Comprehensive Notes

Chapter 1 Internal users of accounting information are all employees who work for the organization to plan and organize. These users include HR managers, finance and marketing directors, etc. External users of accounting information include investors, lenders, and creditors. In order for financial information to have value to its users, it must be prepared by individuals with high standards of ethical behaviour. There are three common forms of business organizations; Sole Proprietorships A business owned by one person with unlimited liability- there is no legal distinction between the business as an economic unit and the owner. The business profits are reported as selfemployment income and taxed on the owner's personal income tax return. Pros: requires a small amount of start up money Cons: the owner receives all profits but is responsible for all loses (unlimited liability) Examples: hair salons, plumbers, mechanics, farms, small retail stores Partnerships A business owned by multiple people with unlimited liability. Partnerships are normally formalized in a written agreement. Pros: more individuals involved bring more resources and spread out liability Cons: the owner receives all profits but is responsible for all loses (unlimited liability) Examples: law firms, architect firms, doctors offices Corporations A business organized as a separate legal entity owned by shareholders. Corporations' shelf life is indefinite, meaning it continues on regardless of who owns its shares. Buying shares in a corporation is also usually a more attractive investment than starting a partnership or proprietorship. A private corporation is one that doesn't give up shares for purchase. Pros: the only loss you can incur is the investment that you originally made (limited liability) Cons: ownership extends to anyone and everyone who owns shares Examples: Twitter, Netflix, Nike, Facebook, Google, Apple Sole proprietorships and partnerships make up the largest number of all Canadian businesses,
but generate the smallest dollar figure. Generally Accepted Accounting Principles (GAAP) provide businesses with the rules, standards, and principles for which they must disclose their financial information. However, publicly traded corporations must use IFRS. Privately held corporations have a choice to use IFRS or ASPE. Most choose ASPE. All businesses are involved in three types of activities; Financing There are two primary methods of raising outside funds for corporations. Debt financing: the company must pay back all of the borrowed money with interest and the company still retains 100% ownership. Equity financing: the company does not need to pay back any of the funds obtained, but must give up partial company ownership. Investing After obtaining financing, the company then participates in the purchase or sale of long-term assets which will help the company generate cash flows. Long-term assets include land, buildings, equipment, and furniture. Operating Once a company has the finances and resources it needs to get started, it can begin its operations. Revenues: the earned monetary amounts from when a business makes sales Expenses: when a business incurs costs in the process of earning revenues An income statement reports the success or failure of the company's operations for a period of time. The revenues are listed first and then its expenses. A statement of changes in equity shows the changes in the total shareholders' equity for the period. In its simplest form it includes common shares and retained earnings. Common shares: amounts contributed by the shareholders in exchange for shares of ownership Retained earnings: the cumulative profit that has been retained (not been paid to shareholders)
A balance sheet reports assets and claims to those assets at a specific point in time. It is also known as the statement of financial position. It is a collection of what we own (assets), what we owe (liabilities), and the difference is the book value of the company (equity). A statement of cash flows provides information about the cash receipts and cash payments of a business for a specific period of time. We are only concerned with cash and must remove all non-cash transactions. This statement reports the effects on cash of a company's operating, investing, and financing activities during the period of time. Investing and operating activities should be negative in the beginning period of opening a company. Financial statements are said to be interrelated because the results from one statement may be used as data for another. Financial statements must be prepared in the order income statement, statement of changes in equity, balance sheet, statement of cash flows because; • profit from the income statement in reported in the statement of changes in equity • ending balances of each shareholders equity account is reported in the balance sheet • statement of cash flows is related to the balance sheet
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