8.3 The Balance Sheet & Income Statement

Canadian Securities Course CSC

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1 Introduction & Exam Overview

About the CSC Exams

2 Chapter 1: The Canadian Investment Marketplace

1.1 The Canadian Securities Industry & the Investment Dealer's Role 1.2 Financial Intermediaries: Banks, Trusts, Credit Unions, Insurers & Pension Funds 1.3 Financial Market Trends 1.4 Investment Capital, Financial Instruments & Financial Markets 1.5 Canadian Exchanges, ATSs, Dark Pools & the Order Protection Rule 1.6 Canadian Securities Regulators, the CSA & CIRO 1.7 Investor Protection: OSFI, CIPF and CDIC 1.8 Ethics, Standards of Conduct & the Client Focused Reforms 1.9 Conflicts of Interest, Complaint Handling & Remediation

3 Chapter 2: The Economy

2.1 Economics Foundations & Measuring Economic Growth 2.2 The Business Cycle & Economic Indicators 2.3 Inflation & Interest Rates 2.4 The Labour Market & Unemployment 2.5 The Bank of Canada & the Inflation-Control Target 2.6 Implementing Monetary Policy: The Operating Band, Market Operations & Transmission 2.7 Fiscal Policy, Deficits & the Challenges of Government Policy 2.8 International Finance & Trade: The Balance of Payments and the Canadian Dollar

4 Chapter 3: Features and Types of Fixed-Income Securities

3.1 The Fixed-Income Marketplace, Bond Terminology & Security 3.2 Protective Covenants, Retirement Provisions & Extendible/Retractable Features 3.3 Government of Canada Securities: T-Bills, Marketable Bonds & RRBs 3.4 Provincial & Municipal Debt and Strip Bonds 3.5 Corporate Bonds, Credit Spreads & Bond Ratings 3.6 Money Market Instruments, Floating-Rate Notes & International Bonds 3.7 Other Fixed-Income Securities & Reading Bond Quotes

5 Chapter 4: Pricing and Trading of Fixed-Income Securities

4.1 Bond Pricing, Price–Yield Relationships & Accrued Interest 4.2 Yield Calculations & Return Measures 4.3 The Term Structure of Interest Rates & Yield Curve Theories 4.4 Fundamental Bond Pricing Properties: Volatility Rules, Duration & Convexity 4.5 Bond Market Trading & Bond Indexes

6 Chapter 5: Common and Preferred Shares

5.1 Common Shares: Ownership Rights, Voting & Restricted Shares 5.2 Dividends, DRIPs, Stock Splits & Consolidations 5.3 Preferred Shares: Features, Cumulative Dividends & Taxation 5.4 Preferred Share Variations: Convertible, Callable, Retractable, Floating & Rate-Reset 5.5 Fundamental Equity Metrics & Ratios 5.6 Stock Indexes & Averages

7 Chapter 6: Equity Transactions

6.1 Order Types, Execution & Market Mechanics 6.2 Margin Trading: Long Accounts & Borrowing 6.3 Short Selling & Short-Margin Requirements 6.4 Trading & Settlement Procedures: T+1, CDS & Confirmations

8 Chapter 7: Derivatives

7.1 Derivatives: Role, Underlying Assets & Users 7.2 Options Fundamentals: Calls, Puts & Moneyness 7.3 Option Strategies & Risk Management 7.4 Forward & Futures Contracts 7.5 Rights & Warrants

9 Chapter 8: Corporations and their Financial Statements

8.1 Corporate Structures & Corporate Governance 8.2 The Annual Report, Accounting Standards & the Auditor's Report 8.3 The Balance Sheet & Income Statement 8.4 The Cash Flow Statement & Earnings Quality 8.5 Public Company Disclosure, Investor Rights, Take-Over Bids & Insider Trading

10 Chapter 9: Financing and Listing Securities

9.1 Government & Corporate Financing: Underwriting and Syndicates 9.2 The Prospectus Process, Stabilization & Purchaser Rights 9.3 The Exempt Market & Private Placements 9.4 The Listing Process: TSX, TSXV & Capital Pool Companies 9.5 Continuous Disclosure, Material Changes & Insider Reporting

11 Chapter 10: Investment Analysis

10.1 Methods of Equity Analysis & Macroeconomic Analysis 10.2 Fundamental Industry Analysis 10.3 Company Analysis: Competitive Advantages, Governance & the Dividend Discount Model 10.4 Discounted Cash Flow & Relative Valuation Multiples 10.5 Financial Statement Ratio Analysis 10.6 Assessing Preferred Share Investment Quality 10.7 Technical Analysis: Charts, Trends & Patterns 10.8 Technical Indicators, Volume, Breadth & Sentiment

12 Chapter 11: Portfolio Analysis

11.1 Measuring Investment Return 11.2 Measuring Risk: Types of Risk, Standard Deviation & Downside Measures 11.3 Portfolio Risk & Return: Correlation and Diversification 11.4 Beta, the Capital Asset Pricing Model & the Security Market Line 11.5 Portfolio Manager Styles: Equity & Fixed Income 11.6 The Portfolio Management Process: Objectives, Constraints & the IPS 11.7 Asset Mix, Monitoring, Performance Evaluation & Rebalancing

13 Chapter 12: Alternative Investments, Other Managed, and Structured Products

12.1 Alternative Investments: Structures, Fees & Liquid Alternatives 12.2 Alternative Strategies, Performance Measurement & Due Diligence 12.3 Segregated Funds, Labour-Sponsored Funds & Listed Private Equity 12.4 Income Trusts, REITs & Closed-End Funds 12.5 Structured Products: PPNs & Market-Linked GICs 12.6 Split Shares & Asset-Backed Securities

14 Chapter 13: Mutual Funds

13.1 Managed Products & Mutual Fund Structure 13.2 Pricing Mutual Fund Units: NAVPS & Forward Pricing 13.3 Mutual Fund Fees, Sales Charges & Unit Series 13.4 Mutual Fund Regulation, Fund Facts & Account Opening 13.5 Types of Mutual Funds & Fund Management Styles 13.6 Redemptions, Withdrawal Plans & Measuring Fund Performance

15 Chapter 14: Exchange-Traded Funds (ETFs)

14.1 ETF Origins, Structure, Tax Efficiency & ETF Facts 14.2 ETF Creation, Redemption & Arbitrage 14.3 Types of ETFs & Advanced Strategies 14.4 Comparing ETFs, Mutual Funds & Individual Securities

16 Chapter 15: Working with the Institutional Client

15.1 The Institutional Marketplace & Institutional Clients 15.2 Institutional Investment Guidelines, Styles & Restrictions 15.3 Buy Side & Sell Side: Trading Desks, Revenue, Clearing & Best Execution 15.4 Block Trading, Dark Pools & Algorithmic Trading

17 Chapter 16: Fee-Based Accounts and Working with the Retail Client

16.1 Fee-Based Accounts: Managed & Non-Managed Models 16.2 Fee Transparency, CRM2 & Total Cost Reporting, and MWRR vs. TWRR 16.3 The Financial Planning Approach & the Life Cycle 16.4 Behavioral Finance, Sequence-of-Returns Risk & Client Coaching 16.5 Estate Planning Basics

18 Chapter 17: Canadian Taxation

17.1 The Canadian Taxation System 17.2 Taxation of Investment Income 17.3 Capital Gains, Losses & The Superficial Loss Rule 17.4 Registered vs Non-Registered Tax-Advantaged Accounts 17.5 Tax Planning Strategies, Pension Plans & the RDSP

8.3 The Balance Sheet & Income Statement

Key Takeaways Explain This Topic AI

The balance sheet is a snapshot at a date: assets = liabilities + shareholders' equity.

Net working capital = current assets − current liabilities.

Ending retained earnings = beginning retained earnings + net income − dividends declared.

The income statement steps from revenue to gross profit, EBITDA, EBIT, earnings before tax and net income.

EBITDA is widely used but is not an IFRS measure.

Last updated: October 2026

The Statement of Financial Position (Balance Sheet)

The Statement of Financial Position (traditionally called the Balance Sheet ) provides a static, point-in-time snapshot of a corporation's financial position as of a specific calendar date (e.g., as at December 31, 2025). It details the economic resources controlled by the corporation ( Assets ), the external legal obligations owed to creditors ( Liabilities ), and the residual interest attributable to equity holders ( Shareholders' Equity ).

The Fundamental Accounting Equation

The balance sheet operates on double-entry bookkeeping, anchored by the foundational accounting equation:

Assets = Liabilities + Shareholders’ Equity \text{Assets} = \text{Liabilities} + \text{Shareholders' Equity} Assets = Liabilities + Shareholders’ Equity

Expressed alternatively to highlight the residual claim of equity owners:

Shareholders’ Equity = Assets − Liabilities \text{Shareholders' Equity} = \text{Assets} - \text{Liabilities} Shareholders’ Equity = Assets − Liabilities

Current vs. Non-Current Classification

Under IFRS (IAS 1), corporations must present assets and liabilities separated into current and non-current (long-term) categories based on an operational time horizon of one year (12 months) or the normal operating business cycle: Balance Sheet Classification Structure

• ├── Current Assets (Liquid within 12 months: Cash, Marketable Securities, Receivables, Inventory, Prepaids)
• ├── Non-Current Assets (Long-term productive capacity: PP&E, Intangibles, Goodwill, Long-term Investments)
• ├── Current Liabilities (Due within 12 months: Accounts Payable, Short-Term Debt, Current Portion of LTD)
• ├── Non-Current Liabilities (Due beyond 12 months: Long-Term Debentures, Lease Liabilities, Deferred Taxes)
• └── Shareholders' Equity (Stated Share Capital, Contributed Surplus, Retained Earnings, AOCI)
• 1. Current Assets

Assets expected to be converted into cash, sold, or consumed within twelve months:

Cash and Cash Equivalents: Bank deposits, Treasury bills, and commercial paper with maturities ≤ 90 \le 90 ≤ 90 days.

Marketable Securities: Liquid short-term debt or equity securities held for trading.

Accounts Receivable (A/R): Amounts due from customers for goods or services delivered on credit, reported net of an allowance for expected credit losses .

Inventory: Merchandise, finished goods, work-in-progress, and raw materials valued under IFRS at the lower of cost and net realizable value (LCNRV) .

Prepaid Expenses: Future operational expenses paid in advance (e.g., insurance premiums, commercial leases).

2. Non-Current (Long-Term) Assets

Tangible and intangible productive assets providing economic value over multi-year periods:

Property, Plant, and Equipment (PP&E): Tangible assets (land, buildings, manufacturing machinery) recorded at acquisition cost less accumulated depreciation (except land, which is not depreciated).

Intangible Assets: Non-monetary assets without physical substance, such as patents, trademarks, licensing agreements, and proprietary software, amortized over their finite useful lives.

Goodwill: The premium paid in an acquisition exceeding the fair market value of net identifiable assets acquired. Under IFRS, goodwill is not amortized; instead, it is tested annually for impairment .

3. Current Liabilities

Obligations that must be satisfied within twelve months using current assets or the creation of other current liabilities:

Accounts Payable and Accrued Liabilities: Unpaid trade invoices for materials and accrued operating expenses (wages, interest, utilities).

Short-Term Borrowings: Operating bank credit lines and commercial paper.

Current Portion of Long-Term Debt (CPLTD): The principal tranche of long-term bonds, mortgages, or loans maturing within the upcoming 12 months.

Unearned (Deferred) Revenue: Cash collected from customers before the delivery of underlying goods or completion of services.

4. Non-Current (Long-Term) Liabilities

Corporate obligations due beyond twelve months:

Bonds and Debentures Payable: Long-term debt instruments carrying fixed or floating contractual coupon payments.

Long-Term Bank Loans & Mortgages: Amortizing facilities secured by real estate or operational assets.

Deferred Tax Liabilities: Temporary differences between accounting income and taxable income (frequently resulting from claiming Capital Cost Allowance [CCA] faster than financial statement straight-line depreciation).

5. Shareholders' Equity

The residual ownership capital of the corporation:

Stated Share Capital: The consideration received by the corporation upon issuing common and preferred shares (recall that Canadian shares under the CBCA are no-par value).

Contributed Surplus: Additional paid-in capital from secondary capital transactions, such as stock-based compensation expensing.

Retained Earnings: Cumulative net income earned by the corporation since its inception, minus all cumulative dividends declared and paid to shareholders:

Ending Retained Earnings = Beginning Retained Earnings + Net Income − Dividends Declared \text{Ending Retained Earnings} = \text{Beginning Retained Earnings} + \text{Net Income} - \text{Dividends Declared} Ending Retained Earnings = Beginning Retained Earnings + Net Income − Dividends Declared

Accumulated Other Comprehensive Income (AOCI): Equity reserve capturing cumulative unrealized gains and losses from items bypassing the income statement (e.g., foreign currency translation adjustments on foreign subsidiaries).

Net Working Capital

A critical liquidity metric derived directly from the balance sheet is Net Working Capital (NWC) :

Net Working Capital = Current Assets − Current Liabilities \text{Net Working Capital} = \text{Current Assets} - \text{Current Liabilities} Net Working Capital = Current Assets − Current Liabilities

A positive working capital position demonstrates that the corporation has sufficient short-term resources to satisfy its immediate obligations as they come due without being forced to liquidate long-term productive assets or incur emergency high-cost borrowings.

Comprehensive Balance Sheet: Maple Leaf Technologies Inc.

• Statement of Financial Position (in millions of CAD) As at Dec 31, 2025 As at Dec 31, 2024
• Current Assets
• Cash and cash equivalents $27.0 $30.0
• Marketable securities $15.0 $10.0
• Accounts receivable (net of allowance) $85.0 $72.0
• Inventories $110.0 $98.0
• Prepaid expenses $10.0 $8.0
• Total Current Assets $247.0 $218.0
• Non-Current Assets
• Property, plant, and equipment (net of depreciation) $420.0 $380.0
• Intangible assets (patents and licenses) $55.0 $60.0
• Goodwill $80.0 $80.0
• Total Assets $802.0 $738.0
• Current Liabilities
• Accounts payable and accrued liabilities $95.0 $82.0
• Short-term bank operating loan $20.0 $15.0
• Current portion of long-term debt $15.0 $12.0
• Income taxes payable $10.0 $8.0
• Total Current Liabilities $140.0 $117.0
• Non-Current Liabilities
• Long-term debentures payable (6.5% coupon) $220.0 $235.0
• Deferred income tax liability $35.0 $31.0
• Total Liabilities $395.0 $383.0
• Shareholders' Equity
• Common shares (authorized: unlimited; issued: 50.0 million) $210.0 $210.0
• Contributed surplus $15.0 $10.0
• Retained earnings $182.0 $135.0
• Total Shareholders' Equity $407.0 $355.0
• Total Liabilities and Shareholders' Equity $802.0 $738.0

Working Capital Check (2025): Net Working Capital = $247.0 million - $140.0 million = $107.0 million (up from $101.0 million in 2024).

Retained Earnings Check: $135.0 million opening + $67.5 million net income − $20.5 million dividends = $182.0 million closing.

The Statement of Comprehensive Income (Income Statement)

The Statement of Comprehensive Income measures financial performance over a defined operating period (e.g., for the fiscal year ended December 31, 2025). Unlike the static balance sheet, the income statement acts like a dynamic video recording, demonstrating how top-line sales revenues are transformed into bottom-line net profit.

Accrual Accounting vs. Cash Accounting

Canadian corporate reporting relies on accrual accounting :

Revenue Recognition: Revenue is recognized when performance obligations are satisfied by transferring promised goods or services to the customer, regardless of when cash is collected.

Expense Matching: Expenses are recognized in the identical accounting period as the revenues they helped generate (e.g., inventory costs are expensed as Cost of Goods Sold only when the inventory is actually sold).

The Multi-Step Income Statement Architecture

The multi-step income statement separates operating activities from financing, investing, and tax charges: Multi-Step Income Statement Cascade

• ├── Revenue (Gross sales less returns, allowances, and discounts)
• ├── Less: Cost of Goods Sold (COGS: direct materials, direct labour, factory overhead)
• ├── Equals: GROSS PROFIT
• ├── Less: Selling, General & Administrative (SG&A) Expenses
• ├── Equals: EBITDA (Operating cash generation before non-cash charges)
• ├── Less: Depreciation and Amortization (D&A)
• ├── Equals: OPERATING PROFIT (EBIT)
• ├── Less: Net Finance Costs (Interest Expense minus Interest Income)
• ├── Equals: EARNINGS BEFORE TAXES (EBT)
• ├── Less: Income Tax Expense (Current and Deferred)
• ├── Equals: NET INCOME (The Bottom Line)
• └── Plus/Minus: Other Comprehensive Income (OCI) -> Total Comprehensive Income
• Intermediate Profitability Metrics: EBITDA and EBIT

Gross Profit: Reflects product-level markup efficiency before corporate overhead.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization):

While EBITDA is a non-IFRS financial measure , it is among the most widely tracked metrics by Canadian investment banking analysts, private equity sponsors, and commercial credit lenders.

It isolates the raw operating cash profitability of core business activities by stripping out the distortive effects of financing structures (interest), tax jurisdictions (taxes), and historic capital asset accounting (depreciation and amortization).

EBIT (Operating Income): Reflects profitability generated by core business operations after accounting for the economic wear-and-tear of capital equipment (depreciation).

Earnings Per Share (EPS):

Basic EPS = Net Income − Preferred Share Dividends Weighted Average Number of Common Shares Outstanding \text{Basic EPS} = \frac{\text{Net Income} - \text{Preferred Share Dividends}}{\text{Weighted Average Number of Common Shares Outstanding}} Basic EPS = Weighted Average Number of Common Shares Outstanding Net Income − Preferred Share Dividends ​

Diluted EPS = Adjusted Net Income Weighted Average Common Shares (assuming exercise of options/convertibles) \text{Diluted EPS} = \frac{\text{Adjusted Net Income}}{\text{Weighted Average Common Shares (assuming exercise of options/convertibles)}} Diluted EPS = Weighted Average Common Shares (assuming exercise of options/convertibles) Adjusted Net Income ​

Comprehensive Income Statement: Maple Leaf Technologies Inc.

• Statement of Comprehensive Income (in millions of CAD) Year Ended Dec 31, 2025 Year Ended Dec 31, 2024
• Revenue $640.0 $550.0
• Less: Cost of goods sold (COGS) ($360.0) ($315.0)
• Gross Profit $280.0 $235.0
• Less: Selling, general, and administrative (SG&A) ($120.0) ($105.0)
• Less: Research and development (R&D) ($30.0) ($25.0)
• EBITDA $130.0 $105.0
• Less: Depreciation and amortization ($25.0) ($22.0)
• Operating Profit (EBIT) $105.0 $83.0
• Less: Finance costs (interest expense) ($15.0) ($16.0)
• Earnings Before Taxes (EBT) $90.0 $67.0
• Less: Corporate income tax expense (25% effective rate) ($22.5) ($16.75)
• Net Income $67.5 $50.25
• Other Comprehensive Income (foreign currency translation) $2.5 ($1.25)
• Total Comprehensive Income $70.0 $49.0
• Basic Earnings Per Share (50.0M common shares) $1.35 $1.01