Brief Contents

PRE FAC E   vi

1 Overview of Corporate Financial Reporting  1-1

2 
Analyzing Transactions and Their Effects on Financial
Statements  2-1

3 Double-Entry Accounting and the Accounting Cycle  3-1

4 Revenue Recognition and the Statement of Income  4-1

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5 The Statement of Cash Flows  5-1

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6 Cash and Accounts Receivable  6-1

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7 Inventory  7-1

8 Long-Term Assets  8-1 MA

9 Current Liabilities  9-1

10 Long-Term Liabilities  10-1

D
TE

11 Shareholders’ Equity  11-1

12 Financial Statement Analysis  12-1

GH

APPE N D I X A  Specimen Financial Statements: Dollarama Inc.  A-1

RI

APPE N D I X B   Revenue Recognition and Long-Term Contracts  B-1

PY

APPE N D I X C  Long-Term Assets  C-1

CO

APPE N D I X D  Investments   D-1

GLOSS ARY   G-1/ CO MPA N Y IN D EX  C-1/ S U BJ E CT INDE X  S-1

xii
 Contents
1 Overview of Corporate Financial How Do the Standard Setters Determine What
Constitutes Useful Financial Information?  2-5
Reporting  1-1 2.3 Accrual Versus Cash Basis of Accounting  2-9
What Is the Difference between the Cash Basis of
Dollar Store Business Is No Small Change  1-1 Accounting and the Accrual Basis of Accounting?  2-9
1.1 Introduction to Financial Accounting  1-2 2.4 The Accounting Equation Template
What Is Financial Accounting?  1-3 Approach   2-11
1.2 Users and Uses of Financial Accounting  1-3 What Is the Accounting Equation Template Approach
Who Needs an Understanding of Financial to Recording Transactions?  2-11
Accounting and Why?  1-4 2.5 Using the Accounting Equation Template Approach
1.3 Forms of Business Organization  1-8 to Analyze and Record Transactions  2-13
What Is a Corporation?  1-8 How Is the Accounting Equation Used to Analyze and
What Differentiates a Corporation from Other Forms Record Transactions?  2-13
of Business?  1-9 What Are the Limitations of the Accounting Equation
1.4 Activities of a Business  1-10 Template Approach?  2-25
What Are the Three Categories of Business 2.6 Financial Statements  2-26
Activities?  1-10 How Do We Know If the Company Was Profitable
What Are Examples of Financing Activities?  1-11 during the Accounting Period?  2-26
What Are Examples of Investing Activities?  1-12 How Can We Tell If the Equity Position of
What Are Examples of Operating Activities?  1-12 Shareholders Changed during the Accounting
1.5 Financial Reporting  1-13 Period?  2-27
What Information Is Included in a Set of Financial How Do We Determine the Company’s Financial
Statements?  1-13 Position at the End of the Accounting Period?  2-28
What Is the Reporting Objective of the Statement of How Can We Tell If the Company’s Cash Position
Income? What Does It Include?  1-14 Changed during the Accounting Period?  2-28
What Is the Reporting Objective of the Statement of 2.7 Using Ratios to Analyze Financial Statements  2-32
Changes in Equity? What Does It Include?  1-17 How Do We Determine the Company’s Profit
What Is the Reporting Objective of the Statement of Margin?  2-32
Financial Position? What Does It Include?  1-18 How Do We Determine How Effective the Company
What Is the Reporting Objective of the Statement of Has Been at Generating a Return on Shareholders’
Cash Flows? What Does It Include?  1-23 Equity?  2-33
What Type of Information Is in the Notes to a How Do We Determine How Effective the
Company’s Financial Statements?  1-25 Company Has Been at Generating Profits Using Its
Assets?  2-34
2 Analyzing Transactions and Their
Effects on Financial Statements  2-1 3 Double-Entry Accounting and the
Accounting Cycle  3-1
A Growing Appetite for Financial
Transparency  2-1 Balancing the Books When Bartering  3-1
Introduction  2-3 3.1 The Double-Entry System  3-3
2.1 Accounting Standards  2-3 How Does the Double-Entry Accounting System Work
What Are Accounting Standards?  2-3 and How Does It Overcome the Limitations of the
Do All Canadian Companies Use the Same Template Method?  3-3
Accounting Standards?  2-3 3.2 The Normal Balance Concept  3-4
Who Sets the Accounting Standards Used in What Is the Normal Balance Concept and How Is It
Canada?  2-4 Used?  3-4
2.2 Qualitative Characteristics of Financial 3.3 Understanding the Accounting Cycle  3-8
Information  2-5 What Are the Steps in the Accounting Cycle?  3-8
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3.4 The Chart of Accounts  3-9 What Is Meant by Earnings per Share, and How Is It
What Is the Chart of Accounts?  3-9 Calculated?  4-23
Can Companies Change Their Chart of Accounts and

3.5
What Are the Implications If They Do?  3-10
Opening Balances  3-11
5 The Statement of Cash Flows  5-1
What Is the Difference between Permanent and
The Dash for Cash  5-1
Temporary Accounts?  3-11
5.1 Introduction  5-3
3.6 Transaction Analysis and Recording  3-11
How Is “Cash” Defined?  5-3
How Are Transactions Identified?  3-11
Why Is the Statement of Cash Flows of Significance to
How Are Transactions Recorded in the General
Users?  5-4
Journal?  3-12
5.2 Differences between the Statement of Cash Flows
Why Are Transactions Also Recorded in the General
and the Statement of Income  5-5
Ledger?  3-19
How Does the Statement of Cash Flows Differ from
What Is the Purpose of Preparing a Trial Balance?  3-21
the Statement of Income?  5-6
3.7 Adjusting Entries  3-22
5.3 Understanding the Statement of Cash Flows  5-7
What Are Adjusting Entries and Why Are They
What Are the Categories of Cash Flows Presented in
Necessary?  3-22
the Statement of Cash Flows and What Are Typical
What Is the Purpose of Preparing an Adjusted Trial
Transactions Included in Each Category?  5-7
Balance?  3-28
Why Is So Much Significance Placed on Cash Flows
3.8 Preparing Financial Statements and Closing
from Operating Activities?  5-8
Entries  3-29
What Is the Difference between the Direct and
What Are Closing Entries and Why Are They
Indirect Methods of Preparing Cash Flows from
Necessary?  3-29
Operating Activities?  5-9
What Do We Know If a Company Has Retained
What Are the Options for Classifying Cash Flows
Earnings?  3-34
Related to Interest and Dividends Paid and
Received?  5-11
4 Revenue Recognition and the Are There Investing and Financing Activities That Do
Statement of Income  4-1 Not Appear on the Statement of Cash Flows?  5-12
5.4 Preparing the Statement of Cash Flows Using the
Competing in the Revenue Game  4-1 Indirect Method  5-12
4.1 Revenue and Its Significance  4-2 How Is a Statement of Cash Flows Prepared
What Is Revenue and Why Is It of Significance to Using the Indirect Method for Operating
Users?  4-3 Activities?  5-13
Why Is Understanding How a Company Recognizes 5.5 Preparing the Statement of Cash Flows Using the
Revenue of Significance to Users?  4-4 Direct Method  5-24
4.2 Revenue Recognition  4-5 How Is a Statement of Cash Flows Prepared Using
When Are Revenues Recognized?  4-5 the Direct Method for Operating Activities?  5-24
4.3 Other Revenue Recognition Issues  4-13 5.6 Interpreting Cash Flow Information  5-26
How Do Rights of Return, Warranties, Consignment, How Can the Information Presented in a
and Third-Party Sale Arrangements Affect Revenue Statement of Cash Flows Be Used to Manage a
Recognition?  4-13 Company?  5-26
4.4 Statement of Income Formats  4-16 What Can Cash Flow Patterns Tell Us?  5-28
How Does a Single-Step Statement of Income Differ 5.7 Financial Statement Analysis  5-30
from a Multi-Step Statement of Income?  4-16 How Do We Determine What Portion of a Company’s
4.5 Statement of Comprehensive Income  4-19 Current Liabilities Could Be Met with Cash Flows
What Is Comprehensive Income and How Does It from Operating Activities?  5-30
Differ from Net Income?  4-19 How Do We Determine How Much Net Free Cash Flow
4.6 Presentation of Expenses by Nature or by a Company Generates?  5-31
Function  4-20
How Does a Statement of Income Presenting 6 Cash and Accounts Receivable  6-1
Expenses by Function Differ from One Presenting
Expenses by Nature of the Items?  4-20 Will That Be Cash or Credit?  6-1
4.7 Financial Statement Analysis  4-22 6.1 Introduction  6-3
 Contents  xv

Why Are Cash and Accounts Receivable of What Goods Are Included in a Company’s
Significance to Users?  6-3 Inventory?  7-7
6.2 Cash  6-4 7.3 Inventory Systems  7-8
What Is Included in the Definition of “Cash”?  6-4 What Is a Periodic Inventory System?  7-8
At What Amount Is Cash Reflected on the Statement What Is a Perpetual Inventory System?  7-10
of Financial Position?  6-4 What Are the Key Distinctions between Periodic and
6.3 Internal Control  6-4 Perpetual Inventory Systems?  7-11
Who Is Responsible for an Organization’s Internal How Does Management Decide Which Inventory
Controls?  6-4 System to Use?  7-12
What Are the Main Principles of Internal Control?  6-5 7.4 Cost Formulas  7-13
What Are the Limitations of Internal Control?  6-7 What Costs Are Included in Inventory?  7-13
6.4 Bank Reconciliation  6-7 What Are Cost Formulas and Why Are They
What Is the Purpose of a Bank Reconciliation and Necessary?  7-14
Why Must It Be Prepared?  6-7 How Are Cost of Goods Sold and Ending Inventory
How Is a Bank Reconciliation Prepared?  6-8 Determined Using the Specific Identification,
6.5 Accounts Receivable  6-12 Weighted-Average, and First-In, First-Out Cost
What Are Accounts Receivable?  6-12 Formulas under a Perpetual Inventory System?  7-17
Why Do Companies Sell on Account?  6-12 How Do Companies Determine Which Cost Formula
Are There Any Additional Costs from Selling on to Use?  7-19
Account?  6-13 7.5 Inventory Valuation  7-20
6.6 The Carrying Amount of Accounts Receivable   6-14 At What Value Is Inventory Reflected on the
At What Amount Are Accounts Receivable Reflected Statement of Financial Position?  7-21
on the Statement of Financial Position?  6-14 How Is the Lower of Cost or Net Realizable Value
6.7 The Allowance Method  6-16 Applied to Inventory?  7-22
What Is the Allowance Method of Accounting for What Types of Inventory Valuation Errors Can
Credit Losses?  6-16 Happen and What Impact Do They Have on the
6.8 Estimating Expected Credit Losses under the Financial Statements?  7-23
Allowance Method  6-20 7.6 Gross Margin  7-24
What Are the Various Risk Characteristics That Could What Is Gross Margin and Why Is It a Key
Be Used to Group Receivables?  6-20 Measure?  7-25
How Does Management Determine the Company’s 7.7 Internal Controls and Inventory  7-26
Expected Rate of Credit Losses?  6-21 What Principles of Internal Control Can Be Applied to
How Does a Company Quantify Its Allowance for Inventory?  7-26
Expected Credit Losses?  6-22 7.8 Financial Statement Analysis  7-27
6.9 The Direct Writeoff Method  6-24 How Often Does the Company Sell through Its
What Is the Direct Writeoff Method and When Is It Inventory?  7-27
Acceptable to Use It?  6-24 How Many Days Did It Take to Sell through the
6.10 Cash-to-Cash Cycle  6-25 Company’s Inventory?  7-28
How Do Companies Shorten Their Cash-to-Cash How Can Inventory Amounts Be Estimated?  7-30
Cycle?  6-25 7.9 Appendix: Inventory Cost Formulas under the
6.11 Financial Statement Analysis  6-27 Periodic Inventory System  7-31
What Is Liquidity and How Is It Assessed?  6-27 How Are Cost of Goods Sold and Ending Inventory
How Effective Has the Company Been at Collecting Determined Using the Specific Identification,
Its Accounts Receivable?  6-29 Weighted-Average, and First-In, First-Out Cost
Formulas under a Periodic Inventory System?  7-31

7 Inventory  7-1
8 Long-Term Assets  8-1
Pivoting in a Pandemic  7-1
7.1 Introduction  7-3 A Canadian Icon’s Long-Term Assets  8-1
What Is Inventory?  7-3 8.1 Introduction  8-3
Why Is Inventory of Significance to Users?  7-3 What Are the Various Types of Long-Term Assets?  8-3
7.2 Types of Inventory  7-5 Why Are Long-Term Assets of Significance to
What Are the Major Classifications of Inventory?  7-5 Users?  8-4
xvi Contents

8.2 Valuation of Property, Plant, and Equipment  8-5 At What Amount Are Biological Assets Reflected on
At What Amount Are Property, Plant, and the Statement of Financial Position?  8-36
Equipment Reflected on the Statement of Financial 8.11 Financial Statement Analysis  8-37
Position?  8-5 How Do We Determine the Relative Age of the
What Is Included in “Cost”?  8-6 Company’s Long-Term Assets?  8-37
What Happens When a Company Purchases Multiple How Do We Assess How Effectively the Company Has
Assets for a Single Price?  8-7 Used Its Long-Term Assets?  8-37
How Do We Account for Costs Subsequent to
Purchase?  8-8
Can a Company Carry Property, Plant, and 9 Current Liabilities  9-1
Equipment at Their Fair Values?  8-8
Booking Revenue for Gift Cards  9-1
8.3 Depreciation  8-9
9.1 Introduction  9-3
Why Do We Depreciate Property, Plant, and
Why Is the Distinction between Current and Non-
Equipment?  8-9
Current Liabilities of Significance to Users?  9-3
8.4 Depreciation Methods  8-10
9.2 Valuation Methods  9-4
What Are the Methods Used to Depreciate Property,
At What Amount Are Current Liabilities Reflected on
Plant, and Equipment?  8-10
the Statement of Financial Position?  9-4
How Do We Choose a Depreciation Method?  8-19
9.3 Current Liabilities Arising from Transactions with
How Do We Record Depreciation Expense?  8-19
Lenders  9-4
Does an Asset’s Carrying Amount Tell Me What It Is
What Current Liabilities Arise from Transactions with
Worth?  8-20
Lenders?  9-5
How Do We Determine Depreciation for Partial
9.4 Current Liabilities Arising from Transactions with
Periods?  8-20
Suppliers  9-8
Is Depreciation Expense Recorded Every Period for
What Current Liabilities Arise from Transactions with
Each PP&E Asset?  8-20
Suppliers?  9-8
Does the Choice of Depreciation Method Affect
Why Are Accounts Payable Sometimes Considered
Corporate Income Taxes?  8-21
“Free Debt”?  9-8
8.5 Changes in Depreciation Methods  8-21
9.5 Current Liabilities Arising from Transactions with
Can We Change Depreciation Estimates and
Customers  9-9
Methods?  8-21
What Current Liabilities Arise from Transactions with
8.6 Impairment  8-25
Customers?  9-9
What Does It Mean If an Asset Is Impaired?   8-25
How Are Deferred Revenues Accounted For?  9-9
8.7 Disposal of Property, Plant, and Equipment  8-27
How Are the Liabilities Related to Gift Cards
How Do We Account for Disposals of Property, Plant,
Accounted For?  9-10
and Equipment?  8-27
How Are the Liabilities Related to Loyalty Programs
8.8 Intangible Assets  8-29
Accounted For?  9-12
What Are Intangible Assets?  8-29
How Are Warranties Accounted For?  9-13
At What Amount Are Intangible Assets Reflected on
9.6 Current Liabilities Arising from Transactions with
the Statement of Financial Position?  8-31
Employees  9-16
How Is Accounting for Intangible Assets Different
What Current Liabilities Arise from Transactions with
from Accounting for Property, Plant, and
Employees?  9-16
Equipment?  8-32
How Are Payroll Costs Accounted For?  9-17
8.9 Goodwill  8-32
Why Are a Company’s Wage Costs Greater Than What
What Is Goodwill?  8-32
It Pays Its Employees?  9-19
At What Amount Is Goodwill Reflected on the
9.7 Current Liabilities Arising from Transactions with
Statement of Financial Position?  8-34
the Government  9-20
How Is Goodwill Treated Differently from Other Long-
What Current Liabilities Arise from Transactions with
Term Assets?  8-35
Government?  9-20
8.10 Other Long-Term Assets  8-35
When Are a Company’s Taxes Due?  9-21
What Are Right-of-Use Assets?  8-35
9.8 Current Liabilities Arising from Transactions with
At What Amount Are Right-of-Use Assets Reflected on
Shareholders  9-21
the Statement of Financial Position?  8-35
What Current Liabilities Arise from Transactions with
What Are Biological Assets?  8-36
Shareholders?  9-21
 Contents  xvii

9.9 Financial Statement Analysis  9-22

How Do We Determine How Long a Company Takes
11 Shareholders’ Equity  11-1

to Pay Its Suppliers?  9-22 Investors Warm up to Owning Shares in Canada

Goose  11-1
10 Long-Term Liabilities  10-1 11.1 Introduction  11-3
Why Is Shareholders’ Equity of Significance to
Avoiding Pension Turbulence  10-1 Users?  11-3
10.1 Introduction  10-3 11.2 The Shareholders’ Equity Section  11-3
Why Are Long-Term Liabilities of Significance to What Is Included in the Shareholders’ Equity Section
Users?  10-3 of the Statement of Financial Position?  11-3
10.2 Long-Term Liabilities Arising from Transactions 11.3 Types of Shares  11-6
with Lenders  10-4 What Types of Shares Is a Company Allowed to
What Long-Term Liabilities Arise from Transactions Issue?  11-6
with Lenders?  10-4 What Is the Difference between Authorized, Issued,
How Are Long-Term Loans and Mortgages Accounted and Outstanding Shares?  11-7
For?  10-4 Why Would a Company Repurchase Its Own
What Are Bonds and How Do They Differ from Long- Shares?  11-7
Term Loans?  10-7 What Are the Differences between Common Shares
How Are Bonds Priced in the Marketplace?  10-10 and Preferred Shares?  11-8
How Does the Pricing of Bonds Affect a Company’s 11.4 Dividends  11-18
Interest Expense?   10-11 Do Companies Have to Pay Dividends?  11-18
10.3 Long-Term Liabilities Arising from Transactions What Are the Different Dates Involved in Declaring
with Other Creditors  10-14 and Paying a Dividend?  11-19
What Long-Term Liabilities Arise from Transactions How Are the Declaration and Payment of Dividends
with Other Creditors?  10-14 Recorded?  11-20
Why Do Companies Lease Capital Assets?  10-14 What Is the Difference between a Cash Dividend and
How Are Leases Accounted For?  10-14 a Stock Dividend?  11-21
10.4 Long-Term Liabilities Arising from Transactions 11.5 Stock Splits  11-24
with Employees  10-16 What Is a Stock Split?  11-24
What Long-Term Liabilities Arise from Transactions Why Would a Company Split Its Shares?  11-25
with Employees?  10-16 11.6 Financial Statement Analysis  11-26
What Are the Differences between Defined What Is the Price/Earnings Ratio?  11-27
Contribution, Defined Benefit, and Hybrid Pension What Other Ratios Measure the Return the
Plans?  10-17 Shareholders Are Earning?  11-28
What Are Other Post-Employment 11.7 Financing with Equity  11-30
Benefits?  10-20 What Are the Advantages and Disadvantages of
10.5 Long-Term Liabilities Arising from Differences Financing with Equity?  11-30
between Accounting Standards and the Income
Tax Act  10-21
What Long-Term Liabilities Arise as a Result of
12 Financial Statement Analysis  12-1
Differences between Accounting Standards and the
Student Stock Analysts Try to “Beat the
Income Tax Act?  10-21
Street”  12-1
10.6 Commitments and Guarantees  10-22
12.1 Introduction  12-3
How Are Contractual Commitments and Guarantees
What Is Financial Statement Analysis?  12-3
Reflected in the Financial Statements?  10-22
What Is the Process for Analyzing Financial
10.7 Contingencies  10-23
Statements?  12-4
What Are Contingent Liabilities and How Are They
12.2 The Contexts for Financial Statement
Accounted For?  10-23
Analysis  12-5
10.8 Financial Statement Analysis  10-25
What Are the Common Contexts for Financial
How Do Users Assess a Company’s Degree of
Statement Analysis?  12-5
Leverage?  10-25
Why Is an Understanding of Context Essential to the
How Do Users Assess a Company’s Ability to Service
Analysis?  12-5
Its Long-Term Debt Obligations?  10-28
12.3 Understanding the Business   12-6
xviii Contents

Why Is It Essential to Understand the Business Being 12.8 Limitations of Ratio Analysis  12-37
Analyzed?  12-6 What Are the Limitations of Ratio Analysis?  12-37
12.4 Business Information  12-7 12.9 Use of Non-IFRS Financial Measures and Other
What Information Is the Financial Statement Analysis Performance Measures  12-39
Based On and Where Is It Found?  12-7 What Non-IFRS Financial Measures and Other
12.5 Financial Statement Analysis Perspectives  12-11 Performance Measures Are Commonly Used by
What Is the Difference between Retrospective and Investors?  12-39
Prospective Analysis?  12-11 Why Should We Be Cautious When Using Non-IFRS
What Is the Difference between Trend Analysis and Financial Measures and Other Performance
Cross-Sectional Analysis?  12-11 Measures?  12-40
12.6 Financial Statement Analysis Techniques  12-16
What Is Common-Size Analysis?  12-16 Specimen Financial Statements:
A P P E NDIX A  
How Is Ratio Analysis Used to Analyze Financial Dollarama Inc.  A-1
Statements?  12-18
What Are the Common Categories of Ratios?  12-19 Revenue Recognition and Long-
A P P E NDIX B  
12.7 Ratio Analysis  12-22 Term Contracts  B-1
What Liquidity Ratios Are Commonly Used?  12-22
What Activity Ratios Are Commonly Used?  12-24 A P P E NDIX C  Long-Term Assets  C-1
What Solvency Ratios Are Commonly Used?  12-28
What Profitability Ratios Are Commonly A P P E NDIX D   Investments   D-1
Used?  12-30
What Equity Analysis Ratios Are Commonly G LO SS A RY  G-1/ CO M PA NY INDE X  C-1/ SUBJECT
Used?  12-33 INDE X   S-1