Preface

Background

Financial Accounting: A User Perspective strives to teach students about accounting information and how it affects decision-making, by complementing the fundamental procedural aspects of accounting with discussions about who uses accounting information and how they make decisions from it. This unique balance has been widely appreciated through previous editions of the text, and is just as relevant today as when it was first published in Canada in 1997. What has changed are the means available to instructors and students, to enhance the learning experience. With successive editions we have introduced a wealth of online resources and made the text the centre of an interactive learning environment with a unique set of technology tools. With the sixth edition we continue to provide extensive online support materials for both students and instructors through WileyPLUS.

The Evolution of This Textbook

While Financial Accounting: A User Perspective has been used successfully for many years, improvements and refinements continue to take place. Throughout the book, changes have been made to make the text even more “reader friendly” than the fifth edition. However, the main change to this edition is the integration of the new accounting standards.

• The text is written using the International Financial Reporting Standards (IFRS) required in Canada as of January 2011.
• Two international companies, H&M and HMV, are used throughout the book to fully demonstrate the use of the new standards. Numerous Canadian companies are also used, where appropriate, to illustrate accounting examples.
• Using IFRS involves a new “language”; this new terminology is emphasized using the Summary of Equivalent Terms in Chapter 1.
• Some of the key changes introduced with IFRS are summarized in IFRS Insights boxes throughout the text.
• Some of the differences between IFRS and Canada's Accounting Standards for Private Entities (ASPE) are also covered using comparative IFRS versus ASPE boxes.

Following is an outline of some of the other key pedagogical and content changes in this edition:

Pedagogical Changes

• There has been a significant restructuring of content in chapters 2-4 to provide clearer coverage of the preparer topics, such as the basic transactions in chapter 2, with a new set of transactions introduced in chapter 3 for more complete coverage. Also, detailed discussion of the Income Statement (Statement of Earnings) has been moved from chapter 3 to chapter 4.
• To enhance the conceptual focus of the book, further emphasis has been placed on Earnings Management boxes, included where appropriate in most chapters.
• Seven varieties of assignment material: Assessing Your Recall, Applying Your Knowledge, User Perspective Problems, Reading and Interpreting Published Financial Statements, Beyond the Book, Cases, and Critical Thinking Questions satisfy a wide variety of learning and teaching objectives. Over one-third of the assignment material is new with this edition.
• There is a set of integrative questions on reading and interpreting financial statements mid-way through the book, and an integrative course project, illustrating the impact of accounting estimates and policy choices, at the end of the book. Alternate versions of the integrative course project (with solutions) will be available on the companion website for instructors.
• IFRS Insights boxes have been added to further students' understanding of the new reporting standards and how they differ from past practice.
• To further clarify the new standards and how to apply them, there is a new box feature entitled IFRS versus ASPE, which provides a distinction for reporting for private enterprises.
• To illustrate the IFRS standards that are now required in Canada, examples from the financial statements of companies from outside of Canada have been used in greater numbers in this edition, because very few Canadian companies adopted the new IFRS standards prior to 2011.
• The number of different companies used to illustrate standards has been reduced in this edition and more excerpts from the same companies have been used to enable students to follow the selected companies through several different topics. The financial statements of these companies are also used in the assignment materials at the end of each chapter.

Content Changes

• Throughout the text, references to Canadian GAAP have been changed to references to IFRS.
• Additional descriptive labels and headings have been added, for easier reference by students and instructors.
• To enhance the clarity of the transaction analysis in Chapter 2, each of the 16 transactions analyzed is followed by a table that shows the accounts involved and the effects on the basic accounting equation. These tables are cumulative, so that by transaction 16 all of the previous transactions can be viewed on the table.
• The discussion of the transactions has been divided into 5 sub-sections — Analysis, Balance Sheet Effects, Cashflow Effect, Earnings Effect, and (in most cases) Related Concepts — to make the discussion easier for students to follow, retain, and refer to later.
• The more complex transactions and adjustments have been reserved for Chapter 3, rather than being partially introduced in Chapter 2.
• Chapter 3 now deals exclusively with the accounting cycle. The other material that was previously in this chapter has been moved to other chapters.
• The detailed discussion of the statement of earnings has been moved from Chapter 3 to Chapter 4, where it complements the discussion of revenue recognition.
• In Chapter 5, there is much more emphasis on understanding the statement of cash flows and interpreting the information contained in it.
• The T-account method of preparing cash flow statements has been replaced by a less technical, more intuitive method that focuses on underlying relationships rather than mechanical procedures. However, the T-account method is presented on the companion website, for those who want to use it.
• All of the examples and problems prior to Chapter 7 now use the perpetual inventory method for calculating the cost of goods sold, so that students will no longer be confused by a mix of periodic and perpetual methods in the early chapters.
• There is now more extensive coverage of bank loans and notes payable in Chapter 9, as well discussion of extended warranty sales, customer loyalty programs, and constructive liabilities.
• The discussion of deferred income tax and income tax disclosures has been revised and moved to chapter 10.
• New sections have been added to Chapter 10 to cover long-term notes and mortgages, and the treatment of both bonds and leases has been simplified.
• Amortization tables are now used for notes, mortgages, bonds and leases, to illustrate the similarities between these different forms of liabilities.
• Tables for the Time Value of Money have been moved from Chapter 10 to the inside back cover, for easy reference.
• In Chapter 12, more emphasis is now placed on the interpretation of ratio results from a user's perspective.
• The inside front cover now provides a list of Key Ratios discussed within the text.
• Efforts were made to alert students to potential areas of accounting where earnings management could take place. Earnings Management boxes are included in most chapters, to describe how the items under discussion could be affected by it.

Text Organization

In order to focus on the understanding and use of financial statements, and to emphasize the importance of topics such as decision-making, cash flows, and ratio analysis, this text is organized in a unique manner.

Chapter 1 lays the conceptual groundwork for the mechanics of the accounting system, and guides students through the annual report of fashion retailer H&M. The section on the users of financial statements ensures that students have a good understanding of who the people are that use the information in financial statements, what kind of decisions they make, and how the financial statements can provide information for them. Students learn basic accounting terminology and are introduced to the three major financial statements: statement of earnings, statement of financial position, and statement of cash flows. This chapter also presents background material on the IFRS standard-setting process and the conceptual framework underlying accounting. Financial ratios associated with specific topics under discussion are introduced in chapter 1 and in each chapter

Chapters 2 and 3 build on the basics from Chapter 1, providing the traditional presentation of the accounting system using the basic accounting equation, followed by a full explanation of the double entry accounting system and the accounting cycle. Both the earnings and cashflow effects of transactions are identified, to enable students to appreciate the differences between the statement of earnings and statement of cash flows that are crucial to understanding accrual basis financial statements.

Chapter 4 caps the coverage of the statement of earnings with a discussion of revenue recognition criteria and methods. This topic is often not emphasized in introductory texts. However, the revenue recognition policies established by a company have a major impact on its reported operating results. It is, therefore, important for students to have a good understanding of accounting policy choices early in the course. A detailed illustration of the format of the statement of earnings is also included in this chapter.

Chapter 5 reflects the importance of the statement of cash flows in at least two ways: it covers the interpretation as well as the construction of the statement, and the coverage occurs earlier than in most other introductory texts. Because this topic is a difficult one for many students, the chapter explains the linkage of the statement of cash flows to the operating policies of the company (accounts receivable, inventory, and accounts payable policies), which helps students to interpret the information in the operating activities section of the statement of cash flows. By the end of Chapter 5, students will have a basic understanding of the three major financial statements. However, because of the complexity of the statement of cash flows, the authors realize that some instructors may prefer to teach this topic later in the course. The chapter has therefore been designed so that it can be taught after Chapter 11 rather than after Chapter 4.

Chapters 6 through 11 discuss the major asset, liability, and equity accounts that students will see in published financial statements. In each of these chapters, students are alerted to the important aspects of these items so that they can better interpret financial accounting information. The chapter material and the assignment materials provide numerous examples of disclosures from the financial statements of real companies.

Financial statement analysis issues are discussed throughout the book and are summarized and extended in Chapter 12. Financial ratios associated with specific topics under discussion are introduced in each chapter. Thus, from their first exposure to accounting, students are given tools that can be used to analyze financial statements. By the time they reach Chapter 12, where financial statement analysis is dealt with in detail, they have already worked with most of the ratios. Chapter 12 gives them an opportunity to pull the analysis together and work with the total corporate entity. In some cases, this takes the coverage slightly beyond what is usual in introductory texts.

Because real corporations are complex and generally prepare consolidated financial statements, an appendix is included that covers long-term investments in other corporations and the consolidation process. Recognizing that consolidation procedures are complicated and beyond the usual scope of an introductory text, this discussion is kept as simple as possible. In keeping with the user orientation, the financial statement impacts of the consolidation policies are considered.

HALLMARK FEATURES OF THIS BOOK

The text's user orientation aims to prepare students for their future in business, no matter what their area of concentration, and has been successfully adopted at universities across Canada. In addition to the content and organizational features described above, some of the proven pedagogical features that support this approach are presented below.

The Use of Financial Statements

A unique balance between covering preparer material and presenting a user perspective runs throughout the book, and recognizes the fact that introductory courses are taken by both accounting and non-accounting students. Since virtually all introductory accounting students, both graduate and undergraduate, will become users of accounting information, while only relatively few will become preparers, this text focuses on the understanding and use of corporate financial statements as a primary source of accounting information. Over the years, instructors across the country have found the balanced perspective featured in this text to be a very effective way of preparing students for further work as users of accounting information, as well as providing a solid foundation for students who do further studies in accounting.

Integral to this approach is the extensive use of real financial statement data. Throughout the text, you will find excerpts from the annual reports of actual corporations, reprinted (whenever possible) exactly as they originally appeared. In this edition, many of the excerpts are from internationally-based corporations where IFRS has been in use for some time.

The annual report of a Swedish company, H&M, is presented in its entirety, along with a variety of excerpts from over 50 other international and Canadian corporations. Examples and problems using the H&M Annual Report are highlighted by means of the H&M logo in the margin. An Annual Report icon in the margin identifies material that has been extracted from actual annual reports and brief notes provide basic background information on the companies involved, in case students are not familiar with them. In addition, the annual reports of HMV plc, a British company, and other international Canadian and companies are available online.

The assignment materials for each chapter also include a set of problems focused on Reading and Interpreting Published Financial Statements, which require students to analyze and interpret actual corporate financial statements and related disclosures.

User Relevance

Another key feature that complements the use of real financial statements is the User Relevance section, found at the beginning of each chapter from Chapter 2 onward. This describes why the content of the chapter is important to users of accounting information as they make business decisions, and prepares students to view the material from a user perspective as they read. Also, throughout the chapter, there are frequent references to what users will see on financial statements and how that information is related to decision-making. To reinforce this, at the end of each chapter there is a set of assignment items called User Perspective Problems, which require students to consider issues and concepts from the perspectives of various users of financial statements.

International Perspectives

In this edition of the text, International Financial Reporting Standards (IFRS) were adopted as the main accounting standards described in the text. In some cases, both the standards and the terminology are different from the previous Canadian GAAP (e.g., the titles of financial statements). Despite the fact that some of the standards are more detailed than the previous Canadian GAAP, efforts were made to portray the information as clearly and simply as possible. Additional international material is set off from the main body in boxes that summarize how some countries' standards are different from IFRS.

IFRS vs. ASPE

Where there are important differences between the IFRS and the standards in place in Canada for private enterprises, the details are included in boxes titled IFRS vs. ASPE.

Ethics in Accounting

Ethical issues are raised in most chapters by special boxed-in sections. These exhibits are designed to raise students' consciousness regarding ethical issues, and to provide a source of in-class discussion topics. The focus of these boxes is on what students need to think about in order to act responsibly. This feature is complemented by additional material on ethical issues in accounting provided on the Companion Website.

Earnings Management

To provide students with some understanding of the impact that the management of earnings can have on the information on financial statements, boxes entitled Earnings Management were added to most chapters. Information about how earnings can be managed with respect to the topic under discussion in the chapter alerts students to the potential for manipulation of the information. This additional knowledge should make them more knowledgeable end users of the financial statements.

Crictical Thinking and Communication Skills

While many of the questions in the Reading and Interpreting Published Financial Statements sections present challenging problems, special critical thinking questions and cases have been included at the end of most chapters. These require students to critically analyze issues, and can be used as the basis for student papers, class discussions, or debates, and to provide opportunities for students to develop their written and oral communication skills. Additional help with their writing skills is available on the Companion Website.

In-Text Student Aids

Each chapter includes the following sections:

HELPFUL HINTS These boxes provide students with tips to help avoid common difficulties.

PRACTICE PROBLEMS The practice problems at the end of each chapter are designed to reinforce the main points in the text and provide examples to assist students when tackling the assignment materials. Students are provided with “Strategies for Success” before they attempt the problems, and explanations of key points are included in the solutions provided. Additional practice problems are available on the Companion Website.

SYNONYMS & ABBREVIATIONS This section presents a summary of common synonyms for key terms used in the chapter, as well as any common abbreviations that are used.

GLOSSARY There is a glossary at the end of each chapter that defines the key terms introduced in the chapter. Key terms are boldfaced in purple the first time they are used. A searchable glossary is also available on the Companion Website.

ASSIGNMENT MATERIALS There are nine types of assignment materials, to satisfy a variety of learning and teaching objectives.

1. The Assessing Your Recall questions are designed to assess students' understanding of the basic concepts and terms introduced in the chapter.
2. The Applying Your Knowledge problems ask students to apply the concepts and procedures discussed in the chapter in hypothetical situations. These problems are similar to those found in traditional texts, and will often reinforce the technical and procedural aspects of accounting. Also, alternate versions of these problems will be available on the Companion Website for instructors. This enables them to assign a different version to another group of students or a new version of the problems in another term.
3. The User Perspective questions have the students assume the role of a particular user and consider and discuss chapter topics from that perspective.
4. The Reading and Interpreting Published Financial Statements section is a hallmark feature of this book, and contains problems that make use of actual corporate financial statement disclosures. The problems typically involve some type of analysis and interpretation of financial statement data.
5. The Beyond the Book section provides an opportunity for instructors to have students do individual or group research. Students are asked to find financial information about a company of their choice and to answer questions about topics introduced in each chapter. The Beyond the Book section in Chapter 1 gives several library and Internet sources of corporate financial statements, which students can use throughout the course.
6. The Cases are hypothetical scenarios in which students are asked to identify problems, evaluate situations, and make recommendations. The required part of the Cases often asks for a written report. Additional Cases can be found on the Companion Website.
7. The Critical Thinking Questions often take students beyond the structured data in the chapter by asking them to consider controversial areas associated with one or more of the chapter's topics.
8. The Integrative Questions (mid-way through the book) provide an opportunity for students to take a comprehensive look at reading and interpreting financial statements and applying a user perspective to accounting data.
9. The Integrative Course Project (following Chapter 11) enables students to examine the impact that accounting estimates and policy choices can have on corporate financial statements and ratio analysis.

Instructor's Resources

All instructor resources are provided on the Instructor Resource site. Included in this convenient format are:

• Instructor's Manual
• Test Bank
• Solutions Manual
• PowerPoint Presentation Slides
• Clicker Questions

Learning Leveraged with Technology

We have created a complete suite of online tools to introduce students to the world of financial accounting. Cognizant of the fact that every school has different needs, Wiley provides you with a variety of technology resources, giving you flexibility to incorporate some or all of these tools into your classes and create the balance that is right for you and your students.

WILEY PLUS

WileyPLUS is an innovative online environment for effective teaching and learning.

It builds students' confidence and increases their likelihood of success, because it takes the guesswork out of studying by providing them with a clear roadmap: what to do, how to do it, and whether they did it right. This interactive approach focuses on:

DESIGN: The research-based design of WileyPLUS is based on proven instructional methods. Content is organized into small, manageable amounts of information, helping students build better time management skills.

ENGAGEMENT: Students can visually track their progress as they move through the material at a pace that is right for them, while individualized self-quizzes followed by immediate feedback helps to sustain their motivation to learn.

OUTCOMES: Self-assessment lets students know the exact outcome of their effort at any time. Advanced reporting features allows instructors to easily spot trends in the performance their classes in order to make more informed decisions. With WileyPLUS, students take more initiative so you'll have greater impact on their achievement in the classroom and beyond.

What do students receive with WileyPLUS?

• Confidence-boosting feedback and proof of progress, 24/7
• Context-sensitive feedback as they work on problems that are linked to relevant sections in the online digital textbook
• An easy-to-navigate framework, calendars, visual progress tracking, and self-evaluation tools that help students study more effectively

What do instructors receive with WileyPLUS?

• Reliable resources that reinforce course goals inside and outside of the classroom
• Media-rich course materials and assessment content—Instructor's Manual, Test Bank, PowerPoint® Slides, Learning Objectives, Interactive Tutorials, Videos, Solutions Manual, Study Guide, Computerized Test Bank, Pre- and Post-Lecture Quizzes, and much more

www.wileyplus.com

ACKNOWLEDGEMENTS

We would like to thank Robert Hoskin, who developed the original concept for this book and who put so much thought and energy into its construction many years ago.

We give great thanks to our contributor and collaborator, Julia Scott, for all of her work on this edition.

We would also like to acknowledge the many reviewers who provided very valuable comments on our plans for the sixth edition and on our writing as we progressed through the chapters. We have tried to incorporate as many of your suggestions as possible.

Reviewers:

Greg Berberich, Wilfrid Laurier University

Rob Ducharme, University of Waterloo

Catherine Fortin, McGill University

Steve Gibson, Simon Fraser University

Else Grech, Ryerson University

Scott Laing, Dalhousie University

Philippe Levy, McGill University

Anne MacDonald, Simon Fraser University

Michelle O'Gay, Georgian College

Patti Proulx, Carleton University

Traven Reed, Canadore College

Julia Scott, McGill University

Sara Stonehouse, Wilfrid Laurier University

Greg Streich, SAIT Polytechnic

Larry Tenenbaum, McGill University

Peggy Wallace, Trent University

We are very grateful to everyone at John Wiley & Sons Canada, Limited. Zoë Craig got us going on the sixth edition, and Theresa Fitzgerald structured all of the text material and ensured that the book was published with as few errors as possible. We also want to thank the many people who worked behind the scenes producing materials that make this book unique: David Schwinghamer, who copyedited the text; Alison Arnot, who researched and summarized many of the numerous news articles that bring the real business world into this book; Merrie-Ellen Wilcox, who proofread all of the pages; and Alan Yoshioka, who produced the index. We also want to thank Aida Krneta, who has developed creative ways of marketing this edition of the text. Last, but by no means least, sincere thanks go to all of the university/college representatives for all their energy and enthusiasm in promoting the merits of the book to instructors. There are several people who worked on supplemental material for the text that also deserve a special thank you:

Margo Burtch, Seneca College

Lynn de Grace, McGill University

Robert G. Ducharme, University of Waterloo

Rosalie Harms, University of Winnipeg

Steven Konvalinka-Plateo, George Brown College

Scott Laing, Dalhousie University

Gerlando La Rocca, Vanier College

Camillo Lento, Lakehead University

Helen Vallee, Kwantlen Polytechnic University

We would also like to thank the companies who granted us permission to reproduce their financial statements, especially H&M and HMV.

CONCLUDING REMARKS

We hope that both students and instructors will find the material in this book and its supplements interesting and helpful as they attempt to understand the complex and fascinating world of corporate financial reporting.

We have tried to be very careful in the editing of this book and the associated support materials, to minimize errors. Any remaining errors are, of course, our responsibility and we would appreciate hearing from you concerning any that you find. We also look forward to receiving any comments and suggestions that you would like to make, so that we can continue to improve this teaching and learning package.

Maureen Fizzell	Don Cherry
Simon Fraser University	Dalhousie University

November 2010