DEMYSTIFYING ACCOUNTING

A MaRS Presentation

What we will cover today…

• Key Terms (30 min)

• Bookkeeping & Financial Statements (55min)

• Break (15 min)

• Cash Flows Strategy & Maintaining (30 min)

• How & When to engage an accountant (20 min)

• Questions (30 min)

Key Terms – “Pop Quiz”

Bookkeeping

DEBIT

CREDIT

LEDGER

POSTING

JOURNAL

ENTRY-

+

ACCRUALCAPITALIZE

AMORTIZATION

What is Bookkeeping?

1. Gathering the source documents

2. Entering information from the source documents into

journals & accounts

3. Performing end of period procedures

4. Closing the books for that period

Goals of good bookkeeping

• Understandable data, cross referenced & easy access to supporting documents for:o internal analysis and

review purposeso support for possible auditso Support for financing and

investment sources

Bookkeeping Software

• Wave Accounting• Sage 50 Accounting (formerly

Simply Accounting)

• QuickBooks• QuickBooks online • Freshbooks• Sage 300

(formerly Accpac)

• …

“Bookkeeping in the Cloud”

There are pro’s and con’s and you need to consider your company’s

unique situation and risk appetite!

Bookkeeping VS. Accounting

• Bookkeeping is record keeping/ data entry.

• Accounting is can include bookkeeping, but also infers tasks such as preparing financial statements from the bookkeeping records, tax planning, advisory and assurance work.

Financial Statements

ASPE

GAAP

IFRS

INDEPENDENT AUDITOR’S REPORT

PUBLIC REPORTINGNOTES TO THE FINANCIAL

STATEMENTS

ANNUAL FINANCIAL STATEMENTS

GENERALLY ACCEPTED

ACCOUNTING PRINCIPLES

Financial StatementsFinancial Statements are a tool to analyze your

company’s performance.

FS – Internal VS. Externalo Internal reporting is flexible and you can create

reports in the format that best suits your needs. They can be weekly, monthly, quarterly or annually

o External reporting is more structured and there are rules that govern their preparation and presentation, to increase the comparability between companies.

FS – External• External users may include CRA, bank/ other lenders,

investors, potential lenders/ investors…• They tend to be annually although may also be quarterly

(required quarterly for public companies).• You might have an external accountant or auditor report

on the statements (usually only for the annual statements).

• You have to choose one set of accounting standards (ASPE, IFRS, Accrual/ tax basis).

FS - Components• Financial statements always include:

– A balance sheet– An income statement and statement of

retained earnings.

• But can also include:o A statement of cash flows,o A report on the statements (by external

accountant)o Notes to the financial statements.

Balance Sheet

Critical “what do we have” statement.

Assets = Liabilities + Equity

(hence “balance” sheet)

AssetsoDefinition of ‘Asset’?

• Generally intuitive • Assets can be valued at cost or at FMV and GAAP

provides rules as to which value can be used and when. This is one of your Accounting Policy Choices.

LiabilityoDefinition of ‘Liability’?

• Also generally instinctive• Like assets, what is considered a liability by GAAP is

generally the same as what you would instinctively consider a liability.

GAAP based varianceso Certain items may have value to you, but you may not be allowed

to record them as an asset. o Intangible assets are an example of this. They must meet the

following criteria in order to be recorded as an asset. They must beo Identifiable, o The company must control them, and o There must be a future economic benefit.

Is it Eligible? Patent -Workforce - Know-how -

GAAP based variancesoA finance lease is another good example of a

GAAP based variance. o Here although there is no obligation to pay the balance of the

lease currently,o The underlying reality of the finance lease arrangement is that

you have purchased the asset and the seller is financing the purchase.

o Therefore GAAP requires you to record the asset & liability at the present value of the minimum lease payments.

Equity

• What is equity?oCapital stockoRetained earnings oOther

Income Statement• The “what did we do” statement.

o Income – expenses = net income.o Some different presentations possibilities

Retained Earnings• Sometimes this statement is part of the Income Statement, • Sometimes it is an entirely separate statement (for IFRS it is

required to be separate).• The closing retained earnings is a cumulative tally of all

previous years’ income, less any dividends paid out of the earnings and any adjustments, since the inception of the company – hence its name.

Accountant’s Report• For general purpose Financial Statements an accountant can

issue:– An Independent auditor’s report, – A review engagement report, or – A notice to reader.

• The report will state the accounting standards applied (IFRS/ ASPE/ accrual/ cash…)

• The report will also state any qualifications & what they mean.

Financial Statements: Notes

• Purpose:o To give background & added disclosure which is not required (or would

be too cumbersome) in the statements themselves. The notes are a required part of GAAP.

o This includes disclose the accounting policies, Related Party Transactions and their impact, loans payable details, capital assets, income taxes, capital stock, commitments…

o Without the notes, there can be a great amount of interpretation to some the details. The notes help to provide context to increase comparability between one set of financial statements and another.

Break – 15 min

Cash Flows Strategy & Maintenance

Demands for cash means you need to plan & manage it to a high degree to make it effective.

o Too much cash is a waste as you will not be earning anything with it and could be earning if it is invested.

o Too little cash and you won’t be able to pay your bills as they come due and will incur interest and penalties.

o Consider maintaining rolling cash flow projection

Cash Flows Strategy & Maintenance

What do these statements tell you for budgeting and cash flow management purposes?

• Cash flow statement• Balance sheet

Prioritizing Cash Flows Step 1:

Set out a hierarchy of payment streams.

Items to consider: o Interest rates

o Penalties for late payments

o Any borrowing covenants

Prioritizing Cash Flows Step 2:

Review the payment terms:

o If there is a discount period, consider if it is worth taking advantage of.

o If not, consider the payment period and plan when you are going to pay (i.e. at the end of the period).

Prioritizing Cash Flows Step 3:

Consider other non-monetary

factors

Weekly Rolling Cash Flow Template

o45 days; 60 days; 90 daysoUpdate weekly (Monday morning?)o Excellent Management Tool; Reflects the best

guess of actual cash availableo Shows you when a “cash crunch” is coming

Accountants: How & When to Engage

Who is your accountant to you? oA service provider oroA strategic partner

A Few Notes of Caution…

The old adage: a penny wise pound foolish. • Some tax planning may not be possible if you wait

too long or it may be significantly more costly to restructure.oQSBC (Qualifying Small Business Corporation) – sale of

business – up to 200K in tax savings, but some of the steps need to be in place 2 years in advance!

oHolding corporation and share structure that is beneficial to you as well as your investors.

Be clear what role you want your accountant to play.• It can be beneficial to have someone who can grow

with you and becomes a key partner in your business.

A Few Notes of Caution…

You don’t know what you don’t know. oGST/ HST – If I make a sale to someone in Manitoba

what rate do I charge?oGST/ HST – Am I eligible for the quick method?

• Generally a fair bit of savings if you do, but only if you elect ahead of time.

o Tax credits – SRED (Scientific Research & Experimental Development), ODMTC (Ontario Digital Media Tax Credits), Apprenticeship Tax Credits, …

A Few Notes of Caution…

http://www.youtube.com/watch?v=UfzUB85ms-s

Video

Questions?