Prep M51C R1601 W01.note.g

Module 5.
1
Intermediate Financial
Reporting 1
Week 1
Student Notes
Chartered Professional Accountants of Canada, CPA Canada, CPA

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2015, Chartered Professional Accountants of Canada. All Rights Reserved.
Reproduced with permission of 2013 Institute of Chartered Accountants of Scotland and BPP Holdings Limited.
All Rights Reserved.
Table of Contents
TOPIC 1.1: INTRODUCTION ..................................................................................................... 4
1.1-1 Prerequisite knowledge .................................................................................................. 4
1.1-2 Structure of course materials ......................................................................................... 4
TOPIC 1.2: ACCOUNTING STANDARDS IN CANADA ............................................................. 6
1.2-1 Generally accepted accounting principles ...................................................................... 7
1.2-2 Development of new and revised accounting standards ................................................ 8
1.2-3 Effect of legislation on accounting standards ................................................................. 8
TOPIC 1.3: THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING ..................... 9
1.3-1 Components of the IFRS Conceptual Framework for Financial Reporting ..................... 9
1.3-2 Users of financial reporting ............................................................................................ 9
1.3-3 Objectives of financial reporting ..................................................................................... 9
1.3-4 Fundamental qualitative characteristics ....................................................................... 10
1.3-5 Enhancing qualitative characteristics ........................................................................... 11
1.3-6 The cost constraint (cost versus benefit) ..................................................................... 11
1.3-7 Underlying assumption going concern .................................................................... 12
1.3-8 Capital maintenance .................................................................................................... 12
1.3-9 The elements of financial statements ........................................................................... 14
1.3-10 Measurement of the elements of financial statements ............................................... 14
TOPIC 1.4: THE ASPE FRAMEWORK .................................................................................... 16
1.4-1 ASPE framework contrasted with IFRS conceptual framework .................................... 16
TOPIC 1.5: FINANCIAL STATEMENTS ................................................................................... 18
1.5-1 Required financial statements ASPE ....................................................................... 19
1.5-2 Financial statements general requirements ............................................................. 20
1.5-3 Statement of financial position ..................................................................................... 21
1.5-4 The statement of profit or loss and other comprehensive income (statement of
comprehensive income) ........................................................................................................ 22
1.5-5 Statement of changes in equity .................................................................................... 27
1.5-6 Events after the reporting period (subsequent events) ................................................ 30
TOPIC 1.6: INTERNAL CONTROL .......................................................................................... 32
1.6-1 Bank reconciliations ..................................................................................................... 32
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TOPIC 1.7: ACCOUNTING INFORMATION SYSTEMS AND INFORMATION

TECHNOLOGY ........................................................................................................................ 36
1.7-1 Accounting software ..................................................................................................... 36
1.7-2 Information technology ................................................................................................. 37
1.7-3 Current trends in computerized accounting information systems ................................. 39
TOPIC 1.8: ETHICS ................................................................................................................. 40
TOPIC 1.9: THE ACCOUNTING CYCLE.................................................................................. 41
APPENDIX A: PROVINCIAL SALES TAX, GOODS AND SERVICES TAX AND
HARMONIZED SALES TAX ..................................................................................................... 53
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Module 5.1 Intermediate Financial Reporting 1
TOPIC 1.1: INTRODUCTION

1.1-1 Prerequisite knowledge
The materials in this module build upon those introduced in Module 1 Introductory Financial
Accounting (or an equivalent post-secondary introductory financial accounting course). You are
expected to have a working knowledge of these concepts. For example, in Week 3 of Module
5.1 you may be asked a question on property, plant and equipment that includes depreciation,
which is not covered in depth in Module 5.1 until Week 4; however, you are expected to
understand this concept, as it was previously introduced in Module 1. If necessary, you should
refer back to introductory financial accounting materials for guidance.
The material in Appendix A associated with PST, GST and HST covered will be examinable.
This material discussed the general concepts surrounding PST, GST and HST. However,
various transactions that affect income (either through profit or loss or other comprehensive
income) may have related tax effects that are not specifically addressed during this modules
materials. Tax effects will be discussed in more detail in Module 5.2; therefore, any tax effects
included in Module 5.1 will be relatively straightforward.
1.1-2 Structure of course materials
Modules 5.1, 5.2 and 5.3 all deal with various aspects of intermediate and advanced financial
accounting and reporting. While the topical coverage of the three parts is different, the CPA
Prerequisite Education Program (CPA PREP) has adopted a common approach in how the
materials are organized. Accounting for most financial statement elements is presented as
follows:
recognition
initial measurement
subsequent measurement
derecognition
presentation and disclosure
The materials have been presented in this fashion for two reasons:
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It is consistent with the methodology used in the CPA Canada Handbook Accounting.
Week 1 Student Notes
It clearly illustrates the similarities and differences in accounting for the different financial
statement elements. For example, while there are numerous types of liabilities, for the most
part they fall into one of three classes1. Each of the liability classes is initially measured in a
specific way. Rather than trying to memorize the different accounting treatments for each
different type of liability, you are required to recognize the class of the liability and then
apply the appropriate accounting treatment to it.
Briefly, recognition is when it is determined whether or not a transaction is first included in one
of the financial statements. This would normally be accomplished by processing a journal entry
that creates an asset, liability, equity, income or expense. For example, when a company
purchases a computer and record this as an asset on its statement of financial position.
Initial measurement deals with how to measure or assign a dollar value to the financial
statement element when it is first included in the financial statements. Using the computer
example, initial measurement describes how the amount at which the asset is first reported on
the statement of financial position is determined. For example, all costs associated with getting
the asset ready for its intended use.
Subsequent measurement describes how to measure or assign a dollar amount to the financial
statement element when it is included in subsequent financial statements. Continuing with the
computer example noted earlier, subsequent measurement specifies how the amount that the
asset will subsequently be reported at is determined. The manner in which many financial
statement elements are subsequently measured can be different from the initial measurement.
For instance, amortized cost differs from the historical cost in which an asset is initially
measured at.
Derecognition outlines when a financial statement element should be removed from the
statement of financial position and how this is accomplished.
Presentation and disclosure specifies the basis of presentation for the financial statement
elements and details the minimum required disclosure in the financial statement and/or the
notes to the financial statements related to that element.
As will be discussed in Module 5.2, the three classes of liabilities are: financial liabilities at fair value through
profit or loss; other financial liabilities; and non-financial liabilities.
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TOPIC 1.2: ACCOUNTING STANDARDS IN CANADA

The accounting body that sets accounting standards in Canada is the Accounting Standards
Board (AcSB). In 2006, the AcSB fundamentally changed its strategy; rather than adopting a
one-size-fits-all philosophy, it determined that it was in Canadas best interest to pursue
separate accounting strategies for entities with different needs. The result of this is that the
CPA Canada Handbook Accounting now contains five parts:
Part I
International Financial Reporting Standards (IFRS): Publicly accountable

enterprises are required to prepare their financial statements in accordance with
Part I of the Handbook.
Part II
Accounting standards for private enterprises (ASPE): Private enterprises may

elect to prepare their financial statements in accordance with either Part I (IFRS)
or Part II (Private Enterprises) of the Handbook.
Part III
Accounting standards for not-for-profit organizations (NFPOs): Non-governmental

NFPOs may choose to apply either Part I (IFRS) or Part III (NFPOs) of the
Handbook supplemented by Part II. NFPOs that choose to adopt IFRS will apply
the same set of standards as publicly accountable enterprises; these standards
will not be modified to accommodate the unique nature of NFPOs.
Part IV
Accounting standards for pension plans: Pension plans are required to prepare
their financial statements in accordance with Part IV of the Handbook, which
governs accounting for the assets and liabilities of the pension plans. The
standards for accounting for pensions from the company perspective are set out
in IAS 19 Employee Benefits.
Part V
Pre-changeover accounting standards: These standards maintain the existing

basis for financial reporting for those publicly accountable enterprises that have
not yet completed the transition to IFRS. This includes some investment
companies, and rate-regulated entities. No changes to Part V are planned or
anticipated, but the AcSB will consider the timing for withdrawal of Part V from the
Handbook.
Accounting for federal, provincial, territorial and local governments is governed by a separate
set of standards set out in the CPA Canada Public Sector Accounting Handbook (PSA
Handbook). It includes the 4200 series of standards, which specifically address the diverse
needs of governmental NFPOs. While governmental NFPOs must report their financial results
in accordance with the PSA Handbook, they may elect to do so with or without the 4200 series.
The preface to the CPA Canada Handbook Accounting includes the following definitions:
(a) A publicly accountable enterprise is an entity, other than a not-for-profit organization,
that:
(i) has issued, or is in the process of issuing, debt or equity instruments that are, or will be,
outstanding and traded in a public market (a domestic or foreign stock exchange or an
over-the-counter market, including local and regional markets); or
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(ii) holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary
businesses.*
(b) A private enterprise is a profit-oriented entity that is not a publicly accountable enterprise.
(c) A not-for-profit organization is an entity, normally without transferable ownership
interests, organized and operated exclusively for social, educational, professional, religious,
health, charitable or any other not-for-profit purpose. A not-for-profit organizations
members, contributors and other resource providers do not, in such capacity, receive any
financial return directly from the organization.
(d) A pension plan is any arrangement (contractual or otherwise) whereby a program is
established to provide retirement income to employees.
* Note: This includes most banks, credit unions, insurance companies, securities
brokers/dealers, mutual funds and investment banks.
The content in Module 5.1 is based on the accounting standards set out in Part I of the CPA
Canada Handbook Accounting (the Handbook), which sets out the requirements for
accounting for publicly accountable enterprises. Where warranted, material differences
between Part I (IFRS) and Part II (ASPE) are explained. Please note that all examples and
questions are based on IFRS unless specified otherwise.
Module 5.1 reflects the guidance set out in IFRS 9 Financial Instruments rather than its
predecessor standard, IAS 39 Financial Instruments: Recognition and Measurement. While the
adoption of IFRS 9 is not yet mandatory (it is effective for annual periods beginning on or after
January 1, 2018), early adoption is permitted.
Similarly, Module 5.1 also reflects the guidance set out in IFRS 15 Revenue Recognition from
Contracts rather than its predecessor standards IAS 11 Construction Contracts and IAS 18
Revenue together with the related interpretations. While the adoption of IFRS 15 is not yet
mandatory (it is effective for annual periods beginning on or after January 1, 2018), early
adoption is permitted.
From a practical perspective, the difference between the old and new standards as they apply
to Module 5.1 is minimal. Moreover, and most importantly, the new standards have been
finalized and will be in effect by the time you earn your CPA designation.
1.2-1 Generally accepted accounting principles
Canadian generally accepted accounting principles (GAAP) refer to the framework of
commonly followed accounting rules and standards for financial reporting. Simply put, it is the
commonly accepted way of reporting financial accounting information. Canadian GAAP for
publically accountable enterprises includes all of the authoritative standards in Part I of the
CPA Canada Handbook Accounting but extends beyond this guidance. In this respect it also
includes pronouncements by the International Accounting Standards Board (IASB), the
governing securities commission regulations for listed companies, and accounting practices
developed by industry and public and private bodies over time.
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1.2-2 Development of new and revised accounting standards

The primary objective of financial reporting is to provide useful information for decision-making.
Over time, accounting standards must evolve to incorporate the development of new financial
instruments and other financial statement elements, as well as address the impact of new or
revised governmental legislation. For example, 50 years ago the governing standards did not
specifically address how to account for derivatives, as they were virtually unheard of and
seldom used. Today, accounting for derivatives is explicitly addressed in IFRS 9 Financial
Instruments. Hence, accounting standards including IFRS are not static. Rather, the IASB and
the AcSB are constantly revising existing standards and introducing new standards to ensure
that financial statements continue to provide useful information for decision-making.
Changes designed to make accounting information and disclosures more useful are always
under consideration. The IASB is currently working on many standards and research projects
that follow a specified process to ensure the validity and necessity of proposed changes. For
example, in the IASB website, under the section IASB projects, it notes that the following steps
are to be performed before adopting a change to the existing standards: selecting topics to be
studied, planning the projects, researching the topics, issuing exposure drafts to solicit
feedback on proposed changes or additions to IFRS, and issuing new or revised standards as
necessary.
1.2-3 Effect of legislation on accounting standards
The accounting profession is largely a self-governing one that identifies and sets its own
standards. Accounting standards are given legislative authority by various securities acts
throughout Canada. Because of this authority, the governing accounting standards are also
subject to legislative processes where the public interest is paramount. An example of the
exercise of this authority was in 2002 when the Ontario legislative assembly passed Bill 198,
which required most publicly reportable enterprises in Canada to expand disclosure of offbalance-sheet financing and stock transactions of corporate officers. This example, while
dated, is the most recent major change to Canadian accounting standards initiated by
legislative authority, as the government so seldom exercises its authority. Bill 198 came about
in direct response to the U.S. governments enactment of the Sarbanes-Oxley Act of 2002,
described below.
The Sarbanes-Oxley Act of 2002 (SOX), also known as the Public Company Accounting
Reform and Investor Protection Act, came about as a direct result of several major frauds
involving large public companies in the United States, including Enron, WorldCom, Tyco
International and others. By passing SOX, the government hoped to restore the investing
publics confidence in the U.S. securities markets.
SOX was far reaching, and it established new or more stringent standards for public
accounting firms and companies Boards of Directors and management. The legislation
addressed several issues, including corporate governance and responsibility, auditor
independence, internal control assessment, financial disclosures, conflicts of interest and fraud
reporting. The law also provided for substantively increased civil and criminal penalties for noncompliance.
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TOPIC 1.3: THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

1.3-1 Components of the IFRS Conceptual Framework for Financial Reporting
The IFRS Conceptual Framework for Financial Reporting, a preface to IFRS, describes
abstract concepts. This section outlines the relationship between these concepts. Note that the
conceptual framework is not an IFRS and so nothing in the conceptual framework overrides
any specific IFRS. In the (increasingly rare) event of a conflict, the requirements of the IFRS
prevail over those of the conceptual framework.
1.3-2 Users of financial reporting
Paragraph OB2 of the conceptual framework (replicated below) establishes that the overall
objective of general purpose financial reporting is to serve the interests of two specific users of
financial information (investors and creditors). It is important to note, though, that there are
many other users of this information. Users can be separated into two broad classes: external
users and internal users.
External users are all users who are not managers of the entity. This includes investors,
creditors, regulatory bodies, taxing authorities and non-management employees. Within this
group there may be several reporting objectives. For example, investors are generally
concerned with assessing the timing and amounts of future cash flows, evaluating the
performance of the entity and assessing how well managers use the resources provided to
them. In private companies, many investors would like to ensure that the company minimizes
or at least defers its income taxes. Other users, such as employees, regulatory bodies and
creditors, are concerned with contractual compliance. They want to ensure that the company
has met all the contractual provisions of its various agreements, such as profit-sharing
programs or debt covenants.
Internal users are the managers of the organization. They are the ones who make decisions
about the entitys accounting policies and estimates as well as the level and types of disclosure
made in the entitys financial statements.
1.3-3 Objectives of financial reporting
Paragraph OB2 of the conceptual framework establishes that:
The objective of general purpose financial reporting is to provide financial information about
the reporting entity that is useful to existing and potential investors, lenders, and other
stakeholders in making decisions about providing resources to the entity. Those decisions
involve buying, selling, or holding equity and debt instruments, and providing or settling
loans and other forms of credit.
General purpose financial reporting refers to financial reports that are intended to meet the
needs of users who are not in a position to require an entity to prepare reports tailored to their
particular information needs.
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This objective includes the provision of information such as:
information to help evaluate the entitys ability to generate future cash flows and the timing
of those cash flows
information about the economic resources controlled by the entity
information about the entitys performance (particularly profitability) and its variability
information about changes in the financial position of the entity
information about the entitys financial structure, liquidity and solvency
To facilitate obtaining these objectives, financial statements are prepared on an accrual basis
rather than a cash basis. That is to say that the effects of transactions and other events are
recognized when they occur, rather than when cash is received or paid, and are recorded in
the financial statements in the period to which they relate. Therefore, financial statements
include obligations to pay cash in the future (for example, payables) and resources that
represent cash to be received in the future (for example, receivables).
Beyond the basic objective to provide useful information for decision-making, financial
reporting should also provide information on the stewardship of management. This type of
information lets the user know how well management has performed with the resources
entrusted to it.
1.3-4 Fundamental qualitative characteristics
The conceptual framework states that for information to be useful, it must be relevant and
faithfully represent the nature of the underlying transaction.
Relevance means that the accounting information provided is capable of making a difference
to the decision maker, and without it, the potential exists for incorrect decisions. Financial
information is relevant if it is capable of making a difference in the users decision. This
includes information that helps predict future outcomes (predictive value) and/or confirms or
changes previous estimates (confirmatory value).
Relevance is tempered by materiality. Information is considered material if omitting it would
influence the decisions of the users of the financial information. By extension, if an item is
immaterial, it is not relevant and can be ignored. Materiality is an entity-specific aspect of
relevance based on both the nature and/or magnitude of the item considered within the context
of the financial information presented. For example, whether a $20,000 cost is capitalized (put
on the statement of financial position) or expensed is probably material to a company with total
equity of $50,000. However, this same $20,000 item is most certainly immaterial to a company
that has more than a billion dollars in assets. The concept of materiality is discussed in more
depth in Module 7 Audit and Assurance.
Faithful representation means that accounting information should represent what it says it
represents. An important aspect of faithful representation is the general requirement that the
substance (economic reality) of transactions are reported in the financial statements, rather
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than merely their legal form. For example, preferred shares redeemable at the option of the
holder are classified as debt, rather than as equity.
Faithful representation has three important attributes: completeness, neutrality and freedom
from material error. If information is to faithfully represent the economic events or financial
elements it purports to measure, it must not leave out details that are important to the user.
Financial information is neutral when it is provided in a way that is unbiased. This means that
the presentation of the information is not changed so that it will be received more or less
favourably by users. Information needs to be free from known error, but this does not mean
that freedom from all error can be achieved. Because of the many estimates that are made in
the development of accounting information, there will always be some variability in the
information. However, the process by which these estimates are developed can be applied
without error and additional information can be provided about the extent of uncertainty in such
estimates, when warranted.
1.3-5 Enhancing qualitative characteristics
There are four enhancing characteristics that contribute to the usefulness of financial reports:
comparability
verifiability
timeliness
understandability
The concept of comparability refers to the ability to compare one set of financial statements
with another. The comparison may be to those of a different company or to those of a prior
period for the same company. Comparability is improved by applying consistent accounting
policies from period to period.
The concept of verifiability means that different knowledgeable and independent observers
measure a transaction and obtain consensus that the reported result is representationally
faithful.
Accounting information is timely when it is reported soon enough for it to be useful to the
decision makers. There is an obvious trade-off between the relevance of timely information and
its reliability.
Understandability refers to the fact that information is only useful to users if they can
understand it. This does not mean that financial reporting needs to be oversimplified; rather, it
means that a user with a reasonable knowledge of business, economic events and accounting
should be able to understand the information after studying it with reasonable diligence.
1.3-6 The cost constraint (cost versus benefit)
The IASB recognizes that although the enhancing characteristics are desirable, an entity will
be constrained by the cost of providing additional information. For this reason, the cost
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constraint establishes that the cost of reporting financial information should not exceed the
benefits that can be obtained by using that information.
1.3-7 Underlying assumption going concern
Financial statements are normally prepared on the assumption that the business is a going
concern and will continue in operation for the foreseeable future. Under this assumption, most
non-current assets, for example, are depreciated over their estimated useful life, as it is
assumed that the business will continue and use the assets in the future. If the company is not
a going concern, it would be more relevant to value the assets at their net realizable values
(liquidation values).
Whether or not a business can be regarded as a going concern is a matter of judgment.
Paragraph 25 of IAS 1 Presentation of Financial Statements requires the going concern basis
to be used unless management intends to liquidate the company or to cease trading, or has no
realistic alternative but to do so. This governing standard requires directors to make an
assessment as to whether or not the business is a going concern each time financial
statements are prepared. In helping directors make this determination, management should
take into account all available information (such as budgeted incomes/losses, debt repayments
and sources of finance) for the foreseeable future, which should be at least 12 months from the
statement of financial position date.
1.3-8 Capital maintenance
Capital is the owners interest in the business. The conceptual framework identifies two main
concepts of capital: a financial concept and a physical concept.
The financial concept of capital maintenance may take two forms: nominal dollar and
purchasing power. The difference between these two methods is that the purchasing power
concept of capital takes into account the general inflationary changes in the value of net
assets. The nominal invested capital concept is based on historic cost values (for
example, what money was originally invested in the entity). The physical concept of capital
takes into account specific changes in the productive capacity of assets by measuring capital
as the change in, for example, units of output per day.
When prices are relatively stable, as they are in Canada, using the nominal dollar financial
concept of capital is a valid approach and is the one adopted by the vast majority of Canadian
businesses. Nominal dollar financial capital maintenance is the most straightforward case
where income is earned only if the monetary amount of net assets at the end of the period,
excluding distributions to contributions from owners, exceeds the monetary amount of net
assets at the beginning of the period.
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Example 1.3a
The following is an example of the capital maintenance concept. A business has $5,000
capital at the start of a period and $6,000 at the end of the period. No new capital was
introduced and no distributions to owners were made. The only asset that the business
had at the start was inventory, which was held for the period and sold at the end for
$6,000. The cost to replace the inventory at the end of the period was $5,200 and the
inflation rate for the period was 10%.
Required:
Calculate income under the two forms of financial concept and physical (productive
capacity) concept for capital maintenance.
Solution to Example 1.3a
There are three approaches to capital maintenance:
a) Nominal dollar financial capital maintenance
b) Purchasing power financial capital maintenance
c) Physical (productive capacity) capital maintenance
a) Nominal dollar financial capital maintenance
Profit (loss) is equal to the nominal increase (decrease) in capital

Profit = Ending capital Beginning capital
Profit = $6,000 $5,000
Profit = $1,000
b) Purchasing power financial capital maintenance
Profit (loss) is calculated after inflation

Profit = Ending balance Beginning balance adjusted for inflation
Profit = $6,000 ($5,000 1.10)
Profit = $6,000 $5,500
Profit = $500
c) Physical (productive capacity) capital maintenance
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Profit (loss) after replacing assets is used up

Profit = Cost of assets used cost of replace assets used
Profit = $6,000 $5,200
Profit = $800
1.3-9 The elements of financial statements

There are two broad classes of the elements of financial statements: those that measure the
financial position of the entity (for example, assets, liabilities and equity) and those that
measure financial performance (for example, revenue, expenses, gains and losses).
Assets are existing economic resources to which an entity has the right or access.
Economic resources are scarce and are capable of producing cash flows (for
example, value) for the entity. The right or access to these resources must be legally or
otherwise enforceable.
Liabilities are existing economic burdens or obligations that can be enforced (legally or
otherwise) against the entity. Economic resources must be given up to settle the liability.
Equity is the residual ownership interest in the assets of an entity after all of its liabilities
have been satisfied. When liabilities are greater than the assets of an entity, the residual
debt is referred to as a deficit. Equity accounts include share capital, retained earnings (or
deficit) and reserves.
Revenues are the gross inflow of economic benefits during the period arising in the course
of the ordinary activities of an entity when those inflows result in increases in equity, other
than those relating to contributions from equity participants.
Expenses are the gross outflow of economic resources during the period arising in the
course of the ordinary activities of an entity when those outflows result in decreases in
equity, other than those relating to distributions to equity participants.
Gains or losses in equity arise from events outside of, or ancillary to, the normal course of
operations.
1.3-10 Measurement of the elements of financial statements

Measurement is the process of placing a monetary value on the elements recognized in the
financial statements. The conceptual framework identifies four principal measurement bases:
Historical cost Assets are recorded at the amount of cash or cash equivalents paid or
the fair value of the consideration given to acquire them at the time of their acquisition.
Liabilities are recorded at the amount of proceeds received in exchange for the obligation at
the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the
normal course of business.
Current cost Assets are carried at the amount of cash or cash equivalents that would
have to be paid if the same or an equivalent asset was acquired currently. Liabilities are
carried at the undiscounted amount of cash or cash equivalents that would be required to
settle the obligation currently.
Realizable value Assets are carried at the amount of cash or cash equivalents that could
currently be obtained by selling the asset in an orderly disposal. Liabilities are carried at
their settlement values that is, the undiscounted amounts of cash or cash equivalents
expected to be paid to satisfy the liabilities in the normal course of business.
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Present value Assets are carried at the present discounted value of the future net cash
inflows that the item is expected to generate in the normal course of business. Liabilities
are carried at the present discounted value of the future net cash outflows that are
expected to be required to settle the liabilities in the normal course of business.
While historical cost remains the most widely used measurement basis, financial statements
are often prepared using a mixture of bases; for example, inventory is valued at the lower of
cost and net realizable value.
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TOPIC 1.4: THE ASPE FRAMEWORK

The ASPE framework as set out in section 1000 Financial Statement Concepts differs
somewhat from IASBs Conceptual Framework for Financial Reporting. The most notable
difference is that ASPEs framework is part of the governing standards, whereas the IFRS
Conceptual Framework for Financial Reporting is a preamble to the standards.
The primary reason for the difference between the two frameworks relates to the differences in
the users of financial statements. In a private entity, the user group is generally limited to
significantly fewer investors and creditors than a publicly accountable entity would normally
have. Also, the investors and creditors of a private entity will often have access to more
information about the internal operations of the entity than investors and creditors of publicly
accountable entities would.
Similar to publicly accountable entities, the users of financial statements of private enterprises
consist primarily of two broad groups: creditors and shareholders (both present and potential).
Thus, the focus of financial statements is to meet the information needs of creditors and
shareholders. Investors and creditors of profit-oriented enterprises are interested in predicting
the ability of the entity to earn income and generate cash flows in the future to meet its
obligations and to generate a return on investment. Consequently, the objective of financial
statements is to communicate information that is useful to investors, creditors and other users
in making their resource allocation decisions and/or assessing management stewardship.
The ASPE version of the conceptual framework includes the following main qualitative
characteristics of accounting information (along with sub-characteristics):
1. Understandability
2. Relevance
predictive and feedback value
timeliness
3. Reliability
representational faithfulness
verifiability
neutrality
conservatism
4. Comparability
1.4-1 ASPE framework contrasted with IFRS conceptual framework
While for the most part the qualitative characteristics in ASPE are similar to the fundamental
and enhancing characteristics in the IFRS conceptual framework, there are some differences
worth noting:
Materiality is included in the ASPE framework as a separate principle outside the qualitative
characteristics, while under IFRS it is a subset of relevance.
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Timeliness is included in the ASPE framework as a sub-characteristic of relevance,

whereas it is a separate enhancing characteristic under IFRS.
The ASPE framework discusses the trade-off between competing qualitative characteristics
(in particular relevance and reliability), whereas IFRS does not (see ASPE Handbook
section 1000.21 for more details).
Conservatism is included in the ASPE framework, as a sub-characteristic of reliability,

whereas it is not addressed in the IFRS conceptual framework. The principle of
conservatism attempts to ensure, in the face of uncertainty, that assets, revenues and
gains are not overstated and, conversely, that liabilities, expenses and losses are not
understated. For example, contingent gains are not normally recognized until realized while
contingent losses are recognized as soon as they are likely to occur.
The definitions of the elements of financial statements (assets, liabilities, equity, revenues,
expenses, gains and losses) are fundamentally the same as for the IFRS conceptual
framework. In addition, the ASPE framework also provides the same four bases of
measurement as the IFRS conceptual framework and notes that historical cost is recognized
as the main basis of measurement. While the IFRS conceptual framework allows for a choice
of capital maintenance concepts, the ASPE framework states that the nominal dollar financial
capital maintenance concept is to be used in the preparation of ASPE financial statements.
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TOPIC 1.5: FINANCIAL STATEMENTS

IAS 1 Presentation of Financial Statements is the governing standard that stipulates the wideranging requirements with respect to the preparation of a complete set of financial statements.
Paragraph 9 of IAS 1 establishes that the objective of financial statements is to provide useful
information about the financial position, financial performance and cash flows of an entity. To
this end the standard requires that financial statements provide information about an entitys
assets; liabilities; equity; income and expenses and gains and losses; contributions by and
distributions to owners in their capacity as owners; and cash flows.
Paragraph 10 of IAS 1 stipulates that a complete set of financial statements comprises the
following:
a statement of financial position as at the end of the period
a statement of profit or loss and other comprehensive income for the period
a statement of changes in equity for the period
a statement of cash flows for the period
notes to the financial statements comprising a summary of significant accounting policies

and other explanatory information
comparative information in respect of the preceding period (although there are some
exceptions to this rule)
a statement of financial position as at the beginning of the preceding period when an entity
applies an accounting policy retrospectively or makes a retrospective restatement of items
in its financial statements, or when it reclassifies items in its financial statements
The standard provides that An entity may use titles for the statements other than those used
in this Standard. The implication of this assertion is that other titles may be used for the
required statements. In Canada, the statement of financial position has historically been
referred to as the balance sheet, whereas the statement of comprehensive income has
traditionally been called the income statement. You are very likely to see balance sheet and
income statement continue to be used in practice for some time and therefore you may also
encounter these titles in the course. For the most part, the student notes use the terms
statement of financial position and statement of comprehensive income.
This weeks student notes discuss the first three statements, which are often referred to as the
primary financial statements. The statement of cash flows is dealt with in Week 6 of Module 5.1
and again in Module 5.2. Notes to the financial statements are discussed briefly each week
within individual topics and again in Module 5.2. Lastly, retrospective restatements are also
discussed in Module 5.2.
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Items of note
The statement of profit or loss and other comprehensive income may be presented as
either a single statement or separately as a statement of profit or loss and a statement of
comprehensive income (paragraph 10A).
Accounting standards help increase comparability by outlining how transactions and events
are to be recognized, measured and presented. The material in this module will use
International Financial Reporting Standards, unless it is stated otherwise.
See Appendix B for a brief overview of the accounting cycle, including the recording of journal
entries, posting to the general ledger and using this information to prepare a trial balance and
a set of financial statements.
1.5-1 Required financial statements ASPE
Paragraph 1400.10 of Part II of the CPA Canada Handbook Accounting mandates the
required financial statements under ASPE. What constitutes a complete set of financial
statements under ASPE differs substantively from that required under IFRS, as shown below.
The following description only deals with the dissimilarities on a macro or big picture basis
and does not attempt to deal with the minutia of the small technical divergences between the
two standards as they pertain to the preparation of the statements.
IFRS
ASPE
Differences
Statement of financial
position
Balance sheet
Terminology only. The two statements

convey essentially the same information.
Statement of profit or loss
Income statement

Statement of
comprehensive income
Not applicable
ASPE does not address other

comprehensive income. Hence a
statement of comprehensive income is
not required.
Statement of changes in
equity
Statement of
retained earnings
The statement of changes in equity

individually reconciles the changes in all
components of equity (including retained
earnings), whereas the statement of
retained earnings only reconciles the
retained earnings account.
Statement of cash flows
Cash flow
statement

Notes
Notes to financial
statements
Terminology, however, the note disclosure

requirements under IFRS are
substantively more comprehensive than
those under ASPE.
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1.5-2 Financial statements general requirements

IAS 1 includes a number of requirements that pertain to all financial statements, including the
following:
They must be prepared fairly and in accordance with the applicable IFRS (paragraphs 1517).
They shall normally be prepared on a going concern basis (paragraph 25).
They shall be prepared on an accrual basis excepting the statement of cash flows
(paragraph 27).
Each class of similar items and items of a dissimilar nature should be presented separately
unless they are immaterial (paragraphs 29-31).
Neither asset and liabilities nor income and expenses should be offset unless required or
permitted by an IFRS (paragraph 32).
They must be prepared at least annually (paragraph 36).
Comparative information must normally be presented (paragraphs 38-38D).
They should normally present and classify the items in the financial statements on the
same basis from one period to the next (paragraph 45).
Each statement must include the name of the company (or group of companies); the date
of the financial statement or period of time covered by the statement; and the currency and
denomination (level of rounding for example, thousands of dollars) in which the financial
statement is presented (paragraph 51).
Note that IFRS stipulates the minimum information required and where it is to be reported (for
example, on the statement of financial position or in the notes to the financial statements)
rather than mandating the form of presentation of the required financial statements.
Accordingly, in practice, you will observe that very different presentation styles have been
adopted by entities located in some other countries. The overriding requirement, however, is to
ensure that the financial statements give a true and fair view of the activities of the company.
IFRS is similarly not nearly as prescriptive as Part V of the CPA Canada Handbook
Accounting with respect to naming specific components of equity. The IASBs approach
throughout IFRS is to refer to equity and reserves without specifying the class of these
elements. It then requires entities to disclose the component parts so as to keep readers
informed as to the nature of the changes in equity during the period. The IASB takes this
approach because there are a large number of countries (over 100) that use IFRS. Many of
these countries have differing legal requirements with respect to the names and components
of capital. By taking a less prescriptive approach, the IASB ensures that IFRS does not conflict
with local regulations. By requiring adequate disclosure, the IASB ensures that the users have
sufficient information to make informed decisions.
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1.5-3 Statement of financial position

The statement of financial position reports the resources of the entity (assets) and claims
against the entity (liabilities) segregated in accordance with the governing standards at a point
in time, usually year end. IFRSs detailed requirements for preparing the statement of financial
position are set out in paragraphs 54 to 80A of IAS 1. An illustration and highlights of the
standards follow:
Example 1.5a
The following is a sample statement of financial position prepared in accordance with
IFRS.
XYZ Ltd.
Statement of financial position
As at December 31
(in thousands of Canadian dollars)
20X6
Current assets
Cash and cash equivalents
Trade and other receivables
Inventories
Other current assets
Non-current assets
Investments
Investments in associates
Property, plant and equipment net
Intangible assets
Total assets
Current liabilities
Overdraft
Trade and other payables
Taxes payable
Warranty liability
Current portion of long-term debt
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411
5,124
4,563
681
10,779
20X5
$
389
4,985
4,614
722
10,710
2,348
6,791
25,542
6,149
40,830
$ 51,609
2,411
6,542
27,215
5,282
41,450
$ 52,160
1,538
4,415
823
165
1,514
8,455
1,955
4,385
911
174
1,654
9,079
Non-current liabilities
Bank loans
Long-term debt
Finance lease obligations
Employee benefit obligation
Deferred income taxes
Other non-current liabilities
Total liabilities
Equity
Share capital
Reserves (contributed surplus)
Retained earnings
Total equity
Total liabilities and equity
2,134
1,845
3,850
2,317
1,598
5,214
16,958
25,413
3,245
1,648
3,822
2,149
1,611
5,255
17,730
26,809
5,000
3,488
17,708
26,196
$ 51,609
5,000
3,684
16,667
25,351
$ 52,160
Items of note
The governing standard includes an extensive list of items that must be presented
separately. Refer to paragraph 54 in Appendix C for specific details.
Current and non-current assets (as defined in paragraph 66) and current and non-current
liabilities (as defined in paragraph 69) must normally be presented separately (paragraph
60).
There is a general requirement that further sub-classifications of the line items should be
provided as appropriate. Normally, equity is analyzed on the face of the statement of
financial position and all other analysis is given in the notes (paragraph 77).
1.5-4 The statement of profit or loss and other comprehensive income (statement of
comprehensive income)
The statement of comprehensive income reports the entitys performance on an accrual basis
for a period of time, usually a year. Conceptually, total comprehensive income represents the
change in equity during a period resulting from transactions and other events, other than
transactions with owners in their capacity as owners (for example, the payment of dividends to
shareholders).
Whether presented as one or two statements, the statement of comprehensive income has two
distinct parts: the statement of profit or loss and the statement of other comprehensive income.
Upon adoption of IFRS 9 Financial Instruments, paragraph 7 of IAS 1 Presentation of Financial
Statements will define these two components as follows:
Profit or loss is the total of income less expenses, excluding the components of other
comprehensive income.
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Other comprehensive income comprises items of income and expense (including

reclassification adjustments) that are not recognized in profit or loss as required or
permitted by other IFRSs.
As can be seen by reviewing the actual standard in Appendix C, other comprehensive income
has numerous components. While not readily evident, the elements will change somewhat
upon the adoption of IFRS 9. Many of these parts are fairly complex. The common
components of other comprehensive income you are likely to encounter in Modules 5.1 and
5.2 include the following:
changes in revaluation surplus
remeasurements of defined benefit pension plans
gains and losses from investments in equity instruments designated at fair value through
other comprehensive income*
gains and losses on financial assets measured at fair value through other comprehensive
income*
* Reflects the terminology that will be used in IAS 1 Presentation of Financial Statements
subsequent to the adoption of IFRS 9 Financial Instruments.
Comprehensive net income thus represents the total of net income and other comprehensive
income, with profit or loss being computed in the usual fashion. With certain exceptions,
recognition of gains has historically been deferred until the gains are realized. For example,
holding gains were not realized on investments in debt or equity securities until the underlying
security was sold, although impairment losses were recognized so as to comply with what was
then the conservatism criterion. IFRS now requires that a company report various items
including the four detailed above in other comprehensive income. Financial instruments will be
discussed in depth in Week 5 of Module 5.1.
Format
The expenses for the period should be analyzed either in terms of their nature or in terms of
their function within the company. In this respect, nature refers to the source of the expense
(for example, energy costs, employee benefits, and so on) whereas function refers to the use
to which the expense has been put (for example, cost of goods sold, selling and administrative
expenses, and so on). Paragraph 99 of IAS 1 Financial Statement Presentation requires that
the entity use the method that provides reliable and more relevant information. As this is a
matter of professional judgment, differences will be observed in practice.
Both presentations result in the same net income, as the same costs have been captured in
the respective statements; they are simply categorized and presented differently.
Example 1.5b
The following is a sample statement of comprehensive income prepared in accordance
with IFRS. For sake of comparison, the same information has been presented in a
single statement of comprehensive income with costs categorized by their function and
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in a separate statement of profit and loss and statement of other comprehensive income
with costs categorized by their nature.
A Illustrating the use of a single statement; costs categorized by their function
XYZ Group
Statement of comprehensive income
For the year ended December 31
20X7
Revenue
$ 390,000
Cost of sales
(245,000)
Gross profit
145,000
Other income
20,667
Distribution costs
(9,000)
Administrative expenses
(20,000)
Other expenses
(2,100)
Finance costs
(8,000)
Share of profit of associates
35,100
Profit before income taxes
161,667
Income tax expense
(40,417)
Profit for the year from continuing operations
121,250
Loss for the year from discontinued operations,
net of income taxes
Profit for the year

121,250
Other comprehensive income:
Items that will not be reclassified to profit or
loss:
Gains on property revaluation
933
Changes in fair value of investments classified
as fair value through other comprehensive
income
(24,000)
Actuarial gains (losses) on defined benefit
pension plans
(667)
Share of gain (loss) on property revaluation of
associates
400
Income taxes relating to items that will not be
reclassified to profit or loss
5,834
(17,500)
Items that may be reclassified subsequently to
profit or loss:
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20X6
$ 355,000
(230,000)
125,000
11,300
(8,700)
(21,000)
(1,200)
(7,500)
30,100
128,000
(32,000)
96,000
(30,500)
65,500
3,367
26,667
1,333
(700)
(7,667)
23,000
Exchange differences on translating foreign

operations
Cash flow hedges
Income taxes relating to items that may be
reclassified subsequent to profit or loss
Other comprehensive income for the year, net
of income tax
Total comprehensive income for the year
Earnings per share:
Basic and diluted
$
$
5,334
(667)
10,667
(4,000)
(1,167)
3,500
(1,667)
5,000
(14,000)
107,250
0.46
28,000
93,500
0.30
B Illustrating the use of two statements; costs categorized by their nature

XYZ Group
Statement of profit or loss
For the year ended December 31
20X7
Revenue
$390,000
Other income
20,667
Changes in inventories of finished goods and
work-in-progress
(115,100)
Work performed by the entity and capitalized
16,000
Raw material and consumables used
(96,000)
Employee benefits expense
(45,000)
Depreciation and amortization expense
(19,000)
Impairment of property, plant and equipment
(4,000)
Other expenses
(6,000)
Finance costs
(15,000)
Share of profit of associates
35,100
Profit before income taxes
161,667
Income tax expense
(40,417)
Profit for the year from continuing operations
121,250
Loss for the year from discontinued operations,
net of income taxes
Profit for the year

$121,250
Earnings per share:
Basic and diluted
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$0.46
20X6
$355,000
11,300
(107,900)
15,000
(92,000)
(43,000)
(17,000)
(5,500)
(18,000)
30,100
128,000
(32,000)
96,000
(30,500)
$65,500
$0.30
XYZ Group
Statement of profit or loss and other comprehensive income
for the year ended December 31
20X7
20X6
Profit for the year
$121,250
$65,500
Other comprehensive income:
Items that will not be reclassified to profit or
loss:
Gains on property revaluation
933
3,367
Changes in fair value of investments classified
as fair value through other comprehensive
income
(24,000)
26,667
Actuarial gains (losses) on defined benefit
pension plans
(667)
1,333
Share of gain (loss) on property revaluation of
associates
400
(700)
Income tax relating to items that will not be
reclassified to profit or loss
5,834
(7,667)
(17,500)
23,000
Items that may be reclassified subsequently to
profit or loss:
Exchange differences on translating foreign
operations
5,334
10,667
Cash flow hedges
(667)
(4,000)
Income taxes relating to items that may be
reclassified subsequently to profit or loss
(1,167)
(1,667)
3,500
5,000
Other comprehensive income for the year, net
of income taxes
(14,000)
28,000
Total comprehensive income for the year
$107,250
$93,500
Items of note
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Profit or loss, total other comprehensive income, and comprehensive income must
all be separately presented (paragraph 81A).
Revenue; finance costs; share of profit or loss of associates and joint ventures
accounted for using the equity method; tax expense; and discontinued operations
must be presented separately in the statement of profit or loss (paragraph 82).
There are two broad categories of other comprehensive income: that which will not
be subsequently reclassified to profit or loss, and that which will be subsequently
reclassified to profit or loss when certain conditions are met. Other comprehensive
income must be categorized as to its nature within one of these two groups
(paragraph 82A).
There is a general requirement that further sub-classifications of the line items

should be provided as appropriate (paragraph 85).
The standards prohibit the reporting of extraordinary gains or losses (paragraph 87).
The amount of income tax relating to each item of other comprehensive income
must be reported in the statement of comprehensive income or in the notes
(paragraph 90). From a practical perspective, companies typically:
o report the gross (before tax) amount of other comprehensive income less income
tax expense or recovery on the statement of other comprehensive income; or
o report the net (after tax) amount of other comprehensive income on the
statement of other comprehensive income and disclose the related income tax
expense or recovery in the notes.
When items are material, they must be separately disclosed (paragraph 97).
1.5-5 Statement of changes in equity

The statement of changes in equity is essentially a table that reconciles the changes in all
equity accounts, including retained earnings, for the period, usually a year.
Paragraph 106 of IAS 1 Presentation of Financial Statements requires that the statement of
equity include the following:
total comprehensive income for the period, showing separately the total amounts
attributable to owners of the parent and to non-controlling interests (this only applies to
consolidated financial statements which are covered in Module 5.3)
for each component of equity, the effects of retrospective application or restatement

(covered in Module 5.2)
for each component of equity, a reconciliation between the carrying amount at the
beginning and end of the period, separately disclosing changes resulting from:
o profit or loss
o other comprehensive income
o transactions with owners in their capacity as owners, showing separately, contributions
by and distributions to owners
Example 1.5c
The following is a partial trial balance for Venus Company, a public company, for the
year ended December 31, 20X6. Each item has its normal debit or credit balance, but
the total does not equal $0 (nil) as it is a partial trial balance that includes all asset and
liability accounts (but excludes some profit or loss statement accounts).
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Venus Company
Partial trial balance
For the year ended December 31, 20X6
Accounts receivable
$ 150,000
Sales revenue
800,000
Prepaid expenses
30,000
1
Machinery, net
120,000
Cost of goods sold
600,000
Accounts payable
75,000
2
Fair value through other comprehensive income investments
100,000
3
Ordinary shares
95,000
Unearned revenue
20,000
Retained earnings January 1, 20X6
70,000
Cash
25,000
Dividends declared and paid July 1, 20X6 (preferred shares)
25,000
4
Preferred shares
100,000
Loss on discontinued operations
25,000
5
Profit or loss
?
Additional information
(1) The machinery is net of accumulated depreciation of $40,000.
(2) The balance in the fair value through other comprehensive income investments
account represents the original cost at the date of acquisition, July 30, 20X5. As of
December 31, 20X6, none of these investments had been sold. Fair market value of
these investments was $140,000 at the end of 20X5 and $130,000 at the end of 20X6.
(3) The ordinary shares have no par value, 100,000 shares are authorized and 60,000
shares had been issued on January 1, 20X4, and a further 35,000 shares were issued
on July 1, 20X6. All shares were issued for $1 each.
(4) The preferred shares have no par value, 25,000 shares are authorized and 15,000
shares were issued at $10 each in 20X5. In 20X6, 5,000 shares were redeemed at $10
each.
(5) Ignore income taxes for this example. Because only a partial trial balance is
provided, 20X6 net income cannot be directly calculated. It can only be estimated since
information on all other balance sheet accounts has been provided.
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Required:
Prepare a statement of changes in equity for the year ended December 31, 20X6, in
good form, using appropriate terminology. A separate statement of financial position is
not required.
Solution to Example 1.5c
Balance at January 1,
20X6
Issuance of ordinary
shares
Redemption of preferred
shares
Total comprehensive
income
Dividends
Balance at December 31,
20X6
Venus Company
Statement of changes in equity
For the year ended December 31, 20X6
Accumulated
Capital Capital
other
preferred ordinary Retained comprehensive
shares
shares
earnings
income
$ 150,000 $ 60,000 $ 70,000
$ 40,000
Total
$ 320,000
35,000
35,000
(50,000)
(50,000)
90,0002
(10,000)
80,000
(25,000)
$ 95,000 $ 135,000 1
$ 30,000
(25,000)
$ 360,000
$ 100,000
(1) Assets Liabilities Ordinary share capital Preferred share capital Accumulated
other comprehensive income = Retained earnings December 31, 20X6
Retained earnings, December 31, 20X6 = ($150,000 + $30,000 + $120,000 + $130,000
+ $25,000) ($75,000 + $20,000) ($95,000) ($100,000) ($30,000) = $135,000
(2) Opening retained earnings + Net income Dividends = Closing retained earnings
$70,000 + Net income $25,000 = $135,000
Thus, net income = $90,000
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1.5-6 Events after the reporting period (subsequent events)

This modules student notes provide considerable discussion as to what events are reported in
an entitys financial statements and how they are measured and reported. To ensure that our
financial statements portray economic events in accordance with IFRS, we need to consider
both events that occur during the reporting period as well as the interval between period end
and when the financial statements are authorized for issue. This latter period of time is
commonly referred to as the subsequent events period.
Paragraph 3 of IAS 10 Events after the Reporting Period first defines events after the
reporting period as those events, favourable and unfavourable, that occur between the end of
the reporting period and the date when the financial statements are authorized for issue.
IAS 10 then goes on to identify two categories of subsequent events, which are as follows:
those that provide evidence of conditions that existed at the end of the reporting period
(adjusting events after the reporting period)
those that are indicative of conditions that arose after the reporting period (non-adjusting
events after the reporting period)
The key difference between these two outcomes is that in the first category, we receive
information after period end that helps us better measure an event that happened before fiscal
period. In the second category, the event did not transpire until after the period end.
Accounting for these two categories of subsequent events is very different. Per paragraph 8 of
IAS 10, it requires that the financial statements be updated to reflect adjusting events found
after the reporting period. Conversely, paragraph 10 of IAS 10 prohibits companies from
amending the amounts recognized in the financial statements to reflect non-adjusting events
after period end. The disclosure requirements for both types of events will be discussed in the
following section.
An example of an adjusting event after the reporting period is as follows. XYZ Corporation has
a fiscal year end of December 31, 20X1. In January 20X2 (during the subsequent events
period), the company learns that a major client has declared bankruptcy and that they will only
receive 40% of the value of the accounts receivable noted at year end. This event will result in
an adjusting entry for XYZ Corporations December 31, 20X1, fiscal year-end financial
statements because this new information pertains to the measurement of receivables
recognized at year end.
An example of a non-adjusting event is as follows. ABC Corporation has a fiscal year end of
December 31, 20X4. In February 20X5 (during the subsequent events period), there was an
earthquake that caused major, uninsured damage to the companys plant and equipment. This
event would not result in an adjusting entry on ABC Corporations December 31, 20X4,
financial statements because it does not change any estimates or assumptions that were used
in valuing the companys plant and equipment as at December 31, 20X4 (fiscal year end).
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The earthquake should be disclosed by ABC Corporation in the notes to the financial
statements (for its December 31, 20X4, financial statements) and the amount of the loss
incurred by the company due to the earthquake should also be quantified. The effect of
the natural disaster on the following years earnings should also be commented on (if
an estimate can be made). Disclosure of this event in ABC Corporations December 31,
20X4, financial statements will be required given the material nature of the loss.
Disclosure
Material non-adjusting events must be disclosed in accordance with paragraph 21 of IAS 10
Events after the Reporting Period. This standard requires the entity to disclose the nature of
the event and an estimate of its financial impact on the entity. If the financial impact cannot be
estimated, the entity must make a statement to this effect. The rationale for this requirement is
that non-disclosure could potentially affect the ability of users of financial statements to reach a
proper understanding of the financial position of the reporting entity at the statement of
financial position date.
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TOPIC 1.6: INTERNAL CONTROL

Internal control refers to the organizational plan designed to safeguard the assets of an entity
and ensure the integrity of the financial reporting system. Cash is one of the most desirable
assets and is central to the financial information system of any organization, since almost all
transactions flow through the cash account. Therefore, a good system of internal control over
cash helps ensure the reliability of not only the balance of cash and cash equivalents but also
the balance in virtually every other account.
Cash is susceptible to physical theft as well as misappropriation through accessing the
accounting system to obtain custody of cash by issuing non-approved payments or
misdirecting cash receipts. For this reason, the segregation of duties is one of the most basic
principles of internal control. By separating the custody of cash from record keeping, a
business can prevent the theft of cash and the subsequent cover-up of that theft through
manipulation of the accounting records.
Another important principle of internal control is the periodic comparison of records with
physical assets. For example, it is important that inventory records be verified periodically by
counting the physical inventory.
Examination of an entitys bank statement provides the opportunity for the cash records of the
business to be compared to corresponding information from an independent, external source.
A bank reconciliation compares transactions in the companys records with transactions in the
bank statement to ensure that the records are accurate and complete. Thus, a bank
reconciliation is an important part of internal control when prepared by someone not involved in
issuing cheques or making deposits.
1.6-1 Bank reconciliations
The cash account in the companys general ledger (G/L) records all transactions that affect the
bank account. However, the balance in the general ledger cash account at any point in time
may not match the balance on the bank statement. The two possible reasons for such a
discrepancy are errors and timing differences. Examples of each are listed in the following
chart.
Reason type
Action required
1. Errors in the general ledger cash account.
Prepare journal entries and

adjust general ledger cash
account.
2. Errors on the bank statement.
Advise bank of error. Correct

on bank side of reconciliation.
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Reason type
Action required
3. Timing Items recorded on the bank statement are not yet

recorded in the cash book (such as bank interest or service
charges).
Prepare journal entries and

adjust general ledger cash
account.
4. Timing difference Items recorded in the cash book do not

yet appear on the bank statement; for example, deposits
that have not yet cleared through the bank account
(deposits-in-transit) or cheques written that have not yet
cleared through the bank account (outstanding cheques).
Correct on bank side of

reconciliation.
The following example illustrates the identification of discrepancies and the corresponding
corrective steps in the bank reconciliation.
Example 1.6a: Timing differences
Colin & Co.s bank statement for September is as follows:
Colin & Co.
Bank statement
As at September 30
Date
Sept. 1
Sept. 7
Sept. 9
Sept. 10
Sept. 16
Sept. 22
Description
Balance
Chq 004
Chq 005
Deposit
Deposit
Chq 006
DR
CR
300
200
1,000
1,100
400
Balance
10,000 CR
9,700 CR
9,500 CR
10,500 CR
11,600 CR
11,200 CR
Note: The bank statement shows the companys bank balance from the banks
perspective. Therefore, the debits and credits are opposite to those in the companys
cash account.
Colins general ledger cash account shows the following (assuming that the balance
brought forward is the same as that on the bank statement):
Cash account
Balance forward
September 3
Chq 004
September 5
Customer A
September 6
Chq 005
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DR
CR
300
1,000
200
Balance
10,000 DR
9,700 DR
10,700 DR
10,500 DR
Cash account
September 12
Customer B
September 19
Chq 006
September 27
Chq 007
September 28
Cash sales
September 30
Chq 008
DR
1,100
CR
400
500
2,000
200
Balance
11,600 DR
11,200 DR
10,700 DR
12,700 DR
12,500 DR
A reconciliation must be performed to verify that the general ledger balance of $12,500
is correct. The first step is to identify the differences between the cash account and
bank statement by eliminating all the items that appear in both the bank statement and
the general ledger. After completing this step, three items remain that cannot be
matched:
Description
Reason type
Action
1. The cash sales recorded in the general ledger

on September 28 did not clear through the bank
before the end of the month and is therefore not
included in the bank statement balance (a
deposit-in-transit).
Timing difference
Correct on
bank side.
2. Cheque 007 recorded on September 27 was

not presented to the bank in time to be
deducted from the September 30 bank
statement balance (an outstanding (O/S)
cheque).
Timing difference
Correct on
bank side.
3. As above, cheque 008 is also outstanding at the

end of September.
Timing difference
Correct on
bank side.
The bank reconciliation accounts for these timing differences by adjusting the bank
statement balance for the three outstanding items as follows:
Balance per bank statement
Add: Sep 28 deposit-in-transit
Less: O/S Cheques:
- #007
- #008
Balance per general ledger
$11,200
2,000
(500)
(200)
$12,500
The reconciliation proves that the general ledger balance is correct.
34 / 56
In addition to timing differences, there are sometimes errors within the general ledger,
the bank statement, or both, that must be corrected before the two balances can be
reconciled. The following is a useful summary of bank reconciliation adjustments:
Balance per bank statement
+/ Errors in the bank statement
+ Deposits-in-transit
Outstanding cheques
Revised bank statement balance
X
X/(X)
X
(X)
X
Balance per general ledger

+/ Errors in the general ledger cash account
+/ Items on bank statement but not yet in G/L cash account
Revised general ledger balance
X
X/(X)
X/(X)
X
Journal entries are required for all adjustments to cash in the general ledger. It is always
the reconciled balance per the general ledger cash account (and not the bank
statement) that appears on the statement of financial position under current assets.
If the bank statement shows the account to have a negative balance (that is, an
overdraft), the reconciliation procedures are the same. However, the reconciliation must
be started with a negative figure.
35 / 56
TOPIC 1.7: ACCOUNTING INFORMATION SYSTEMS AND INFORMATION TECHNOLOGY

Businesses must develop systems that allow them to capture financial transactions and
process the data. The accounting information system can be manual, computerized or a
combination of the two.
The level of complexity in the information system will vary widely depending upon the size of
the organization. For example, an individual operating a corner store may maintain a record of
cash transactions using a simple spreadsheet, whereas a large company is likely to have fully
integrated systems that perform a range of tasks, including production of the financial
statements. The more complex the organization, the more likely the accounting system is to be
computerized, due to the greater efficiency of a computerized system in capturing and
manipulating data and the need within these organizations to have relevant and reliable
information for decision-making. In large organizations, the accounting information system is
often integrated with other operating systems, such as finance, human resources, operations
management and sales and marketing.
Most businesses today use computerized information systems to record financial transactions;
to maintain records of assets, liabilities and equity; and to prepare the financial statements and
other accounting reports. Many different accounting software packages, both generic and
customized, are available. Typically, the software captures input data and produces processed
information to meet the end users needs. Data may be input manually by an accountant at
year end, entered by staff at the point of transaction or captured directly through an interface
with a suppliers or a customers system. At any given point in time, full accounting software
packages can generate a trial balance, and from there, some can automatically create financial
statements. Normally, a generic software package includes different layouts for various types
of businesses. A customized package contains layouts specific to the end users requirements.
1.7-1 Accounting software
Accounting information software is designed to provide accurate and timely information to
accountants and business personnel for decision-making purposes. At the most basic level,
this involves producing financial statements, accounting reports (such as payroll, accounts
receivable and accounts payable) and printing cheques for payment of accounts payable and
other items. Software systems can be designed to address cash management, budgeting,
investment management, costing, inventory management, capital asset management and
GST/HST information collection. Computerizing these processes allows for reduction of
manual entry, less repetition in inputting and greater efficiency in reporting. Many different
products are available, but because they all produce reports with a similar layout, it can be
assumed that the same inputs are required.
To avoid duplication of effort and to minimize the risk of errors being introduced, it is possible
to buy a complete set of software applications that share the core business data and produce
the desired results for each accounting area. Such applications have developed significantly
over the last few years and have proved to be highly efficient and effective in working with
accounting information.
36 / 56
An accounting information system typically includes a chart of accounts, identifying all

classifications used by the company for accounting transactions. This is used to record journal
entries in the general ledger, subsidiary ledgers, chequebook and deposit record. The system
also generally includes a procedures manual to provide assistance to those using the features
of the system.
The entry of transactions into the system takes place once, either through the entry of a
transaction in a sales or purchase ledger or through an adjusting journal entry in the general
ledger. Source documents for inputting transactions can include bank or loan statements for
interest or service charges; time cards for payroll; cash and credit card receipts for sales;
supplier invoices and purchase orders for purchases; deposit slips for accounts receivable;
and cancelled cheques for accounts payable. In todays business environment, many if not all
of these source documents are stored electronically to reduce the amount of paper storage.
This means that the source documents are available for review through the computer network,
eliminating reliance on paper copies.
Not all accounting software packages treat postings in the same way. Some packages require
a balancing entry to be made in a corresponding control account, which ensures that all debit
entries have a corresponding credit. In this case, the user is not permitted to complete the
posting batch until the net balance is zero. This ensures a proper trial balance and balanced
financial statements; however, it cannot guarantee that the accounts used or figures entered
are correct. Other software packages allow the user to post each side of an entry, with the
software automatically making the corresponding debit or credit to a suspense account,
providing the original posting debit and credit are equal.
All accounting software packages should allow the posting of transactions, the creation of a
trial balance from the general ledger, the entry of adjusting journal entries, the creation of
financial statements, the automation of closing entries and the ability to roll forward to a new
fiscal year.
Popular off-the-shelf accounting software packages include Sage 50 Accounting (formerly
Simply Accounting) and QuickBooks.
1.7-2 Information technology
Computerized systems enable accountants to maintain an integrated database in which
information related to financial transactions, payroll and tax returns is held in a central location.
Accountants using older methods maintain separate files for different tasks. Using a database
instead of separate files allows items such as revenue, income, expenses and employment or
trade details that are useful for more than one purpose to be entered into a system once and
then shared by different outputs. This type of information system helps avoid repetition,
thereby improving efficiency, reducing time spent on administrative tasks (such as keeping
information up to date in various locations) and decreasing the potential for human error, as
humans are involved in the system in fewer places. By using an accounting software package,
it is possible to save a great deal of time if the software is used properly. However, the
computer will not do all the work and is not a substitute for a good accountant.
37 / 56
One issue that is often overlooked is that even with a computer system, the operator must
check that all the data has been entered, the totals agree with what has been input, the
amounts allocated to each account are correct and so on. It is also important to verify that
spreadsheet data has not been altered inadvisably. In addition, there is a tendency to accept
figures blindly if they are presented in a professional-looking set of financial statements. This is
especially true now that high-quality financial statements can be generated with very little
effort. It is important that the quality or style of a report does not overshadow its content or
attempt to obscure its lack of accuracy.
Another issue is the need for appropriate training, which cannot be overemphasized for those
operating accounting software. Training is particularly important when software is used in a
shared (networked) environment, when new software packages are introduced and when there
are significant upgrades to current software.
An adequate backup system is essential for any computer-based data, and especially for
accounting data. A company may have invested a significant amount of time in arriving at the
final financial statement stage, and the data may be costly to recreate if lost. In addition,
historical data must remain accessible because of the statutory requirement to hold accounting
information for seven years.
Accountants also have a responsibility to keep data secure. Accounting records are
confidential, and the files that contain the accounting information should be kept in a secure
environment. Most businesses have guidelines that instruct staff on best practices when
dealing with accounting and related data. In addition, a company may institute a hierarchy of
user privileges for the accounting software. For example, there may be staff who are able to
enter postings but are denied the right to print draft or final reports. The ability to implement
security of this type is often part of the software itself.
Dashboard
Accounting information systems are designed to allow users to access the information needed
to do their jobs. Usually, a dashboard interface appears when the software is opened. This
type of interface provides a high-level overview of the supporting information layered within the
system. Through the dashboard, the user can directly access specific areas of the system and
retrieve key information. For example, a dashboard can allow an accounts receivable clerk to
access the accounts receivable sub-ledger and extract a list of overdue client accounts for
follow-up and deadlines for postings. A dashboard can be a generic platform or a highly
customized interface, such as one designed to provide graphs, charts or links to information.
Spreadsheets
Many businesses make use of spreadsheet programs for holding source data, tracking
business information or preparing basic calculations. A spreadsheet program allows for input of
data, organization of those data and basic analyses and calculations. Spreadsheets are useful
tools and often replace paper listings, but they should be viewed with caution. It is difficult to
limit alteration of the data contained within spreadsheets, making audit problematic. It is
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important that control of input data be maintained securely, in case of problems with the
program or with alteration of its data.
1.7-3 Current trends in computerized accounting information systems
Real-time information
In todays business environment, computers have become essential for making transactions
and for recording and preparing accounting information. As a result, there is a need for
networked computer systems that are accessible from all parts of a company, including
between company locations. There is also a need for information that is available in real time,
meaning that the data is accurate and timely each time it is viewed, with no delays for posting
or processing of transactions. Real-time information ensures that the same picture of the
companys financial status is available to all users.
Remote access
Another feature of computer systems in many companies is the ability to access the
information from outside the company, that is, remotely. A virtual private network (VPN) allows
a computer connected to the Internet to act as if it were connected directly to the corporate
network or server. In this way, employees travelling for business or working from home can
access the system for postings, adjustments and report creation. If remote access is enabled,
it is important to ensure that internal controls and data security measures are working to
compensate for the potential risks in this wider working environment. A different type of online
access can provide a portal through which customers may purchase products or make
payments directly into a companys system. Such access can also allow suppliers to upload
invoices for payment, based on goods ordered or services provided.
Report Generator and eXtensible Business Reporting Language (XBRL)
Working in an international environment has required change on many levels, such as the
adoption of IFRS for public companies. It has also made it imperative that financial information
be quickly and reliably reported; this has created a need for technological advances in report
creation and filing. Extensible Markup Language (XML) is a system for encoding documents
for transmission over the Internet. Report Generator converts XML reports into readable files,
allowing the information to be read by end users in various formats. eXtensible Business
Reporting Language (XBRL) is an XML-based system that enables business reporting. Already
in use around the world, XBRL is now being adopted in Canada for financial reporting. The
system allows financial statements prepared under GAAP or IFRS and their notes to be
uploaded, searched and used by regulators, banks, insurance companies, financial markets,
other businesses and international institutions, thereby ensuring accuracy of information and
timely access.
39 / 56
TOPIC 1.8: ETHICS

While both IFRS and ASPE provide significant guidance in helping accountants report on the
financial results for companies, both tend to present more principle-based as opposed to rulebased standards. As such, there are still many areas where accountants must make
judgments, including appropriate measurement methods, accounting estimates and
disclosures. It is important that preparers of financial reports do not allow their personal biases
to influence the overall fairness of the financial reporting process. Examples of potentially
biased activity include attempts to choose policies and make estimates that smooth income,
maximize earnings or even minimize earnings.
Managers motivation to smooth income stems from the perception that widely fluctuating
incomes indicate significant business risk. With the significant role of estimates in preparing a
companys financial statements (for example, bad debts, inventory writedowns and
depreciation), managers may use these estimates to smooth earnings. The motivation to
maximize income is obvious, as management compensation is often tied to the companys
financial performance in the form of bonuses or increased share prices. Finally, managers may
want to minimize income in order to avoid paying income taxes or attracting the attention of
competitors, regulators, or employees seeking higher compensation.
40 / 56
TOPIC 1.9: THE ACCOUNTING CYCLE

This topic provides a brief review of the accounting cycle including the recording of journal
entries; posting to the general ledger; and using this information to prepare a trial balance and
a set of financial statements.
The accounting cycle is the process of compiling and recording data for all of the transactions
and select economic events that take place within an entitys operating period, including the
preparation of financial statements. The steps in the cycle are as follows:
1. Identifying and measuring transactions and other economic events (for example, the sale of
merchandise)
2. Journalizing the transactions (for example, posting them to the general journal)
3. Posting the transactions to the general ledger (G/L)
4. Preparing a trial balance that summarizes all of the account balances in the general ledger
5. Preparing adjusting journal entries for accruals and adjustments in order to ensure that all
balances reflect the economic events that transpired during the operating period
6. Preparing an adjusted trial balance that summarizes the updated account balances in the
general ledger
7. Preparing a set of financial statements for the reporting period
8. Closing the (temporary) revenue and expense accounts out to retained earnings
9. Preparing a post-closing trial balance (optional)
10. Journalizing reversing entries (optional)
There is not any further discussion of steps 9 and 10 in these student notes given their
straightforward and optional nature.
Note that special journals are sometimes used to summarize high activity transactions that
have a common characteristic (for example, sales whereas subsidiary ledgers detail the
specifics of a given general ledger balance, accounts receivables). For ease of reference, we
shall concentrate on posting to the general journal.
Journalizing
This step must be performed irrespective of whether an accounting software package is used.
Journal entries are prepared to record transactions and economic events affecting the entity
during the period and are then recorded in the general journal. Entries should describe the
event to which the journal entry relates with descriptions and dates being as specific as
possible.
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Posting
This step is typically automated in most accounting software packages but must be performed
in manual systems. In involves transferring the information posted in the general journal to the
general ledger. Recall that the G/L maintains a separate record for each account that details all
entries to that account during the period as well as the ending balance.
Preparing the unadjusted trial balance
Again, this step is typically automated. It involves listing the balances of all the general ledger
accounts at period end and ensuring that the sum of the debit balances equals the sum of the
credit balances.
Journalizing adjusting entries
This step must be performed irrespective of whether an accounting software package is used.
Journal entries are prepared to ensure that revenue and expense recognition criteria are met.
This typically involves recording non-transactional events to reflect the passage of time (for
example, providing for depreciation expense for the year and accruing for utility expense
between the last billing date and year end). Adjustments must also be made for items such as
bad debts; inventory obsolescence; fair value adjustments, and so forth.
Preparing the adjusted trial balance
The process for producing the adjusted trial balance is identical to that of the unadjusted trial
balance. The only difference is that the adjusted trial balance reflects the balances in the G/L
after the adjusting entries have been posted.
The following are a list of common adjustments that are generally be made in a set of financial
statements:
Adjust prepaid expenses account to correctly account for the prepaid portion (for example,
prepaid rent, prepaid insurance).
Adjust depreciation expense to the correct amount recognized in the year.
Record accruals for any unrecorded liabilities outstanding at year end.
Preparing the financial statements

Preparing the financial statements is also typically an automated function in most accounting
software packages. Preparing the financial statements involves using information on the
adjusted trial balance to create the statement of comprehensive income; the statement of
changes in equity; and the statement of financial position. These statements, together with
supplementary accounting information are then used to prepare the statement of cash flows.
Journalizing and posting closing entries
After the financial statements have been prepared, the books can be closed. This involves
preparing closing entries that returns the balance of all temporary accounts (revenues and
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expenses) to zero and posting them to the general ledger with the net difference credited or
debited to retained earnings.
Journalizing reversing entries (optional)
A reversing journal entry relates to reversing certain journal entries that have been made in the
previous accounting period. For example, if a company has made an accrual during the
previous accounting period, the company can setup a reversing journal entry in the current
period to reverse the accrual made in the previous period. The reversing journal entry is
designed to ensure that a transaction is recorded properly in the correct accounting period.
The following is an example of how a company would record and use a reversing journal entry:
Example 1.9a
Rockman Inc. has a December 31 fiscal year. In the 20X4 fiscal year, Rockman
recorded the following expense accrual for services performed by Bulldozer Corp. but
for which the invoice was not yet received at year end.
DR Consulting
CR Accrued liabilities
1,000
1,000
At beginning of the subsequent period (on January 1, 20X5) Rockman would record the
following reversing journal entry to reverse the accrual that was made in the 20X4 fiscal
year. This adjusting entry would result in Rockman having on January 1, 20X5, a
balance of nil for accrued liabilities and a credit balance of $1,000 for consulting fees.
DR Accrued liabilities
CR Consulting fees
1,000
1,000
On January 31, 20X5, Rockman receives the invoice for $1,000 for the consulting
services that were performed by Bulldozer (during the 20X4 fiscal year). The journal
entry that would be recorded by Rockman would be as follows:
DR Consulting
CR Accounts payable
1,000
1,000
You will note the net effect of the journal entries as at January 31, 20X5, is Rockman
would have a nil balance for consulting fees and a credit balance of $1,000 for accounts
payable. The reversing journal entry that has been made above helps to ensure that
Rockman has not recorded this transaction twice in its accounting records.
Example 1.9b: Accounting cycle
Spartacus Sports Ltd. is a small private company that prepares its financial statements
in accordance with ASPE. This illustration involves journalizing and posting adjusting
journal entries to the GL (t-accounts); preparing an adjusted trial balance; and preparing
43 / 56
the income statement, statement of retained earnings and balance sheet for the year
ended April 30, 20X2.
Spartacuss unadjusted trial balance is as follows:
Unadjusted trial balance April 30, 20X2
DR
Accounts receivable
27,101
Allowance for doubtful accounts
Inventory
24,102
Land
49,000
Buildings
222,736
Accumulated depreciation buildings
Office furniture
72,300
Accumulated depreciation office furniture
Vehicles
47,120
Accumulated depreciation vehicles
Bank indebtedness
Accounts payable
Accrued liabilities
Long-term debt
Common shares
Retained earnings
Sales
Purchases
120,820
Administration expense
22,700
Salaries and wages expense
74,333
Insurance expense
6,300
Interest expense
16,090
Miscellaneous expense
_______
682,602
CR
1,780
29,328
36,150
19,325
45,697
12,260
9,333
150,000
20,000
93,429
255,300
10,000
682,602
Depreciation rates
Buildings
5.0% declining balance
Office furniture 20.0% declining balance
Vehicles
25.0% declining balance
Supplemental information
1. No depreciation expense has been recorded for this year.
2. 10,000 new common shares were issued during the year for $10,000. The
proceeds were originally credited to miscellaneous expense.
3. An accounts receivable of $1,010 due from Billy & Partners is uncollectible. This
debt has been outstanding since March 1, 20X1.
4. The value of inventory at April 30, 20X2, is $22,080.
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5. The company purchased a three-year insurance policy on January 1, 20X2, for

$6,300.
6. The principal balance on the long-term debt is due on April 30, 20X6. Interest at
5.0% was last accrued and paid on November 30, 20X1. For ease of computation,
use the number of months to calculate interest expense, rather than the number of
days.
7. Spartacus received a deposit of $4,000 from a customer for equipment that was not
delivered until May 15, 20X2. The $4,000 was credited to sales in the April 30,
20X2, fiscal year end.
8. As is determinable from the purchases account on the trial balance, Spartacus uses
a periodic inventory system.
Solution to Example 1.9b
Adjusting journal entries April 30, 20X2
1. Depreciation expense
Accumulated depreciation buildings
Accumulated depreciation office furniture
Accumulated depreciation vehicles
To record depreciation expense for the year.
DR
23,849
CR
9,670
7,230
6,949
Calculations:
Buildings ($222,736 $29,328 = $193,408 5.0% = $9,670)
Office furniture ($72,300 $36,150 = $36,150 20.0% =
$7,230)
Vehicles ($47,120 $19,325 = $27,795 25.0% = $6,949)
2. Miscellaneous expense
Common shares
To adjust and properly record issuance of common shares.
3. Allowance for doubtful accounts
Accounts receivable
To write off account of Billy & Partners, as the amount is
determined to be uncollectible.
4. Cost of goods sold
Inventory
Purchases
To record cost of goods sold for the year.
Net inventory adjustment = beginning inventory ending
inventory ($24,102 $22,080 = $2,022)
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10,000
10,000
1,010
1,010
122,842
2,022
120,820
5. Prepaid insurance
Insurance expense
To record prepaid portion of insurance policy.
5,600
5,600
$6,300 / 36 months 32 months remaining in policy =

$5,600
6. Interest expense
Interest payable
To record interest expense from December 1 to April 30.
3,125
3,125
$150,000 5.0% 5 / 12 months = $3,125

7. Sales
Unearned revenue
To adjust for customer deposit received by the company on
future sales.
46 / 56
4,000
4,000
General journal posting April 30, 20X2

Assets
Accounts receivable
DR
CR
27,101
1,010
26,091
(3)
Land
DR
49,000
47 / 56
Building
DR
CR
222,736
CR
Accumulated
depreciation office
furniture
DR
CR
36,150
7,230
43,380
Allowance for doubtful

accounts
DR
CR
1,780
1,010
770
Vehicles
DR
CR
47,120
(1)
Inventory
DR
CR
24,102
(3)
2,022
(4)
22,080
Accumulated
depreciation building
DR
CR
29,328
9,670
38,998
Accumulated
depreciation vehicles
DR
CR
19,325
6,949
26,274
Prepaid insurance
DR
CR
5,600
5,600
Office furniture
DR
CR
72,300
(1)
(1)
(5)
Liabilities and equity

Accounts payable
Accrued liabilities
DR
CR
DR
CR
12,260
9,333
Bank indebtedness
DR
CR
45,697
Unearned revenue
DR
CR
4,000
4,000
Long-term debt
DR
CR
150,000
CR
255,300
4,000
(7)
251,300
Interest expense
DR
CR
16,090
3,125
19,215
Admin. expense
DR
CR
22,700
48 / 56
Common shares
DR
CR
20,000
10,000
30,000
(7)
Sales
DR
(6)
Revenue and expenses

Purchases
Cost of goods sold
DR
CR
DR
CR
120,820
120,820 (4)
122,842
122,842
DR
CR
10,000
10,000
(2)
Depreciation expense
DR
CR
23,849
23,849
Interest payable
DR
CR
3,125 (6)
3,125
Retained earnings
DR
CR
93,429
(2)
(4)
Insurance expense
DR
CR
6,300
5,600 (5)
700
Salaries and wages
expense
DR
CR
74,333
(1)
Adjusted trial balance

April 30, 20X2
Accounts receivable
Allowance for doubtful accounts
Inventory
Prepaid insurance
Land
Buildings
Accumulated depreciation
buildings
Office furniture
office furniture
Vehicles
vehicles
Bank indebtedness
Accounts payable
Accrued liabilities
Unearned revenue
Interest payable
Long-term debt
Common shares
Retained earnings
Sales
Cost of goods sold
Purchases
Administration expense
Salaries and wages expense
49 / 56
Unadjusted trial
balance
DR
CR
27,101
1,780
24,102
49,000
222,736
Adjusting entries
DR
CR
1,010
1,010
2,022
5,600
29,328
9,670
Ref #
3
3
4
5
72,300
38,998
72,300
36,150
7,230
47,120
43,380
47,120
19,325
45,697
12,260
9,333
150,000
20,000
93,429
255,300
120,820
22,700
74,333
Adjusted trial balance

DR
CR
26,091
770
22,080
5,600
49,000
222,736
6,949
4,000
3,125
7
6
10,000
120,820
7
4
4
4,000
122,842
23,849
26,274
45,697
12,260
9,333
4,000
3,125
150,000
30,000
93,429
251,300
122,842
22,700
23,849
74,333
Insurance expense
Interest expense
6,300
16,090
682,602
50 / 56
5,600
10,000
682,602
3,125
10,000
170,426
170,426
5
6
2
700
19,215
708,566
708,566
Spartacus Sports Ltd.

Income statement
For the year ended April 30, 20X2
Sales
Cost of goods sold
Gross margin
$251,300
122,842
128,458
Operating expenses:
Administration expense $22,700
23,849
Salaries and wages
74,333
Insurance
700
Interest
19,215
Net income (loss)
140,797
$ (12,339)

Statement of retained earnings
For the year ended April 30, 20X2
Retained earnings, April 30, 20X0
Net income (loss) for the year
Retained earnings, April 30, 20X1
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$93,429
(12,339)
$81,090

Balance sheet
As at April 30, 20X2
Assets
Current assets:
Accounts receivable (net of allowance of $770)
Inventory
Prepaid insurance
Non-current assets:
Property, plant and equipment
Total assets
Liabilities and equity
Current liabilities:
Bank indebtedness
Accounts payable
Accrued liabilities
Unearned revenue
Interest payable
Non-current liability:
Long-term debt
Total liabilities
Shareholders equity
Common shares
Retained earnings
Total shareholders equity
Total liabilities and shareholders equity
52 / 56
$ 25,321
22,080
5,600
53,001
391,156
(108,652)
282,504
$ 335,505
$ 45,697
12,260
9,333
4,000
3,125
74,415
150,000
224,415
30,000
81,090
_111,090
$335,505
APPENDIX A: PROVINCIAL SALES TAX, GOODS AND SERVICES TAX AND

HARMONIZED SALES TAX
This appendix provides a brief overview of sales and consumption taxes in Canada, in
particular provincial sales tax (PST), goods and services tax (GST) and harmonized sales tax
(HST).
For Module 5.1 the theoretical concepts associated with PST, GST and HST are examinable.
However, various transactions that affect income (either through profit or loss or other
comprehensive income) may have related tax effects that are no specifically addressed during
this modules materials. Tax effects will be discussed in more detail in Module 5.2; therefore,
any tax effects included in Module 5.1 will be relatively straightforward.
Depending on where a company sells its product and the nature of the good or service sold,
businesses are normally required to collect PST, GST or HST. The vendor is required by law to
charge the prescribed amount of tax on the transaction and remit the funds to the government
at a later date.
As at January 1, 2015, the rates applicable in the provinces and territories were as set out
below:
PST, GST and HST rates as at January 1, 2015
Alberta
British Columbia
Manitoba*
New Brunswick
Newfoundland
Northwest Territories
Nova Scotia
Nunavut
Ontario
Prince Edward Island
Quebec**
Saskatchewan
Yukon
PST
7%
8%
9.975%
5%
GST
5%
5%
5%
5%
5%
5%
5%
5%
HST
13%
13%
15%
13%
14%
* In Manitoba, the PST is known as the retail sales tax (RST).

** In Quebec, the PST is known as the Quebec sales tax (QST).
Provincial sales tax (PST)
The rules for determining on what items PST is to be charged can be complex and vary by
province. Moreover, businesses are typically exempt from paying PST on goods purchased for
resale. For this course, it is important to know the following:
53 / 56
PST must be paid by purchasers on non-exempt goods for items procured from vendors in
B.C., Manitoba, Quebec and Saskatchewan. The sales tax paid is a non-refundable tax.
Hence it will be included in the cost of most property, plant and equipment (this will
discussed further in Week 4) and other non-exempt purchases. Merchandise inventory is
usually an exempt item as it is intended for resale.
PST must be collected on the sale of non-exempt goods by vendors in British Columbia,
Manitoba, Quebec and Saskatchewan. The tax collected must be subsequently remitted to
the applicable provincial government in accordance with the governing legislation.
Goods and services tax (GST)

GST was implemented by the federal government on January 1, 1991, replacing the federal
sales tax (FST). Since January 1, 2008, GST has been charged at the rate of 5% of the selling
price of goods and services. GST is designed to be paid only by the final consumers of items
and is therefore known as a consumption tax.
To ensure that all consumption is taxed, GST must be paid every time items are purchased
from a vendor, and the vendor must remit the amounts collected to the Canada Revenue
Agency (CRA). If items pass through several distribution levels before reaching the final
consumers, GST must be paid each time the items are sold.
To ensure that only the final consumers will pay GST on the purchase of items, registered
businesses are permitted to claim a credit, called an input tax credit (ITC), for GST paid on
their purchases. This tax credit is deducted from GST collected on sales, and the balance is
remitted to the CRA. The ITC can also be claimed for GST paid on the purchase of items and
capital assets that are used in the business. In this instance, the business is not considered to
be the final consumer, since the cost of using these items and capital assets will be passed on
to the final consumers through the cost of goods or services sold by the business.
Only 50% of the GST paid on business meals and entertainment may be claimed as an ITC.
This restriction parallels the Income Tax Act, which allows a deduction for only 50% of meals
and entertainment expenses.
If an account receivable becomes a bad debt, the GST previously remitted can be claimed as
an input tax credit adjustment. Similarly, for items that are returned for a refund or credit, the
GST is included in the refund or on the credit memo and is claimed on the supplier's next GST
filing.
Businesses that have sales of GST-taxable items of more than $30,000 per year are required
to register with the CRA and collect GST on the sale of all taxable items. Registered
businesses are assigned a registration number, which must be shown on all sales invoices.
Only registered businesses may collect GST. Businesses with annual sales of taxable items of
$30,000 or less are not required to register but have the option of doing so.
The reporting periods and filing requirements for a business depend on the annual sales of
taxable and zero-rated items and the fiscal year end of the business.
54 / 56
Example
A distributor purchases 100 items from a manufacturer for $80 each and sells them to a
wholesaler for $100 each. The wholesaler sells them to a retailer for $125 each. The
retailer sells them to the final consumers for $170 each. For the purposes of this
example, assume that the manufacturer does not have any taxable purchases.
Total sales
Manufacturer $ 8,000
Distributor
10,000
Wholesaler
12,500
Retailer
17,000
GST collected
$
400
500
625
850
2,375
ITC claimed
$
$
400
500
625
1,525
GST remitted
$
400
100
125
225
850
A total of $2,375 GST was collected, $1,525 in input tax credits was claimed, and a net
amount of $850 was remitted to the CRA. This result has the same effect as if the GST
had been collected on the sales to the final consumers only (that is, $170 100 5% =
$850).
Registered businesses must follow several regulations in accounting for the GST and for
calculating the amount of the remittances to the CRA. Separate general ledger accounts
should be maintained for GST collected on sales and for GST paid on purchases. The GSTcollected general ledger account is set up as a current liability account and is used to record
GST charged on sales. The GST-paid general ledger account is usually established as a
contra account immediately following the GST collected account in the current liability section
of the general ledger and is used to record the GST paid on purchases. The GST paid is the
input tax credit. The remittances are the net amount of GST charged on all sales, whether
collected or not, and the GST paid on all purchases, whether paid or not. This practice is
consistent with the accrual method of accounting for transactions.
For financial statement presentation, the balances in the GST-collected account and the GSTpaid account are netted and shown as a single amount. Since most businesses will normally
have more revenue than expenses, the net amount will usually be a credit balance and will
appear in the current liability section of the statement of financial position. If the net amount is
a debit balance, it will appear in the current asset section of the statement of financial position.
Example
The following are examples of journal entries that should be recorded by an entity when
they collect GST from a sale of an item and when the company pays GST on the
purchase of an item.
Sale:
DR Accounts receivable / cash
CR Revenue
CR GST collected
55 / 56
3,150
3,000
150
Purchase of office equipment:

DR Office equipment
DR GST paid
CR Accounts payable / cash
2,500
125
2,625
It is appropriate that the asset account should not include the amount paid as GST,
since this amount is ultimately recovered through an input tax credit.
The general ledger accounts now contain a credit balance of $150 in the GST collected
account and a debit balance of $125 in GST paid account. The statement of financial
position would report a net $25 in GST payable in the current liabilities section.
The GST reporting form would show GST collected of $150 and input tax credits of
$125. The difference of $25 is the amount that must be remitted to the CRA.
To calculate the amount of GST included in the selling price, multiply the total selling
price by 5/105. To obtain the pre-tax total, multiply the gross selling price by 100/105.
Harmonized sales tax (HST)
When GST was first introduced, consumers were typically faced with paying two consumption
taxes on most purchases GST and, in all provinces except Alberta, PST. In an effort to
reduce the administrative aspects of maintaining two independent sales tax systems, as set
out in the table above five provinces have adopted HST.
HST, like GST, is collected by the CRA, which then remits the appropriate amounts to the
participating provinces. The mechanics of collecting and remitting the HST by businesses are
substantially the same as that described for the GST. Specifically, separate general ledger
accounts should be maintained for HST collected on sales and for HST paid on purchases.
GST and HST are refundable taxes. Hence they will be excluded when determining the cost of
most property, plant and equipment and other assets.
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Module 5.

Chartered Professional Accountants of Canada, CPA Canada, CPA

TOPIC 1.7: ACCOUNTING INFORMATION SYSTEMS AND INFORMATION

Module 5.1 Intermediate Financial Reporting 1

TOPIC 1.1: INTRODUCTION

presentation and disclosure

Module 5.1 Intermediate Financial Reporting 1

Week 1 Student Notes

Module 5.1 Intermediate Financial Reporting 1

Week 1 Student Notes

TOPIC 1.2: ACCOUNTING STANDARDS IN CANADA

International Financial Reporting Standards (IFRS): Publicly accountable

Accounting standards for private enterprises (ASPE): Private enterprises may

Accounting standards for not-for-profit organizations (NFPOs): Non-governmental

Pre-changeover accounting standards: These standards maintain the existing

Module 5.1 Intermediate Financial Reporting 1

Week 1 Student Notes

Module 5.1 Intermediate Financial Reporting 1

Week 1 Student Notes

1.2-2 Development of new and revised accounting standards

Module 5.1 Intermediate Financial Reporting 1

Week 1 Student Notes

TOPIC 1.3: THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

Module 5.1 Intermediate Financial Reporting 1

Week 1 Student Notes

This objective includes the provision of information such as:

information about the economic resources controlled by the entity

information about changes in the financial position of the entity

information about the entitys financial structure, liquidity and solvency

Module 5.1 Intermediate Financial Reporting 1

Week 1 Student Notes

Module 5.1 Intermediate Financial Reporting 1

Week 1 Student Notes

Module 5.1 Intermediate Financial Reporting 1

Week 1 Student Notes

Profit (loss) is equal to the nominal increase (decrease) in capital

b) Purchasing power financial capital maintenance

Profit (loss) is calculated after inflation

c) Physical (productive capacity) capital maintenance

Profit (loss) after replacing assets is used up

Module 5.1 Intermediate Financial Reporting 1

Week 1 Student Notes

1.3-9 The elements of financial statements

1.3-10 Measurement of the elements of financial statements

Module 5.1 Intermediate Financial Reporting 1

Week 1 Student Notes

Module 5.1 Intermediate Financial Reporting 1

Week 1 Student Notes

TOPIC 1.4: THE ASPE FRAMEWORK

Module 5.1 Intermediate Financial Reporting 1

Week 1 Student Notes

Timeliness is included in the ASPE framework as a sub-characteristic of relevance,

Conservatism is included in the ASPE framework, as a sub-characteristic of reliability,

Module 5.1 Intermediate Financial Reporting 1

Week 1 Student Notes

TOPIC 1.5: FINANCIAL STATEMENTS

a statement of financial position as at the end of the period

a statement of changes in equity for the period

a statement of cash flows for the period

notes to the financial statements comprising a summary of significant accounting policies

Module 5.1 Intermediate Financial Reporting 1

Week 1 Student Notes

Terminology only. The two statements