Chapter 4: Completion of the Accounting Cycle
Accounting Principles - Tenth Canadian Edition
Chapter 4: Completion of the Accounting Cycle
- Purpose: Understanding the completion of the accounting cycle through financial statements.
Learning Objectives
- Objective 3: Prepare a classified balance sheet.
Classified Balance Sheet
- Definition: A financial statement that organizes similar assets and liabilities together for enhanced usability.
- Standard Classifications Include:
- Assets
- Current Assets
- Non-current Assets
- Long-term investments
- Property, plant, and equipment
- Intangible assets
- Goodwill
- Liabilities
- Current Liabilities
- Non-current Liabilities
- Owner’s Equity (shareholders’ equity)
Current Assets
- Definition: Cash and other resources that can be converted to cash, sold, or used up within one year from the balance sheet date.
- Note: The period can extend if the operating cycle is greater than one year.
- Order of Presentation: Listed in order of liquidity.
- Examples of Current Assets:
- Cash
- Short-term investments
- Receivables
- Inventory
- Supplies
- Prepaid expenses
Operating Cycle
- Definition: The duration it takes for a company to convert cash to inventory and back to cash through sales.
- Typical Duration: Usually less than one year; however, some businesses may have a longer operating cycle.
Non-current Assets
Long-Term Investments
- Definition: Investments in debt or equity anticipated to be held for an extended duration, typically not convertible into cash within one year.
- Examples:
- Investments in shares or bonds of another company
- Long-term notes receivable
- Land held for resale
Property, Plant, and Equipment (PP&E)
- Definition: Tangible assets that are long-lived and utilized in business operations, not intended for sale.
- Also Known As: Capital assets or fixed assets.
- Examples:
- Land
- Buildings
- Equipment
- Vehicles
- Furniture
Intangible Assets and Goodwill
- Definition of Intangible Assets: Long-lived assets that lack physical substance, granting rights and privileges to a company.
- Examples of Intangible Assets:
- Patents
- Copyrights
- Trademarks
- Trade names
- Licenses
- Definition of Goodwill: A form of intangible asset that arises when a company is acquired at a price above the fair value of its net assets.
Current Liabilities
- Definition: Obligations expected to be settled within one year or during the regular operating cycle.
- Order of Presentation: Listed first in the liabilities section of the balance sheet, usually in order of liquidity.
- Examples of Current Liabilities:
- Accounts payable
- Notes payable
- Interest payable
- Salaries payable
- Unearned revenues
- Current maturities of long-term debt
Non-current Liabilities
- Definition: Obligations that are expected to be settled in more than one year.
- Examples of Non-current Liabilities:
- Long-term notes payable
- Bonds payable
- Mortgages payable
- Lease liabilities
- Deferred income taxes
Equity Section
- Variation Based on Business Type:
- Proprietorship: One capital account labeled as “Owner’s Equity.”
- Partnership: Individual capital accounts under the heading “Partners’ Equity.”
- Corporation: Shareholders’ equity consists of:
- Share Capital
- Retained Earnings
Comparing IFRS and ASPE
- Statement Names:
- Under IFRS: Known as a Statement of Financial Position.
- Under ASPE: Known as a Balance Sheet.
- Note: Both terminologies are acceptable; provisions exist for either title.
- Requirements Under Both IFRS and ASPE:
- Separation of current assets and non-current assets.
- Required presentation of specific accounts, including intangible assets, goodwill, and long-term investments.
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