Sources and References

Primary textbook — Introductory Accounting for Private and Public Companies (Top Hat interactive e-text, ISBN 978-1-77412-900-5). This text covers AFM 191 and continues into AFM 182.

Supplementary — Robert Libby, Patricia Libby, and Frank Hodge, Financial Accounting, 10th Edition (McGraw-Hill, 2020); Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield, Intermediate Accounting, IFRS Edition, 4th Edition (Wiley, 2020). Where IFRS standards are cited, references follow IAS/IFRS as issued by the International Accounting Standards Board (IASB).

Chapter 1: The Language and Purpose of Accounting

What Is Accounting?

Accounting is often described as the language of business. Its core function is to identify, measure, record, and communicate financial information about an economic entity to a wide range of users who rely on that information to make decisions. Unlike everyday language, accounting has a precise vocabulary, a set of codified rules (standards), and a logical internal structure — the double-entry system — that ensures internal consistency.

The distinction is important: financial accounting is backward-looking and standardized (governed by IFRS or ASPE); managerial accounting is forward-looking and customized to the needs of each organization.

Users of Financial Information and Their Needs

Under IFRS, the primary users of general-purpose financial statements are existing and potential investors, lenders, and other creditors. The IASB explicitly notes that it cannot satisfy all possible user needs simultaneously; the focus is on capital providers.

Forms of Business Organization

In Canada, public corporations (those whose shares trade on a stock exchange) must follow IFRS as adopted by the Canadian Accounting Standards Board (AcSB). Private enterprises may use ASPE. AFM 191 takes an IFRS orientation because the AFM program trains future public-company professionals.

The Accounting Equation

At the heart of all financial accounting is one fundamental identity:

This equation must hold at every instant in time, after every transaction, and after every adjusting entry. It is not a simplification — it is a mathematical identity that follows from the definition of equity as a residual claim on assets after all liabilities are settled.

Expanding the equity section:

And since retained earnings accumulate net income less dividends:

Chapter 2: The Conceptual Framework Under IFRS

The IASB and Its Objectives

The International Accounting Standards Board (IASB) is an independent, private-sector body that develops and maintains IFRS. The IASB’s Conceptual Framework for Financial Reporting (2018 revision) provides the theoretical foundation for all individual standards. It is not itself a standard — individual IAS and IFRS standards take precedence — but it guides the IASB in developing new standards and helps preparers resolve issues not addressed by a specific standard.

Objective of general-purpose financial reporting: To provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions relating to providing resources to the entity.

Qualitative Characteristics of Useful Financial Information

The Conceptual Framework divides qualitative characteristics into fundamental and enhancing categories.

Fundamental Qualitative Characteristics

Relevance: Financial information is relevant if it is capable of making a difference in the decisions made by users. Relevance has two sub-qualities:

• Predictive value: Information that can be used as an input to processes employed by users to predict future outcomes. For example, a trend in revenue growth has predictive value for estimating next year’s revenue.
• Confirmatory value: Information that provides feedback about prior evaluations — it confirms or changes prior assessments. The same information can have both predictive and confirmatory value simultaneously.

Faithful representation: To be useful, information must faithfully represent the phenomena it purports to represent. Faithful representation requires three characteristics:

Enhancing Qualitative Characteristics

These characteristics distinguish more useful information from less useful information that is already relevant and faithfully represented.

Elements of Financial Statements

The Conceptual Framework defines five elements:

Recognition and Measurement

Recognition is the process of including an item in the financial statements. Under the 2018 Conceptual Framework, an item is recognized only when it:

1. Meets the definition of an element, and
2. Recognition provides users with useful information — meaning it is relevant and provides a faithful representation, and the benefits outweigh the costs.

Measurement bases determine the monetary amount at which elements are recognized and carried:

Chapter 3: Double-Entry Bookkeeping — Debits, Credits, and T-Accounts

The Logic of Double-Entry

Every transaction is recorded in at least two accounts — one account is debited and another is credited. The total dollar amount of all debits must equal the total dollar amount of all credits in every transaction. This is the essence of the double-entry system attributed to Luca Pacioli (1494).

The normal balance of an account is the side (debit or credit) that increases it:

T-Account Structure

A T-account is a simplified graphical representation of a ledger account:

         Account Name
   ┌─────────────────────┐
   │  Debit  │  Credit   │
   │  (Left) │  (Right)  │
   └─────────────────────┘

The running balance is the net of all debits and credits posted to the account.

A Complete Worked Example: Transactions to Trial Balance

Scenario: NorthStar Consulting Inc. is incorporated on January 1, Year 1. The following transactions occur during January.

Step 1 — Journal Entries

Jan 1   Cash                        50,000
            Common Shares                       50,000
        (Issuance of shares for cash)

Jan 3   Cash                        20,000
            Bank Loan Payable                   20,000
        (Borrowed from bank)

Jan 5   Equipment                   18,000
            Cash                                18,000
        (Purchased office equipment)

Jan 8   Office Supplies              1,200
            Accounts Payable                     1,200
        (Supplies purchased on account)

Jan 12  Cash                         8,000
            Service Revenue                      8,000
        (Services rendered; cash collected)

Jan 18  Accounts Receivable          5,500
            Service Revenue                      5,500
        (Services rendered on account)

Jan 22  Salaries Expense             3,000
            Cash                                 3,000
        (Paid employee salaries)

Jan 25  Cash                         3,000
            Accounts Receivable                  3,000
        (Collected from Jan 18 client)

Jan 28  Accounts Payable               800
            Cash                                   800
        (Partial payment to supplier)

Jan 31  Rent Expense                   500
            Cash                                   500
        (Paid monthly rent)

Step 2 — Post to T-Accounts

              CASH
  Dr              |    Cr
  50,000 (1)     |  18,000 (5)
  20,000 (2)     |   3,000 (7)
   8,000 (5)     |     800 (9)
   3,000 (8)     |     500 (10)
─────────────────|─────────────
  Balance: 58,700

        ACCOUNTS RECEIVABLE
  Dr              |    Cr
   5,500 (6)     |   3,000 (8)
─────────────────|─────────────
  Balance: 2,500

        OFFICE SUPPLIES
  Dr              |    Cr
   1,200 (4)     |
─────────────────|─────────────
  Balance: 1,200

          EQUIPMENT
  Dr              |    Cr
  18,000 (5)     |
─────────────────|─────────────
  Balance: 18,000

       ACCOUNTS PAYABLE
  Dr              |    Cr
     800 (9)     |   1,200 (4)
─────────────────|─────────────
  Balance: 400

      BANK LOAN PAYABLE
  Dr              |    Cr
                 |  20,000 (2)
─────────────────|─────────────
  Balance: 20,000

        COMMON SHARES
  Dr              |    Cr
                 |  50,000 (1)
─────────────────|─────────────
  Balance: 50,000

       SERVICE REVENUE
  Dr              |    Cr
                 |   8,000 (5)
                 |   5,500 (6)
─────────────────|─────────────
  Balance: 13,500

      SALARIES EXPENSE
  Dr              |    Cr
   3,000 (7)     |
─────────────────|─────────────
  Balance: 3,000

        RENT EXPENSE
  Dr              |    Cr
     500 (10)    |
─────────────────|─────────────
  Balance: 500

Step 3 — Unadjusted Trial Balance (January 31, Year 1)

The trial balance confirms that total debits equal total credits — a necessary (though not sufficient) check for recording accuracy.

Chapter 4: The Full Accounting Cycle

Overview of the Accounting Cycle

The accounting cycle is the sequential set of steps performed each accounting period to record transactions and prepare financial statements. The cycle has eight steps:

1. Identify and analyze transactions
2. Record transactions in the general journal
3. Post journal entries to the general ledger
4. Prepare an unadjusted trial balance
5. Record and post adjusting entries
6. Prepare an adjusted trial balance
7. Prepare financial statements
8. Record and post closing entries; prepare a post-closing trial balance

Adjusting Entries

At the end of each period, certain revenues and expenses have been earned or incurred but have not yet been recorded in the accounts. Adjusting entries bring the accounts up to date so that financial statements correctly reflect economic reality under the accrual basis of accounting.

There are four categories of adjusting entries:

Worked Example — Adjusting Entries for NorthStar Consulting

Continuing from the January transactions, the following additional information is known at January 31:

• (A) Office supplies on hand at Jan 31: $900 (meaning $300 was consumed)
• (B) Equipment has a 5-year useful life, no residual value; straight-line depreciation applies
• (C) The bank loan accrues interest at 5% per annum (one month outstanding)
• (D) The company received $2,000 on Jan 20 for services to be delivered in February (not yet recorded above — assume it was initially credited to Deferred Revenue)

(A) Supplies Expense                 300
        Office Supplies                       300
    (Supplies used: $1,200 – $900)

(B) Depreciation Expense             300
        Accumulated Depreciation–Equip        300
    ($18,000 / 5 yrs / 12 months = $300/month)

(C) Interest Expense                  83
        Interest Payable                       83
    ($20,000 × 5% × 1/12 = $83.33, rounded)

(D) No revenue recognized — Deferred Revenue remains as a liability
    (Services not yet delivered)

Adjusted Trial Balance (January 31, Year 1)

Closing Entries

At the end of each period, all temporary accounts (revenues, expenses, and dividends) must be reset to zero so they accumulate information for only one period at a time. Closing entries transfer the balances of temporary accounts to Retained Earnings, which is a permanent account.

The closing sequence is:

1. Close all revenue accounts to Income Summary (Dr Revenue; Cr Income Summary)
2. Close all expense accounts to Income Summary (Dr Income Summary; Cr Expenses)
3. Close Income Summary to Retained Earnings (Dr/Cr Income Summary; Cr/Dr Retained Earnings)
4. Close Dividends to Retained Earnings (Dr Retained Earnings; Cr Dividends)

Closing entries for NorthStar (January 31, Year 1):

Step 1: Service Revenue            13,500
            Income Summary                     13,500

Step 2: Income Summary              4,183
            Salaries Expense                    3,000
            Rent Expense                          500
            Supplies Expense                      300
            Depreciation Expense                  300
            Interest Expense                       83

Step 3: Income Summary              9,317
            Retained Earnings                    9,317
        (Net income = $13,500 – $4,183 = $9,317)

Step 4: No dividends declared in January — no entry required

Post-Closing Trial Balance (January 31, Year 1):

Only balance sheet accounts (permanent accounts) appear in the post-closing trial balance. The zero balance of all revenue and expense accounts confirms the closing entries were made correctly.

Chapter 5: Financial Statements Under IFRS

Overview of the Complete Set of Financial Statements

Under IAS 1 Presentation of Financial Statements, a complete set of IFRS financial statements comprises:

1. Statement of Financial Position (SOFP) — snapshot of assets, liabilities, and equity at a point in time
2. Statement of Profit or Loss and Other Comprehensive Income (P&L/OCI) — performance over a period
3. Statement of Changes in Equity (SOCE) — reconciliation of equity components over a period
4. Statement of Cash Flows (SCF) — cash inflows and outflows over a period, classified by activity
5. Notes to the Financial Statements — accounting policies, disaggregations, and other disclosures

Statement of Financial Position (SOFP)

The SOFP presents assets and liabilities classified as either current or non-current (IAS 1.60), unless a liquidity-based presentation provides more reliable and relevant information (common for financial institutions).

Illustrative SOFP — NorthStar Consulting Inc. (January 31, Year 1)

NorthStar Consulting Inc.
Statement of Financial Position
As at January 31, Year 1

ASSETS
  Current Assets
    Cash                                     $58,700
    Accounts Receivable                        2,500
    Office Supplies                              900
  Total Current Assets                       62,100

  Non-Current Assets
    Equipment                    18,000
    Accumulated Depreciation       (300)
    Net Book Value of Equipment              17,700
  Total Non-Current Assets                   17,700

TOTAL ASSETS                                $79,800

LIABILITIES AND EQUITY
  Current Liabilities
    Accounts Payable                         $  400
    Interest Payable                              83
    Deferred Revenue                           2,000
  Total Current Liabilities                   2,483

  Non-Current Liabilities
    Bank Loan Payable                        20,000
  Total Non-Current Liabilities              20,000

TOTAL LIABILITIES                            22,483

  Shareholders' Equity
    Common Shares                            50,000
    Retained Earnings                         9,317
  Total Shareholders' Equity                 59,317

TOTAL LIABILITIES AND EQUITY               $79,800

Statement of Profit or Loss

IAS 1 allows two formats for classifying expenses in the P&L:

Illustrative P&L — NorthStar Consulting Inc. (January, Year 1)

NorthStar Consulting Inc.
Statement of Profit or Loss
For the Month Ended January 31, Year 1

Revenue
  Service Revenue                           $13,500

Expenses
  Salaries Expense                  3,000
  Rent Expense                        500
  Supplies Expense                    300
  Depreciation Expense                300
  Interest Expense                     83
Total Expenses                              (4,183)

Net Income                                  $9,317

Statement of Changes in Equity (SOCE)

The SOCE reconciles the opening and closing balances of each component of equity: share capital, retained earnings, and other comprehensive income (OCI).

NorthStar Consulting Inc.
Statement of Changes in Equity
For the Month Ended January 31, Year 1

                    Share Capital    Retained Earnings    Total Equity
Balance, Jan 1             $  —              $  —              $  —
  Share issuance         50,000                            50,000
  Net income                               9,317            9,317
  Dividends                                   —                —
Balance, Jan 31          $50,000            $9,317          $59,317

Statement of Cash Flows — Overview

The SCF explains the change in cash and cash equivalents during the period, classified into three sections:

Under IFRS, interest paid may be classified as operating or financing; interest received may be operating or investing. The entity must apply a consistent policy and disclose its choice.

Chapter 6: Revenue Recognition Under IFRS 15

The Five-Step Model

IFRS 15 Revenue from Contracts with Customers (effective January 1, 2018) replaced IAS 18 and IAS 11 with a single, comprehensive framework. Revenue is recognized through five sequential steps:

Step 1 — Identifying the Contract

A single contract may contain multiple performance obligations if the customer can benefit from each good or service either on its own or together with other resources readily available to the customer (capable of being distinct), and the promise to transfer each good or service is separately identifiable from other promises in the contract (distinct within the contract).

Step 2 — Identifying Performance Obligations

Step 3 — Determining the Transaction Price

The transaction price is the amount of consideration an entity expects to be entitled to in exchange for transferring promised goods or services. It excludes amounts collected on behalf of third parties (e.g., sales taxes).

Variable consideration — If the transaction price includes variable amounts (discounts, rebates, performance bonuses, penalties), the entity estimates the amount using the method that better predicts the consideration:

• Expected value: Probability-weighted sum of possible outcomes — best when many possible outcomes exist
• Most likely amount: Single most likely outcome — best when only two outcomes are possible

Variable consideration is included only to the extent that it is highly probable that a significant reversal of cumulative revenue will not occur when the uncertainty is resolved (the constraint on variable consideration).

Step 4 — Allocating the Transaction Price

When a contract has multiple performance obligations, the transaction price is allocated based on relative stand-alone selling prices (SSPs). The best evidence of SSP is the price charged when the entity sells the good or service separately. If not directly observable, the entity estimates SSP using approaches such as adjusted market assessment, expected cost plus a margin, or residual approach.

Step 5 — Recognizing Revenue

Revenue is recognized when (or as) a performance obligation is satisfied. A performance obligation is satisfied when control of the promised asset is transferred to the customer.

Contract Modifications

A contract modification is a change in the scope or price (or both) of a contract that is approved by the parties. How the modification is accounted for depends on whether the additional goods or services are distinct:

Principal vs. Agent

When another party is involved in delivering goods or services to a customer, the entity must determine whether it is the principal (recognizes gross revenue) or an agent (recognizes net revenue — commission only).

Indicators of a principal arrangement include: the entity bears inventory risk before the customer orders, the entity has discretion in pricing, and the entity bears the credit risk for the customer’s payment.

Chapter 7: Accounts Receivable and the Allowance Method

Recognizing Accounts Receivable

When a company provides goods or services on credit, it records an asset — accounts receivable — representing the customer’s obligation to pay. At the same time, it recognizes revenue (if the performance obligation is satisfied).

Accounts Receivable          X,XXX
    Service/Sales Revenue              X,XXX

The Problem of Uncollectible Accounts

Not all customers pay. The matching principle requires that bad debt expense be recognized in the same period as the related revenue, not when the account is actually deemed uncollectible. Therefore, IFRS requires the allowance method (also required under IAS 39/IFRS 9 expected credit loss model).

The net realizable value (NRV) of receivables is:

Method 1: Percentage-of-Sales (Income Statement Approach)

Under this method, bad debt expense is estimated as a percentage of credit sales for the period, based on historical experience. This approach emphasizes the matching of expense to revenue.

Bad Debt Expense                12,000
    Allowance for Doubtful Accounts     12,000

Method 2: Aging of Accounts Receivable (Balance Sheet Approach)

Under this method, outstanding receivables are stratified by age (how long they have been outstanding). Each age category is assigned a different uncollectibility rate — older receivables are statistically more likely to default.

Bad Debt Expense               14,100
    Allowance for Doubtful Accounts     14,100
($17,300 required – $3,200 existing = $14,100 adjustment)

Write-Offs and Recoveries

Writing off a specific account: When a specific account is determined to be uncollectible, it is removed from both gross receivables and the allowance. This entry does not affect net income or NRV of receivables.

Allowance for Doubtful Accounts     1,500
    Accounts Receivable – [Customer Name]   1,500

Recovering a previously written-off account: If a customer later pays an account that was written off, the write-off is reversed (to restore the receivable), and then the cash collection is recorded.

Step 1: Accounts Receivable – [Customer Name]   1,500
            Allowance for Doubtful Accounts               1,500
        (Reversal of write-off)

Step 2: Cash                                    1,500
            Accounts Receivable – [Customer Name]         1,500
        (Collection of cash)

Chapter 8: Inventory Under IAS 2

What Is Inventory?

For a merchandising company, inventory consists of goods purchased for resale. For a manufacturing company, there are three categories: raw materials, WIP, and finished goods.

Cost of Inventory

Under IAS 2, inventory is measured at cost, which includes:

• Purchase price (net of trade discounts and rebates)
• Import duties and non-refundable taxes
• Transport and handling costs attributable to acquisition
• Other costs directly attributable to acquiring the inventory

Costs excluded from inventory (expensed as incurred):

• Abnormal waste (spoilage, labour inefficiency)
• Storage costs (other than costs necessarily incurred in the production process)
• Administrative overheads unrelated to production
• Selling costs

Cost Flow Assumptions

IAS 2 prohibits LIFO. Permitted methods are:

1. FIFO (First-In, First-Out): Assumes the oldest units are sold first. Ending inventory consists of the most recently purchased units.
2. Weighted Average Cost: A new average cost is computed after each purchase (perpetual) or for the entire period (periodic).

Worked Example — FIFO vs. Weighted Average

Scenario: Summit Hardware Ltd. tracks inventory of a specific wrench model.

Total units available = 100 + 200 + 150 + 120 = 570 units Units sold = 280 units Units in ending inventory = 570 – 280 = 290 units

FIFO (periodic):

Cost of goods sold (280 units sold):

• First 100 units from Jan 1 layer @ $10.00 = $1,000
• Next 180 units from Jan 8 layer @ $11.00 = $1,980
• COGS = $2,980

Ending inventory (290 units):

• 20 units from Jan 8 layer @ $11.00 = $220
• 150 units from Jan 15 layer @ $12.00 = $1,800
• 120 units from Jan 28 layer @ $13.00 = $1,560
• Ending inventory = $3,580

Check: $2,980 + $3,580 = $6,560 = Total cost available ($1,000 + $2,200 + $1,800 + $1,560) ✓

Weighted Average Cost (periodic):

Weighted average cost per unit = $6,560 / 570 units = $11.51 per unit (rounded)

COGS = 280 × $11.51 = $3,223 Ending inventory = 290 × $11.51 = $3,338

Check: $3,223 + $3,338 = $6,561 ≈ $6,560 (rounding) ✓

Lower of Cost and Net Realizable Value (LCNRV)

IAS 2 requires that inventory be measured at the lower of cost and net realizable value. This is an application of prudence.

If NRV falls below cost, the inventory is written down to NRV. The write-down is recognized as an expense (increase in COGS) in the period it occurs.

Cost of Goods Sold (or Inventory Write-Down Expense)    450
    Inventory                                               450
(Write-down of Wrench B to NRV)

Inventory Errors and Their Impact

Inventory errors can affect two consecutive periods because ending inventory of one period is the beginning inventory of the next.

Chapter 9: Property, Plant and Equipment (PP&E) — Introduction

Recognition and Initial Measurement

Under IAS 16 Property, Plant and Equipment, PP&E items are recognized as assets when it is probable that future economic benefits associated with the item will flow to the entity, and the cost of the item can be measured reliably. PP&E is initially measured at cost.

Examples of directly attributable costs: site preparation, delivery and handling, installation and assembly, professional fees (architects, engineers), testing costs (net of proceeds from trial production).

Examples of costs that are NOT capitalized: administration and general overhead, staff training, initial operating losses, costs of opening a new facility.

Depreciation

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.

Partial-year depreciation: When an asset is acquired partway through a fiscal year, depreciation is recognized only for the portion of the year the asset was held (unless the entity uses a convention such as half-year convention).

Journal entry for depreciation:

Depreciation Expense          16,000
    Accumulated Depreciation–Truck     16,000

The net book value (carrying amount) equals Cost minus Accumulated Depreciation:

Component Depreciation

IAS 16 requires that each significant component of a PP&E item be depreciated separately if it has a useful life that differs from the rest of the asset.

Subsequent Expenditures

After initial recognition, costs related to PP&E are evaluated:

Chapter 10: Current Liabilities

What Is a Current Liability?

A liability is classified as current under IAS 1 when:

• The entity expects to settle it within 12 months of the reporting date
• It is held primarily for the purpose of trading
• It is due to be settled within 12 months of the reporting date
• The entity does not have an unconditional right to defer settlement for at least 12 months

Accounts Payable

Accounts payable arise when goods or services are purchased on credit from suppliers. They are recognized at the transaction price (invoiced amount).

Inventory (or Expense)          5,000
    Accounts Payable                    5,000
(Purchase on account)

Accounts Payable                5,000
    Cash                                5,000
(Payment to supplier)

Accrued Liabilities

Accrued liabilities are expenses that have been incurred but not yet paid at the reporting date. Common examples: accrued wages, accrued interest, accrued utilities.

Wages Expense                   9,000
    Accrued Wages Payable               9,000

Accrued Wages Payable           9,000
Wages Expense                   6,000   (remaining 2 days)
    Cash                               15,000

Deferred Revenue (Unearned Revenue)

Deferred revenue arises when cash is received from a customer before the related performance obligation is satisfied. It is a liability because the entity still owes the customer goods or services.

Cash                              360
    Deferred Revenue                    360

Deferred Revenue                   60
    Membership Revenue                   60
($360 × 2/12 = $60)

Current Portion of Long-Term Debt

The portion of a long-term debt that is due within the next 12 months must be reclassified from non-current to current on the SOFP.

Warranty Provisions

Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, a warranty provision is recognized when:

1. The entity has a present obligation (legal or constructive) as a result of a past event
2. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation
3. A reliable estimate can be made of the amount of the obligation

Warranty Expense                18,000
    Warranty Provision                  18,000

Warranty Provision              14,500
    Cash                               14,500

Chapter 11: Shareholders’ Equity

Components of Shareholders’ Equity

For a corporation, shareholders’ equity comprises:

Common Shares

Issuing common shares for cash:

Cash                           100,000
    Common Shares                      100,000
(Issued 4,000 common shares at $25 per share)

Issuing common shares for non-cash consideration (e.g., land):

Under IFRS, non-cash consideration is measured at fair value of the consideration received. If fair value cannot be reliably measured, the fair value of the equity instruments given up is used.

Land                            80,000
    Common Shares                       80,000
(Issued shares in exchange for land; fair value of land = $80,000)

Preferred Shares

Retained Earnings

Retained earnings is the cumulative amount of net income earned by the corporation since inception, less all dividends declared. It represents the internally generated equity — profits reinvested in the business.

A deficit (negative retained earnings) occurs when cumulative losses and/or dividends exceed cumulative earnings.

Dividends

Dividends are distributions of the corporation’s assets (usually cash) to its shareholders. They are not an expense under IFRS — they are distributions of equity and are recognized in the SOCE.

Cash dividends involve two dates:

Retained Earnings              100,000
    Dividends Payable                  100,000

Dividends Payable              100,000
    Cash                               100,000

Preferred Dividends in Arrears

Chapter 12: Putting It All Together — A Comprehensive Illustration

Maple Grove Services Inc. — Complete Accounting Cycle

Background: Maple Grove Services Inc. is incorporated on January 1, Year 2, with 10,000 authorized common shares. The following transactions occur during the quarter ended March 31, Year 2.

Inventory cost flow: FIFO; perpetual system.

Step 1 — Journal Entries

Jan 1   Cash                       100,000
            Common Shares                      100,000
        (5,000 shares × $20)

Jan 2   Cash                        30,000
            Bank Loan Payable                   30,000

Jan 5   Equipment                   12,000
            Cash                                12,000

Jan 10  Inventory                   20,000
            Accounts Payable                    20,000
        (500 units × $40)

Jan 20  Accounts Receivable         22,500
            Sales Revenue                       22,500
        (300 units × $75)

Jan 20  Cost of Goods Sold          12,000
            Inventory                           12,000
        (300 units × $40 FIFO cost)

Feb 1   Cash                         6,000
            Deferred Revenue                     6,000
        (Advance for 3 months advisory)

Feb 15  Cash                        15,000
            Accounts Receivable                 15,000

Feb 20  Inventory                    8,400
            Accounts Payable                     8,400
        (200 units × $42)

Mar 1   Accounts Payable            20,000
            Cash                                20,000

Mar 15  Accounts Receivable         26,250
            Sales Revenue                       26,250
        (350 units × $75)

Mar 15  Cost of Goods Sold          14,100
            Inventory                           14,100
        (FIFO: 200 units from Jan layer × $40 = $8,000
               150 units from Feb layer × $42 = $6,300
               Total = $14,100 — see working below)

Mar 31  Salaries Expense            18,000
            Cash                                18,000

Mar 31  Retained Earnings            2,500
            Dividends Payable                    2,500
        (5,000 × $0.50)

FIFO COGS Working — March 15 Sale (350 units):

After January 20 sale of 300 units, remaining inventory from Jan 10 purchase = 500 – 300 = 200 units @ $40. February 20 purchase added 200 units @ $42.

Available at Mar 15: 200 @ $40 + 200 @ $42 = 400 units

March 15 sale of 350 units (FIFO):

• 200 units @ $40 = $8,000
• 150 units @ $42 = $6,300
• COGS = $14,100
• Ending inventory: 50 units @ $42 = $2,100

Step 2 — Adjusting Entries (March 31)

• (A) Depreciation on equipment: ($12,000 – $2,000) / 5 years × 3/12 = $500
• (B) Interest accrual: $30,000 × 6% × 3/12 = $450
• (C) Advisory revenue earned: $6,000 × 2/3 months earned (Feb and Mar) = $4,000

(A) Depreciation Expense              500
        Accumulated Depreciation–Equip       500

(B) Interest Expense                  450
        Interest Payable                      450

(C) Deferred Revenue                4,000
        Advisory Revenue                    4,000

Step 3 — Adjusted Trial Balance Excerpt (March 31, Year 2)

Step 4 — Income Statement (Quarter Ended March 31, Year 2)

Maple Grove Services Inc.
Statement of Profit or Loss
For the Quarter Ended March 31, Year 2

Revenue
  Sales Revenue                       $48,750
  Advisory Revenue                      4,000
Total Revenue                          52,750

Expenses
  Cost of Goods Sold        26,100
  Salaries Expense          18,000
  Depreciation Expense         500
  Interest Expense             450
Total Expenses                        (45,050)

Net Income                             $7,700

Step 5 — Statement of Financial Position (March 31, Year 2)

Maple Grove Services Inc.
Statement of Financial Position
As at March 31, Year 2

ASSETS
  Current Assets
    Cash                               $63,000
    Accounts Receivable                 33,750
    Inventory                            2,100
  Total Current Assets                  98,850

  Non-Current Assets
    Equipment                 12,000
    Accum. Depreciation          (500)
    Net Book Value                      11,500
  Total Non-Current Assets              11,500

TOTAL ASSETS                          $110,350

LIABILITIES AND EQUITY
  Current Liabilities
    Accounts Payable                    $8,400
    Interest Payable                       450
    Dividends Payable                    2,500
    Deferred Revenue                     2,000
  Total Current Liabilities             13,350

  Non-Current Liabilities
    Bank Loan Payable                   30,000
  Total Non-Current Liabilities         30,000

TOTAL LIABILITIES                       43,350

  Shareholders' Equity
    Common Shares                      100,000
    Retained Earnings                    5,200
      (Net income $7,700 – Dividends declared $2,500)
  Total Shareholders' Equity           105,200

TOTAL LIABILITIES AND EQUITY         $110,350

Chapter 13: Key Ratios and Analytical Concepts

Using Financial Statements for Decision Making

Financial statements are the primary output of the accounting cycle, but their true value lies in the analysis and interpretation they enable. Users apply ratios to assess performance, liquidity, and solvency.

Liquidity Ratios

Maple Grove Services Inc. — March 31, Year 2:

Current ratio = $98,850 / $13,350 = 7.40 (very liquid)

Quick ratio = ($63,000 + $33,750) / $13,350 = 7.25 (inventory is immaterial here)

Profitability Ratios

Maple Grove Q1 Year 2:

Gross profit = $48,750 – $26,100 = $22,650 (on product sales only) Gross profit margin = $22,650 / $48,750 = 46.5%

Net profit margin = $7,700 / $52,750 = 14.6%

Receivables Management

Inventory Management

Chapter 14: Professional Judgment and the Accounting Profession

The Role of Judgment in Accounting

Accounting is not a mechanical exercise. Many of the numbers in financial statements depend on estimates and judgments:

• The useful life and residual value of PP&E items
• The percentage of receivables that will prove uncollectible
• Whether a warranty provision is required and in what amount
• The stand-alone selling prices used to allocate transaction prices under IFRS 15
• Whether variable consideration should be constrained

The Accounting Profession in Canada

In Canada, the accounting profession is represented by CPA Canada (Chartered Professional Accountants of Canada), which emerged from the 2013 unification of CA, CGA, and CMA designations. The CPA designation is widely recognized as the premier accounting credential.

AFM students at the University of Waterloo are working toward CPA-accredited credentials. The foundation established in AFM 191 — the accounting equation, double-entry bookkeeping, the accounting cycle, and financial statement preparation — underpins all subsequent accounting, audit, tax, and finance courses in the AFM program.

Ethics in Financial Reporting

Financial statements are prepared by management but relied upon by external parties who cannot independently verify the underlying transactions. This information asymmetry creates the potential for misrepresentation. The accounting profession’s ethical framework addresses this through:

Summary: Core Formulas and Relationships

The Accounting Equation

Retained Earnings Roll-Forward

Net Income

Straight-Line Depreciation

Net Book Value

NRV of Receivables

NRV of Inventory

Weighted Average Inventory Cost

IFRS 15 Transaction Price Allocation

Liquidity Ratios

Profitability

Receivables and Inventory Efficiency

Quick-Reference: Normal Balances and the Extended Equation

Extended Accounting Equation

Account Classification Summary

These notes cover the core topics of AFM 191 as taught in the Winter 2026 term. For complete worked problems, additional practice, and exam preparation, consult Libby, Libby & Hodge (Financial Accounting, 10th ed.) and Kieso, Weygandt & Warfield (Intermediate Accounting, IFRS Edition, 4th ed.).