Financial Accounting, 6th Canadian Edition PDF by Walter T. Harrison Jr., Charles T. Horngren, C. William Thomas, Wendy M. Tietz, Greg Berberich, and Catherine Seguin


Financial Accounting, Sixth Canadian Edition

By Walter T. Harrison Jr., Charles T. Horngren, C. William Thomas, Wendy M. Tietz, Greg Berberich, and Catherine Seguin

Financial Accounting, 6th Canadian Edition


About the Authors xi

Preface xiii

Prologue xxiii

Chapter 1

The Financial Statements 1

SPOTLIGHT | Canadian Tire 1

Using Accounting Information 2

Explain Why Accounting Is the Language of Business 3

Who Uses Accounting Information? 3

Two Kinds of Accounting: Financial Accounting and

Management Accounting 4

Organizing a Business 5

Describe the Purpose of Each Financial Statement and

Explain the Elements of Each One 7

Generally Accepted Accounting Principles 7

The Income Statement Measures Operating

Performance 8

The Statement of Retained Earnings Reports

Changes in Retained Earnings 10

The Balance Sheet Measures Financial Position 11

The Statement of Cash Flows Measures Cash Receipts and Payments 15

The Notes to the Financial Statements Provide

Additional Information 17

Financial Reporting Responsibilities 17

Explain the Relationships Among the Financial Statements 18

Explain Accounting’s Conceptual Framework and Underlying Assumptions 20

Accounting’s Conceptual Framework 20

Fundamental Qualitative Characteristics 20

Enhancing Qualitative Characteristics 21

The Cost Constraint 22

Assumptions Underlying the Conceptual

Framework 22

Make Ethical Business Decisions 24

Fraud and its Impact 25

End-of-Chapter Summary Problem 30

Chapter 2

Recording Business Transactions 55

SPOTLIGHT | Apple Inc. 55

Describe Common Types of Accounts 56

Asset Accounts 56

Liability Accounts 57

Shareholders’ Equity Accounts 57

Illustrate the Impact of Business Transactions

on the Accounting Equation 58

Transactions and Financial Statements 64

Analyze Business Transactions Using T-Accounts 69

Chart of Accounts 69

The T-Account 70

Increases and Decreases in the Accounts: The Rules

of Debit and Credit 70

The Expanded Accounting Equation 71

Analyzing Transactions Using Only

T-Accounts 72

Record Business Transactions in the Journal and Post

Them to the Ledger 73

Posting from the Journal to the Ledger 74

The Flow of Accounting Data 74

Accounts After Posting to the Ledger 78

Prepare and Use a Trial Balance 79

End-of-Chapter Summary Problem 82

Chapter 3

Accrual Accounting and the

Financial Statements 109

SPOTLIGHT | Le Château 109

Explain How Accrual Accounting Differs from

Cash-Basis Accounting 110

Apply the Revenue and Expense Recognition

Principles 112

The Revenue Recognition Principle 112

The Expense Recognition Principle 113

Record Adjusting Journal Entries 114

Types of Adjusting Entries 115

Deferrals—Prepaid Expenses 115

Deferrals—Unearned Revenues 117

Depreciation of Property, Plant, and Equipment 119

Accruals—Accrued Expenses 120

Accruals—Accrued Revenues 122

Summary of the Adjusting Process 123

The Adjusted Trial Balance 126

Prepare the Financial Statements 127

Formats for the Financial Statements 129

Record Closing Journal Entries 136

Analyze and Evaluate a Company’s

Debt-Paying Ability 138

Net Working Capital 138

Current Ratio 138

Debt Ratio 139

How Do Transactions Affect the Ratios? 139

End-of-Chapter Summary Problem 144

Chapter 4

Cash and Receivables 177

SPOTLIGHT | CGI Group Inc. 177

Account for Cash 178

Prepare and Use a Bank Reconciliation 179

Signature Card 179

Deposit Slip 179

Cheque 179

Bank Statement 180

Bank Reconciliation 180

Preparing the Bank Reconciliation 181

Online Banking 184

Account for Receivables 187

Types of Receivables 187

How Do We Manage the Risk of Not

Collecting? 187

Estimate and Account for Uncollectible

Accounts Receivable 189

Allowance Method 190

Recovery of an Uncollectible Account 193

Summary of Transactions for Accounts

Receivable 193

Computing Cash Collections from Customers 193

Account for Notes Receivable 195

Accounting for Notes Receivable 196

Explain How to Improve Cash Flows from Sales and

Receivables 199

Reporting on the Statement of Cash Flows 200

Evaluate a Company’s Liquidity 201

Acid-Test (or Quick) Ratio 202

Days’ Sales in Receivables 203

End-of-Chapter Summary Problem 205

Chapter 5

Inventory and Cost of

Goods Sold 230

SPOTLIGHT | Leon’s Furniture 230

Account for Inventory Using the Perpetual and

Periodic Inventory Systems 232

Accounting for Inventory 232

Sales Price Versus Cost of Inventory 233

What Goes into Inventory Cost? 234

Accounting for Inventory in the Perpetual

System 234

Apply and Compare Three Inventory Costing

Methods 239

Inventory Costing Methods 239

The Effects of FIFO and Weighted-Average Cost

on Cost of Goods Sold, Gross Profit, and Ending

Inventory 243

Comparison of the Inventory Methods 244

Explain How Accounting Standards Apply

to Inventory 247

Comparability 247

Lower of Cost and Net Realizable Value 248

Compute and Evaluate Gross Profit and

Inventory Turnover 249

Gross Profit Percentage 249

Inventory Turnover 250

Analyze the Effects of Inventory Errors 252

Inventory Errors 252

Reporting on the Statement of

Cash Flows 253

End-of-Chapter Summary Problem 254

Chapter 6

Property, Plant, and Equipment, and

Intangible Assets 278

SPOTLIGHT | Canadian Tire 278

Measure and Account for the Cost of Property, Plant,

and Equipment 280

Land 280

Buildings, Machinery, and Equipment 281

Land Improvements and Leasehold

Improvements 281

Lump-Sum (or Basket) Purchases of Assets 281

Capital Expenditure Versus an Immediate

Expense 282

Measure and Record Depreciation on Property,

Plant, and Equipment 283

How to Measure Depreciation 284

Depreciation Methods 285

Comparing Depreciation Methods 289

Explain Additional Topics in Accounting for Long-Lived

Tangible Assets 293

Depreciation for Partial Years 293

Changing the Useful Life of a Depreciable

Asset 293

Fully Depreciated Assets 294

Derecognition of Property, Plant, and

Equipment 294

T-Accounts for Analyzing Property, Plant, and

Equipment Transactions 297

Special Issues in Accounting for Property, Plant,

and Equipment 297

Depreciation for Tax Purposes 297

Depreciating Significant Components 298

Impairment 298

Revaluation Model 299

Account for Intangible Assets 300

Accounting for Specific Intangibles 301

Accounting for the Impairment of an Intangible

Asset 303

Accounting for Research and Development

Costs 303

Analyze a Company’s Return on Assets 304

Analyze the Cash Flow Impact of Long-Lived

Asset Transactions 305

End-of-Chapter Summary Problem 308

Chapter 7

Investments and the Time Value

of Money 333


Share Investments: A Review 334

Share Prices 334

Reporting Investments on the Balance Sheet 335

Accounting for Investments in Shares 335

Analyze and Report Non-Strategic Investments 336

What Value of an Investment Is Most

Relevant? 337

Selling a Non-Strategic Investment 339

Analyze and Report Strategic Investments 339

Accounting for Investments Using the Equity

Method 339

Analyze and Report Controlling Interests in other

Corporations Using Consolidated Financial

Statements 342

Why Buy Another Company? 342

Consolidation Accounting 342

The Consolidated Balance Sheet and the Related

Work Sheet 342

Goodwill and Non-Controlling Interests 344

Income of a Consolidated Entity 344

Analyze and Report Long-Term Investments

in Bonds 344

Report Investing Activities on the Statement

of Cash Flows 348

Explain the Impact of the Time Value of Money

on Certain Types of Investments 349

Future Value 349

Present Value 350

Present-Value Tables 351

Present Value of an Annuity 352

Using Present Value to Compute the Fair

Value of Investments 353

Using Microsoft Excel to Calculate Present

Value 353

Present Value of an Investment in Bonds 355

End-of-Chapter Summary Problem 357

Chapter 8

Liabilities 375

SPOTLIGHT | WestJet Airlines 375

Explain and Account for Current Liabilities 376

Current Liabilities of Known Amount 376

Current Liabilities That Must Be Estimated 383

Contingent Liabilities 385

Are All Liabilities Reported on the Balance Sheet

or Disclosed in the Notes? 385

Summary of Current Liabilities 385

Explain the Types, Features, and Pricing of Bonds Payable 387

Bonds: An Introduction 387

Account for Bonds Payable 390

Issuing Bonds at Face Value 390

Issuing Bonds at a Discount 391

Calculate and Account for Interest Expense on Bonds Payable 392

Interest Expense on Bonds Issued at a Discount 394

Partial-Period Interest Amounts 395

Issuing Bonds at a Premium 396

The Straight-Line Amortization Method 399

Explain the Advantages and Disadvantages of Financing with Debt Versus Equity 400

Analyze and Evaluate a Company’s

Debt-Paying Ability 402

The Leverage Ratio 403

The Times-Interest-Earned Ratio 404

Describe Other Types of Long-Term Liabilities 405

Term Loans 405

Leases 405

Post-Employment Benefits 406

Report Liabilities on the Balance Sheet 406

End-of-Chapter Summary Problem 410

Chapter 9

Shareholders’ Equity 435

SPOTLIGHT | Canadian Tire 435

Explain the Main Features of a Corporation 436

Controlling and Managing a Corporation 438

Shareholders’ Rights 438

Shareholders’ Equity 439

Classes of Shares 439

Account for the Issuance of Shares 440

Explain Why a Company Repurchases Shares 443

Account for Retained Earnings, Dividends,and Stock Splits 444

Declaring and Paying Dividends 444

Cash Dividends 444

Stock Dividends 445

Dividends on Preferred Shares 446

Stock Splits 447

Summary of the Effects on Assets, Liabilities, and

Shareholders’ Equity 448

Distinguish Between Fair Value and Book Value per Share 448

Fair Value 449

Book Value 449

Evaluate a Company’s Return on Assets and Return on Equity 450

Return on Assets 450

Return on Equity 451

Report Equity Transactions and Events in the Financial Statements 453

Reporting Changes in Shareholders’ Equity 453

Reporting in the Balance Sheet and Notes 454

End-of-Chapter Summary Problem 457

Chapter 10

The Statement of Cash Flows 481

SPOTLIGHT | Canadian Tire 481

Explain the Uses of the Statement of Cash Flows 483

How Healthy Is a Company’s Cash Flow? Telltale Signs of Financial Difficulty 485

Explain and Classify Cash Flows from Operating, Investing, and Financing Activities 486

Classifying Interest and Dividends 487

Two Methods of Determining Cash Flows from Operating Activities 488

Prepare a Statement of Cash Flows Using the Indirect Method of Determining Cash Flows from Operating Activities


Cash Flows from Operating Activities 490

Cash Flows from Investing Activities 497

Cash Flows from Financing Activities 499

Non-Cash Investing and Financing Activities 501

Measuring Cash Adequacy: Free Cash Flow 502

End-of-Chapter Summary Problem 505

Chapter 11

Financial Statement Analysis 553

SPOTLIGHT | Empire Company Ltd. 553

How Is a Company Evaluated? 554

Perform Horizontal Analysis 556

Illustration: Empire Company Limited 556

Trend Percentages 559

Perform Vertical Analysis 560

Illustration: Empire Company Limited 560

Prepare Common-Size Financial Statements 563

Benchmarking 563

Benchmarking Against a Key Competitor 563

Analyze the Statement of Cash Flows 564

Use Ratios to Make Business Decisions 569

Remember to Start at the Beginning: Company and Industry Information 569

Measuring the Ability to Pay Current Liabilities 570

Measuring Turnover and the Cash Conversion Cycle 573

Measuring Leverage: Overall Ability to Pay Debts 576

Measuring Profitability 577

Analyzing Shares as an Investment 581

The Limitations of Ratio Analysis 584

Red Flags in Financial Statement Analysis 584

End-of-Chapter Summary Problem 590

Appendix A

Financial Statements from Canadian Tire Annual Report 2014 623

Appendix B

Summary of Differences Between International Financial Reporting

Standards and Accounting Standards for

Private Enterprises 673

Appendix C

Check Figures 679



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