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Chapter 11 Corporations and their financial statements - Coggle Diagram
Chapter 11 Corporations and their financial statements
Corporation and their structure
business structure
sole proprietorship
personally liable for all debts, losses and obligations
partnership
2 or more persons run the business; can be general or limited partnership
corporations
Advantages and disadvantages of incorporation
advantages
limited shareholder liability
continuity of existence
transfer of ownership
ability to finance
growth
professional management
disadvantages
inflexibility
taxation
pay tax on dividend income
expense
capital withdrawal
private and public corporations
private: shareholders no more than 50; prohibit members from inviting the public to subscribe for their securities
public: shares are listed on a stock exchange or traded over the counter
corporate by-laws
regulated by the federal or provincial ;
by-laws are passed by the board of directors and approved by the shareholders
deal with issues:
“Shareholders’ and directors’ meetings
• Qualification, election, and removal of directors
• Appointment, duties, and remuneration of officers
• Declaration and payment of dividends
• Date of fiscal year end
• Signing authority for documents”
vote rights
shareholders' meetings
voting by proxy
most retail investors cast their votes by proxy ; proxy: a member of the company's management team who is given authority through power of attorney to vote according to shareholders' intentions
information circular : informing the shareholder of issues for consideration at the annual meeting
the proxy must be completed in writing and signed by the shareholder granting the proxy ; if unmarked, the ballot is cast with management 's viewpoint
shares registered in street form: the nominee must notify all beneficial holders of meetings
voting trusts
a corporation undergoing restructuring may place a few individuals a voting trust; (put into effect for specific period)
transfer voting control: shareholders deposit their shares with a trustee( company) with a voting trust agreement
voting privileges remain with the trustee
The corporate structure
directors
chairman of the board
president
vice-president
officers
Financial statements of a corporation
GAAP(generally accepted accounting principles): mix of rule- and principles -based accounting ; less ambiguous
international financial reporting standards: principles-based; more general
Statement of financial position
fiscal year: banks and trust company, October is the last month of each fiscal year
shows three items
“• Assets consist of what the company owns and what is owed to it.
• Equity represents the shareholders’ interest in the company.
•Liabilities are what the company owes.”
book value: net asset value; equity also referred to book value; the excess of the company's assets over its liabilities (total asset- intangible asset - liabilities )
Total assets= total equity + total liabilities
classification of assets
non current assets
PP&E: property, plant, and equipment
wear out over time: depreciation
depletion: consumption of natural resources that are part of a company's asset (annual decrease in value ); known as wasting asset
amortization: gradual write off of intangible assets like patents or trademark
statement of comprehensive income: companies record depreciation expenses (PP&E)
calculate annual depreciation expense
straight line
(original expense- residual value )/ expected life
declining -balance
straight line percentage depreciation rate *2 on each year's remaining balance
non cash expense: depreciation, depletion, and amortization
statement of cash flow: how the company generate and spent its cash during the year
capitalization: records an expenditure as an asset, rather than an expense
goodwill : “Goodwill appears on the purchasing company’s statement of financial position as the excess of the amount paid for the shares over their net asset value.”
intangible asset: patents, copyrights, franchises, and trademark
investment in associates : “refers to the degree of ownership that a company has in another company. As a general rule, significant influence is presumed to exist when a company owns at least 20% – but less than half – of the voting rights of the other company.”
If Company A owns more than 50% of Company B, Company B would be considered a subsidiary of Company A. Company A would be considered the parent company.
If Company A owns between 20% and 50% of Company B, Company B would be considered an associated company.
amortization is usually used to describe writing down intangible assets. Depletion is usually a term used to describe writing down resource assets. Depreciation is usually a term used to describe writing down fixed assets.
current assets
“Current assets are assets that will be realized, consumed, or sold in the normal course of business, typically within one year. They include inventory, prepaid expenses, and trade receivables, as well as cash and cash equivalents.”
inventory : RW, WIP, and FG
the value of inventory at original cost:
the weighted average method : the average of the total cost of goods purchased over the period on a per unit basis
FIFO: first in first out: the items acquired earliest are assumed to be used or sold first
prepaid expenses: rent, insurance premiums, and taxes
trade receivables: 应收款项 ； “Because some customers fail to pay their bills, an item called allowance for doubtful accounts is often subtracted from receivables”； （allowance is management's estimate of the amount that will not be collected)
cash and cash equivalents: funds in the bank account or funds held in short-term investments; readily convertible into cash
Classification of equity
share capital 股本
“Share capital is the money paid in by shareholders. This is the amount received by the company for its shares at the time that they were issued.”
does not change unless company issues new shares or buy back outstanding shares
retained earnings 留存收益
“the profits earned over time that have not been paid out as dividends”; annual earning after all expenses and distribution of all dividends
reinvest in business (held in cash or inventories)
non- controlling interest
“Non-controlling interest appears as a category when a company owns more than 50% of a subsidiary company and consolidates its financial statements.”
“This item is the interest or ownership that outsiders have in the subsidiary company.”
Classification of liabilities
non-current liabilities
long-term debt
mortgages, bonds and debentures
long-term debt that is due within the current year is current item
deferred tax liabilities
income taxable in future periods
current liabilities
debts incurred by a company in the ordinary course of its business that must be paid within one year
“Current portion of long-term debt due in one year
• Taxes payable to the government in the near term
•Trade payables (unpaid bills for items such as raw materials and supplies)
• Short-term borrowings from financial institutions”
“When calculating a company’s debt ratios, it is important to distinguish between debts, such as short-term borrowings and bonds, and other types of liabilities, such as trade payables and taxes owed. Only debts incurred by borrowing are included in ratios involving debt.”
The statement of financial position presents a snapshot of a company’s operations at a specific date.
Statement of comprehensive income
shows how much money earned compared to how much money it spent
where earnings come from
where earnings go
the adequacy of earnings
“When analyzing the financial condition of a company, its earning power and cash flow are of primary interest.
The proof of a company’s financial strength and security lies in its ability to generate earnings and, through those earnings, cash flow.
Evidence of the adequacy of these items is provided by both the statement of comprehensive income and the statement of cash flows.”
structure of the statement of comprehensive income
revenue (income)
the income from sale of products or services
cost of sales
costs of labour, RM, fuel and power, supplies and services and other kinds of expenses that go directly into the cost of manufacturing
two formats
by nature of their use (e.g., depreciation, RM, and employee benefit)
by function : ( e.g., cost of sales, administrative, and distribution)
gross profit
revenue- cost of sales ( measures the margin of profit 利润率or spread 利差between the cost of goods produced for sale and revenue)
other income
“This category includes dividends and interest from investments, rents, and sometimes profits from the sale of PP&E.”
revenue and other income be shown separately in the statement; if combine it with avenue, would have a false impression of the company's earning power
other income is added after gross profit is calculated
general expenses
“Distribution costs, including such expenses as advertising costs and salaries and commissions to sales personnel
• Administrative expenses, including office salaries, accounting staff salaries, and office supplies
• Other expenses not directly related to the company’s normal operating activities, including expenses associated with the sale of PP&E
• Finance costs in the form of interest payments on debtholders’ securities or loans to the company”
interest charges are fixed, a default payment would give creditors the right to place the company in receivership and put company at risk of bankruptcy
share of profit of associate
“occurs when one company’s investment in another company creates significant influence without gaining control, and when each company has its own financial statements. ”
“Traditionally, a company has significant influence (but falls short of control) when it owns at least 20%—but less than half—of voting shares.”
non-cash source of funds
“If an entity under a company’s significant influence experiences a loss, the company reports its share of the loss on its statement of comprehensive income. This entry is called share of loss of associates”
“The
cost method
of accounting is primarily used for ownership holdings that do not result in significant influence (traditionally ownership of less than 20%) and where investments in other companies are reported in the form of investments on the financial statements.”
income tax expense
includes both current tax and deferred tax for the time period
profit
the amount of profit (or loss) that may be available for distribution to shareholders
other comprehensive income
“• Actuarial gains and losses on defined benefit plans
• Gains and losses from currency translations relating to the financial statements of a foreign operation”
total comprehensive income : the profit (loss) plus the other comprehensive income
Statement of changes in equity
retained earnings
“profits earned over the years that have not been paid out to shareholders as dividends. ”
these retained profits accrue to the shareholders
The purpose of the retained earnings is to record the profits kept in the business.
Additionally, the retained earnings provide a direct link between the statement of comprehensive income and the statement of financial position.
dividends declared during the year are subtracted from retained earnings in the statement of changes in equity
total comprehensive income
retained earnings + non-controlling interests (attributable to owners: need to minus the non-controlling interest)
Statement of cash flows
helps reader to evaluate the liquidity and solvency of a company and assess its overall quality
the assessment
“• Can the company pay its creditors, especially in business downturns?
• Can it fund its needs internally, if necessary?
• Can it reinvest while continuing to pay dividends to shareholders?”
structure of the statement of cash flows
operating activities
profit + depreciation - share profit of associate
change in net working capital
“Trade receivables
• Inventories
• Trade payables
• Interest payable
• Taxes payable”
financing activities
issue new share capital or debt ( cash flow into the company)
repays debt or pay dividends (cash flow out)
“Dividends paid to shareholders could be placed in either the operating activities section or the financing activities section”
investing activities
purchase / disposal of new capital assets
dividends received from associates (this could be placed in the operating section as well)
the change in cash flow
increase /decrease in cash (sum up operating, financing and investing cash)
cash and cash equivalents (year-end)
The statement of cash flow is established using IFRS.
Annual report
notes to the financial statements
detailed information must be disclosed
statement of compliance with IFRS
the accounting policies used
detailed descriptions of fixed assets, share capital and long-term debts
commitments and contingencies
“Potential investors should also look in the notes to ascertain whether the company uses derivatives for hedging or other purposes.”
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The notes to the financial statements provide important details about the company’s financial condition not reported in the actual financial statements.
the auditor's report
every limited company appoint an auditor to represent shareholders and report to them annually
“The auditor must express an opinion in writing as to the fairness of those statements. ”
private corporations, an audit is not necessary
Public company disclosures and investor rights
control position
ownership of voting stock in a company ( 20% holding except Manitoba, New Brunswick and Quebec)
continuous disclosure
reporting issuer: “is a corporation that has issued securities to the public and must comply with the timely and continuous public disclosure requirements of the securities acts.
material change
report: “a change in the business, operations, or capital of an issuer that would reasonably be expected to have a significant effect on the market price or value of its securities.”
shareholders and admins be provided with
“Comparative audited annual financial statements should be sent within 120 days of the financial yearend, for companies listed on the TSX Venture Exchange, or within 90 days, for senior issuers on the TSX.
• Comparative unaudited quarterly interim financial statements should be sent within 60 days of the end of each of the first three quarters of the financial year, for companies listed on the TSX Venture Exchange, or within 45 days, for issuers on the TSX.”
Statutory rights of investors
right of withdrawal
2 business days after receipt or deemed receipt of a prospectus招股说明书
“In Quebec, the purchaser can apply for an adjustment of the purchase price.”
most provinces permit a purchaser to revoke the transaction
The right of withdrawal is for shares issued under a prospectus (i.e., new shares being issued that haven’t been sold to the public before)
right of rescission
the right to rescind or cancel a completed contract for the purchase of securities if the prospectus or amended prospectus offering the security contains a misrepresentation”
right of action for damages
“anyone who signs a prospectus, may be liable for damages if the prospectus contains a misrepresentation.”
“an expert (such as an auditor, lawyer, geologist, or appraiser) only liable if the misrepresentation is with respect to their report or opinion”
Takeover bids and insider trading
takeover bid
an offer to purchase from a company's shareholders more than 20% of the outstanding voting securities of the company (or combine with the existing shares exceeds 20%)
to control the targeted company
includes an offer to purchase, an acceptance of an offer to sell , and a combination of two
early warning disclosure
accumulating 10% or more , must issue a press release immediately to a statement of the purpose of the acquisition and any future intentions to increase ownership or control.”
After a formal bid is made for voting securities of a reporting issuer, and before the expiry of the bid, every person or company acquiring 5% or more of the securities of the class subject to the bid must issue a press release reporting this information
Insider trading
insiders
directors of the issuer
senior officers of the issuer
any person or company *excluding underwrites in the course of public distribution ) own more than 10% of the voting rights
any director or senior officer of a company that is a subsidiary of the issuer or is itself an insider due to ownership, (control more than 10% of voting rights)
In some circumstances, if a corporation becomes an insider of a second corporation, an insider of the first corporation may be deemed to be an insider of the second corporation as well
insider reporting
insiders must inform the securities commissions when they become insiders
“most acts require an insider who transfers securities of a reporting issuer into the name of an agent, nominee, or custodian to file a report with the administrator. ”
大多数行为都需要内部人员将报告发行人的证券转让为代理人，代名人或保管人的名义，才能向管理员提交报告
all reports filed with the administrator are open for public inspection”
investment in associate: 20%- 50%; (share of profit of associate (equity method)
non-controlling interest: more than 50% (subsidiaries)
cost method: less than 20%