained Earnings

      • Comprehensive Illustration

    • LO 2: Identify and calculate ratios for analyzing a company’s liquidity, solvency, and profitability.

      • Using the Statement of Financial Position (Balance Sheet)

        • Purpose of the Statement of Financial Position

        • Liquidity

        • Solvency

      • Using the Income Statement

        • Purpose of the Income Statement

        • Profitability

    • LO 3: Describe the framework for the preparation and presentation of financial statements.

      • Objective of Financial Reporting

      • Qualitative Characteristics of Useful Financial Information

        • Fundamental Qualitative Characteristics

        • Enhancing Qualitative Characteristics

      • Cost Constraint

      • Going Concern Assumption

      • Elements of Financial Statements

      • Measurement of the Elements

        • Historical Cost

        • Current Value

      • Summary of Conceptual Framework

  • 3 The Accounting Information System

    • Learning to Handle the Dough

    • LO 1: Analyze the effect of transactions on the accounting equation.

      • Analyzing Transactions

      • Analyzing Transactions Illustrated

        • Summary of Transactions

        • Balances at the Beginning of the Period

    • LO 2: Explain how accounts, debits, and credits are used to record transactions.

      • T Accounts

      • Normal Balances and Debit and Credit Effects

        • Assets

        • Liabilities

        • Shareholders’ Equity

        • Summary of Normal Balances and Debit and Credit Effects

      • Financial Statement Relationships

    • LO 3: Journalize transactions in the general journal.

      • General Journal

    • LO 4: Post transactions to the general ledger.

      • Chart of Accounts

      • Posting

      • The Recording Process Illustrated

    • LO 5: Prepare a trial balance.

      • Preparing a Trial Balance

      • Limitations of a Trial Balance

      • Review of the Accounting Cycle—Steps 1–4

  • 4 Accrual Accounting Concepts

    • School’s Out, Time to Balance the Books

    • LO 1: Explain the accrual basis of accounting and the reasons for adjusting entries.

      • Revenue Recognition

      • Expense Recognition

      • Accrual versus Cash Basis of Accounting

      • Adjusting Entries

    • LO 2: Prepare adjusting entries for prepayments.

      • Prepaid Expenses

        • Insurance

        • Supplies

        • Depreciation

      • Unearned Revenues

    • LO 3: Prepare adjusting entries for accruals.

      • Accrued Expenses

        • Interest

        • Salaries

      • Accrued Revenues

      • Summary of Basic Relationships

        • Sierra Corporation Illustration

    • LO 4: Prepare an adjusted trial balance and financial statements.

      • Adjusted Trial Balance

      • Financial Statements

    • LO 5: Prepare closing entries and a post-closing trial balance.

      • Closing Entries

      • Post-Closing Trial Balance

      • Review of the Accounting Cycle

  • 5 Merchandising Operations

    • Going with the Flow

    • LO 1: Identify the differences between service and merchandising companies.

      • Income Measurement Process

      • Inventory Systems

        • Perpetual Inventory System

        • Periodic Inventory System

    • LO 2: Prepare entries for purchases under a perpetual inventory system.

      • Purchases

        • Sales Taxes

        • Freight Costs

        • Purchase Returns and Allowances

        • Discounts

    • Summary of Purchase Transactions

    • LO 3: Prepare entries for sales under a perpetual inventory system.

      • Sales

        • Sales Taxes

        • Freight Costs

        • Sales Returns and Allowances

        • Discounts

      • Summary of Sales Transactions

    • LO 4: Prepare a single-step and a multiple-step income statement.

      • Single-Step Income Statement

      • Multiple-Step Income Statement

        • Net Sales

        • Gross Profit

        • Income from Operations

        • Non-operating (Other) Revenues and Expenses

        • Net Income

    • LO 5: Calculate the gross Profit margin and Profit margin.

      • Gross Profit Margin

      • Profit Margin

    • LO 6: Appendix 5A: Account for and report inventory in a periodic inventory system.

      • Recording Purchases of Merchandise

        • Freight Costs

        • Purchase Returns and Allowances

        • Purchase Discounts

      • Recording Sales of Merchandise

        • Freight Costs

        • Sales Returns and Allowances

        • Sales Discounts

      • Calculating Cost of Goods Sold

        • Cost of Goods Purchased

        • Cost of Goods Available for Sale

        • Cost of Goods Sold

      • Adjusting Entry at Period End

      • Comparison of Entries: Perpetual vs. Periodic

        • Income Statement

    • 6 Reporting and Analyzing Inventory

    • lululemon athletica Stretches Inventory Levels

    • LO 1: Describe the steps in determining inventory quantities.

      • Determining Ownership of Goods

        • Goods in Transit

        • Consigned Goods

      • Taking a Physical Inventory

    • LO 2: Apply the cost formulas using specific identification, FIFO, and average cost under a perpetual inventory system.

      • Specific Identification

      • First-In, First-Out (FIFO)

      • Average Cost

    • LO 3: Explain the effects on the financial statements of choosing each of the inventory cost formulas.

      • Choice of Cost Formula

      • Financial Statement Effects

        • Income Statement Effects

        • Statement of Financial Position Effects

        • Summary of Advantages and Financial Statement Effects of Each Cost Formula

    • LO 4: Identify the effects of inventory errors on the financial statements.

      • Errors Made When Determining the Cost of Inventory

      • Errors Made When Recording Goods in Transit at Period End

    • LO 5: Demonstrate the presentation and analysis of inventory.

      • Valuing Inventory at the Lower of Cost and Net Realizable Value

      • Reporting Inventory

      • Inventory Turnover

    • LO 6: Appendix 6A: Apply the FIFO and average cost formulas under a periodic inventory system.

      • First-In, First-Out (FIFO)

      • Average Cost

  • 7 Internal Control and Cash

    • Controlling Cash at Nick’s

    • LO 1: Explain the components of an internal control system, including its control activities and limitations.

      • Control Activities

        • Assignment of Responsibility

        • Segregation of Duties

        • Documentation

        • Physical Controls

        • Review and Reconciliation

      • Limitations of Internal Control

        • Cost/Benefit Considerations

        • Human Error

        • Collusion

        • Management Override

    • LO 2: Apply the key control activities to cash receipts and payments.

      • Control Activities over Cash Receipts

        • Over-the-Counter Receipts

        • Electronic Receipts

        • Cheque Receipts

      • Control Activities over Cash Payments

    • LO 3: Prepare a bank reconciliation.

      • Bank Statements

        • Amounts Deducted from a Bank Account (Debits)

        • Amounts Added to a Bank Account (Credits)

      • Reconciling the Bank Account

        • Reconciliation Procedures

        • Reconciling Items per Bank

        • Reconciling Items to Cash Balance per Company’s Books

        • Bank Reconciliation Illustrated

        • Bank Reconciliation Journal Entries

    • LO 4: Explain the reporting and management of cash

      • Reporting Cash

      • Managing Cash

  • 8 Reporting and Analyzing Receivables

    • Varying Degrees of Credit

    • LO 1: Identify the types of receivables and record accounts receivable transactions.

      • Recording Accounts Receivable

      • Subsidiary Ledgers

      • Interest Revenue

    • LO 2: Account for bad debts.

      • Measuring and Recording Estimated Uncollectible Accounts

      • Writing Off Uncollectible Accounts

      • Collecting Uncollectible Accounts

      • Summary of Allowance Method

    • LO 3: Account for notes receivable.

      • Recording Notes Receivable

        • Interest Revenue

        • Uncollectible Notes Receivable

      • Derecognizing Notes Receivable

        • Honoured (Collected) Notes Receivable

        • Dishonoured Notes Receivable

    • LO 4: Explain the statement presentation of receivables.

      • Statement of Financial Position

      • Income Statement

    • LO 5: Apply the principles of sound accounts receivable management.

      • Extending Credit

      • Establishing a Payment Period

      • Monitoring Collections

      • Evaluating Liquidity of Receivables

  • 9 Reporting and Analyzing Long-Lived Assets

    • WestJet’s Assets Are for the Long Haul

    • LO 1: Determine the cost of property, plant, and equipment.

      • Determining Cost

        • Land

        • Land Improvements

        • Buildings

        • Equipment

        • Expenditures During Useful Life

      • To Buy or Lease?

    • LO 2: Explain and calculate depreciation.

      • Depreciation Methods

        • Straight-Line Method

        • Diminishing-Balance Method

        • Units-of-Production Method

        • Comparison of Depreciation Methods

      • Other Depreciation Issues

        • Significant Components

        • Depreciation and Income Tax

        • Impairments

        • Revaluation Model

        • Revising Periodic Depreciation

    • LO 3: Account for the derecognition of property, plant, and equipment.

      • Sale of Property, Plant, and Equipment

      • Retirement of Property, Plant, and Equipment

    • LO 4: Identify the basic accounting issues for intangible assets and goodwill.

      • Accounting for Intangible Assets

        • Intangible Assets with Finite Lives

        • Intangible Assets with Indefinite Lives

      • Goodwill

    • LO 5: Illustrate how long-lived assets are reported in the financial statements.

      • Statement of Financial Position

      • Income Statement

      • Statement of Cash Flows

    • LO 6: Describe the methods for evaluating the use of assets.

      • Return on Assets

      • Asset Turnover

      • Profit Margin Revisited

  • 10 Reporting and Analyzing Liabilities

    • Canada Post Borrows for Future Gains

    • LO 1: Account for current liabilities.

      • Operating Line of Credit

      • Sales Taxes

      • Property Taxes

      • Payroll

      • Short-Term Notes Payable

      • Current Maturities of Non-Current Debt

      • Provisions and Contingent Liabilities

    • LO 2: Account for instalment notes payable.

      • Fixed Principal Payments Plus Interest

      • Blended Principal and Interest Payments

      • Current and Non-Current Portions

    • LO 3: Identify the requirements for the financial statement presentation and analysis of liabilities.

      • Presentation

        • Current Liabilities

        • Non-Current Liabilities

      • Analysis

        • Liquidity

        • Solvency

    • LO 4: Appendix 10A: Account for bonds payable.

      • Accounting for Bond Issues

      • Accounting for Bond Interest Expense

      • Accounting for Bond Retirements

      • Determining the Issue Price of Bonds

  • 11 Reporting and Analyzing Shareholders’ Equity

    • Owning Shares Is a Family Affair

    • LO 1: Identify and discuss the major characteristics of a corporation.

      • Characteristics of a Corporation

        • Separate Legal Existence

        • Limited Liability of Shareholders

        • Transferable Ownership Rights

        • Ability to Acquire Capital

        • Continuous Life

        • Corporation Management

        • Government Regulations

        • Income Tax

        • Summary

      • Share Issue Considerations

        • Authorized Share Capital

        • Issue of Shares

        • Fair Value of Shares

        • Legal Capital

    • LO 2: Record share transactions.

      • Common Shares

        • Issue of Common Shares

        • Reacquisition of Common Shares

      • Preferred Shares

        • Issue of Preferred Shares

        • Preferential Features of Preferred Shares

        • Comparison of Preferred Shares and Liabilities

        • Summary Comparison of Preferred Shares and Common Shares

    • LO 3: Prepare the entries for cash dividends, stock dividends, and stock splits, and understand their financial impact.

      • Cash Dividends

      • Stock Dividends

      • Stock Splits

      • Comparison of Effects

    • LO 4: Indicate how shareholders’ equity is presented in the financial statements.

      • Statement of Financial Position

        • Contributed Capital

        • Retained Earnings

        • Accumulated Other Comprehensive Income (IFRS)

        • Illustration of Shareholders’ Equity Section

      • Statement of Changes in Equity (IFRS)

      • Statement of Retained Earnings (ASPE)

      • Summary of Shareholders’ Equity Transactions

    • LO 5: Evaluate dividend and earnings performance.

      • Dividend Record

      • Earnings Performance

        • Basic Earnings per Share

        • Return on Equity

        • The Effect of Debt on the Return on Shareholders’ Equity

        • Summary of Ratios

  • 12 Reporting and Analyzing Investments

    • Managing Money for Clients and the Company

    • LO 1: Identify reasons to invest, and classify investments.

      • Non-Strategic Investments

      • Strategic Investments

    • LO 2: Account for non-strategic investments.

      • Valuation of Non-Strategic Investments

      • Using Fair Value Models

        • Fair Value Through Profit or Loss

        • Fair Value Through Other Comprehensive Income (OCI)

    • LO 3: Account for strategic investments.

      • Using the Equity Method

        • Recording Acquisition of Shares

        • Recording Income from Associates

      • Using the Cost Model

        • Recording the Acquisition of Shares

        • Recording Dividend Revenue

        • Recording the Sales of Shares

    • LO 4: Explain how investments are reported in the financial statements.

      • Income Statement

      • Statement of Comprehensive Income

      • Statement of Changes in Equity

        • Closing Entries for Other Comprehensive Income

      • Statement of Financial Position

        • Accounting for Investments under IFRS

        • Accounting for Investments under ASPE

        • Classifying Investments on the Statement of Financial Position

        • Accumulated Other Comprehensive Income (Loss)

    • LO 5: Appendix 12A: Compare the accounting for a bond investment and a bond payable.

      • Recording a Bond Investment for the Investor

      • Recording a Bond for Investor and Investee

  • 13 Statement of Cash Flows

    • Cash Flow Can Be a Rocky Road

    • LO 1: Describe the content and format of the statement of cash flows.

      • Classification of Cash Flows

        • Activities Reported on the Statement of Cash Flows

        • Activities Not Reported on the Statement of Cash Flows

      • Format of the Statement of Cash Flows

      • Preparation of the Statement of Cash Flows

    • LO 2: Prepare the operating activities section of a statement of cash flows using the indirect method.

      • Noncash Expenses

      • Losses and Gains

      • Changes in Current Asset and Current Liability Accounts

        • Changes in Current Assets

        • Changes in Current Liabilities

      • Summary of Conversion to Net Cash Provided (Used) by Operating Activities—Indirect Method

    • LO 3: Prepare the investing and financing activities sections and complete the statement of cash flows.

      • Investing Activities

        • Land

        • Buildings

        • Equipment

        • Investments

      • Financing Activities

        • Bank Loan and Mortgage Payable

        • Share Capital

        • Retained Earnings

        • Accumulated Other Comprehensive Income

      • Completing the Statement of Cash Flows

    • LO 4: Use the statement of cash flows to evaluate a company.

      • Corporate Life Cycle and Cash Flows

      • Free Cash Flow

    • LO 5: Appendix 13A: Prepare the operating activities section of a statement of cash flows using the direct method.

      • Cash Receipts

        • Cash Receipts from Customers

        • Cash Receipts from Interest

      • Cash Payments

        • Cash Payments to Suppliers

        • Cash Payments for Operating Expenses

        • Cash Payments to Employees

        • Cash Payments for Interest

        • Cash Payments for Income Tax

      • Summary of Conversion to Net Cash Provided (Used) by Operating Activities—Direct Method

  • 14 Performance Measurement

    • From the Fur Trade to Fifth Avenue

    • LO 1: Explain and apply comparative analysis.

      • Horizontal Analysis

        • Statement of Financial Position

        • Income Statement

      • Vertical Analysis

        • Statement of Financial Position

        • Income Statement

        • Intercompany Comparisons

      • Ratio Analysis

    • LO 2: Calculate and interpret ratios that are used to analyze liquidity.

      • Working Capital

      • Current Ratio

      • Receivables Turnover

        • Average Collection Period

      • Inventory Turnover

        • Days in Inventory

      • Liquidity Conclusion

      • Summary of Liquidity Ratios

    • LO 3: Calculate and interpret ratios that are used to analyze solvency.

      • Debt to Total Assets

      • Times Interest Earned

      • Free Cash Flow

      • Solvency Conclusion

      • Summary of Solvency Ratios

    • LO 4: Calculate and interpret ratios that are used to analyze profitability.

      • Gross Profit Margin

      • Profit Margin

      • Asset Turnover

      • Return on Assets

      • Return on Common Shareholders’ Equity

      • Basic Earnings per Share

      • Price-Earnings (P-E) Ratio

      • Payout Ratio

      • Dividend Yield

      • Profitability Conclusion

      • Summary of Profitability Ratios

    • LO 5: Understand the limitations of financial analysis.

      • Diversification

      • Alternative Accounting Policies and Estimates

      • Other Comprehensive Income

      • Discontinued Operations

      • Nonrecurring Items

  • Appendix A Specimen Financial Statements: The North West Company Inc.

  • Appendix B Specimen Financial Statements: Sobeys Inc.

  • Glossary

  • Company Index

  • Subject Index

  • EULA

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