Reading Financial Statements — What do I need to …

Reading Financial Statements-- What do I need to know?

COMMON QUESTIONS ANSWERED

John Hughes, CPA, CA Alex Fisher, CPA, CA

STARTER'S GUIDE

FINANCIAL LITERACY

Reading Financial Statements-- What do I need to know?

COMMON QUESTIONS ANSWERED

John Hughes, cpa, ca Alex Fisher, cpa, ca

STARTER'S GUIDE

DISCLAIMER

This publication was prepared by the Chartered Professional Accountants of Canada (CPA Canada) as non-authoritative guidance. CPA Canada and the authors do not accept any responsibility or liability that might occur directly or indirectly as a consequence of the use, application or reliance on this material.

Copyright ? 2014 Chartered Professional Accountants of Canada All rights reserved. This publication is protected by copyright. Written permission is required to reproduce, store in a retrieval system or transmit in any form or by any means (electronic, mechanical, photocopying, recording, or otherwise). For information regarding permission, please contact permissions@cpacanada.ca Cataloguing information available from the National Library of Canada. This publication may be downloaded at cpacanada.ca

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Table of Contents

Notice to Readers

1

Preface

3

Understanding Concepts and Practices

11

Q. Are financial statements precise?

13

Q. What does "consolidated" mean in the context

of financial statements?

14

Q. Why are assets and liabilities recognized in the financial

statements measured in different ways?

15

Q. What is the difference between costs recognized

as assets and those recognized as expenses?

17

Q. What is the difference between net income or loss

and "comprehensive" income or loss?

18

Q. What is the difference between the income statement

and the statement of cash flows?

19

Q. What are the elements and complexities of equity?

21

Q. What is the importance of the notes to the financial statements? 22

Q. What is the significance of disclosures about "going concern"?

24

Understanding Reports, Including Structure and Organization

27

Q. What is the importance of the auditor's report?

29

Q. How do interim reports differ from annual reports?

31

Q. Why do similar companies use such different labels, captions

and formats when they prepare their statements?

32

Q. What is the importance of all the subtotals in the income

statement--"gross margin," "loss before other items," etc.?

34

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Reading Financial Statements--What do I need to know?

Q. What is the importance of the distinction between current

and non-current (or long-term) assets and liabilities?

35

Q. When is "ratio analysis" helpful in understanding

the financial statements?

37

Q. What is the Management's Discussion and Analysis (MD&A)?

38

Understanding Specifics

41

Q. What are the complexities of recognizing revenue?

43

Q. What are goodwill and intangible assets?

44

Q. How does one assess the success of an acquisition?

46

Q. What are the ways of accounting for investments in

equity securities?

47

Q. What are depreciation and amortization?

49

Q. What are impairment losses?

50

Q. What is "stock-based compensation" (including stock options

and other kinds of share-based units), and how does

the accounting work?

51

Q. How does foreign exchange accounting work?

53

Q. What do the tax numbers in financial statements mean?

54

Q. What are earnings per share (EPS) and diluted earnings per share? 56

Q. What information do financial statements provide about

dividends and similar distributions?

57

Q. How do financial statements treat mineral properties?

59

Q. What is segment reporting?

60

Q. How do financial statements treat events occurring after

the end of the reporting period?

61

Glossary

63

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Notice to Readers

Chartered Professional Accountants of Canada (CPA Canada) is the largest professional accounting association in Canada dedicated to fostering public confidence in the CPA profession by acting in the public interest and helping our members excel. Chartered Professional Accountants (CPAs) are valued for their integrity and expertise. The Research, Guidance and Support Group of the Chartered Professional Accountants of Canada (CPA Canada) commissioned this publication as part of its continuing research program. The views and conclusions expressed in this non-authoritative publication are those of the authors. They have not been adopted, endorsed, approved or otherwise acted upon by any board or committee of CPA Canada, any Provincial Institute/Ordre, the Accounting Standards Board (AcSB) or the Canadian Securities Administrators. This publication contains general information only and is not intended to be comprehensive or to provide specific accounting, business, financial, investment, legal, tax or other professional advice or services. This publication is not a substitute for professional advice or services, and it should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Before making any decision or taking any action that may affect you or your business, you should consult a qualified professional advisor. Although every effort has been made to ensure the accuracy of the information contained in this publication, it cannot be guaranteed, and neither CPA Canada nor the authors accept any responsibility or liability that might occur directly or indirectly as a consequence of the use, application or reliance on this material.

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