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Studocu is not sponsored or endorsed by any college or university Bus 251 Chapter 1 - Lecture notes 1 Financial Accounting I (Simon Fraser University) Studocu is not sponsored or endorsed by any college or university Bus 251 Chapter 1 - Lecture notes 1 Financial Accounting I (Simon Fraser University) Downloaded by Ishani Kalra ([email protected]) lOMoARcPSD|17234971

CHAPTER 1 INTRODUCTION TO FINANCIAL ACCOUNTING Learning Objective 1: Define Financial Accounting and Understand its Relationship to Economic-Decision Making. (a) What is Financial Accounting? ● *** Financial Accounting (External Financial Accounting) is the process by which information on the transactions of an organization are captured, analyzed, and communicated to external decision makers. ● These decision makers are referred to as financial statement users and include investors and creditors. ● The primary purpose of financial accounting is to aid external users in making economic decisions related to the reporting organization, such as whether to invest in or lend to. ● Accounting consists of three basic activities-it ○ Identifies ○ Records, and ○ Communicates ■ The economic (financial) events of an organization to interested users. ● Identification- select economic events (transactions) ○ A transaction only occurs when there is an exchange between the two parties. ● Recording- Record, classify, and summarize. ● Communication-prepare accounting reports ○ Analyze and interpret to users. USERS AND USES OF FINANCIAL ACCOUNTING Learning Objective 2: Identify the main users of financial accounting information and explain how they use this information (a) Who needs an understanding of financial accounting and why? ● Internal Users- The management ● External Users Downloaded by Ishani Kalra ([email protected]) lOMoARcPSD|17234971

○ Shareholders: will the company pay a dividend this year? What is happening to the company's share price? Is the company making a profit ? How much? ○ Bankers/Creditors: Will the company be able to pay irs payments on its loans on time? ○ Employees/ Labour Unions: Will the company be willing to discuss improvements to employee wages or benefits in the next round of labour negotiations? ○ Suppliers: Should we allow the company to purchase on account? Is there any concerns in the company's liquidity and ability to pay its suppliers in the future? FORMS OF A BUSINESS ORGANIZATION Learning Objective 3: Describe the major forms of business organization and explain the key distinctions between them. (a) What is a corporation? ● There are three major forms of business organization: (1) proprietorships, (2) partnerships, and (3) corporations. ● There are public corporations (whose shares trade on a public stock exchange and are widely held) and private corporations (whose shares do not trade on a public exchange and are generally owned by a small number of people). ● Corporations are separate legal entities, whereas proprietorships and partnerships are not. This means the personal assets of the owners are protected in the event of legal action against corporations, whereas they are at risk in the case of proprietorships and partnerships. It also means corporations file separate tax returns, whereas the income from proprietorships and partnerships is reported on the personal tax returns of their owners. (b) What differentiates a corporation from other forms of a business? Proprietorship Partnership Corporation - Single Owner - Owner is often a manager/operator. - Owner receives any profits, suffers any losses, and is - Multiple Owners - Often, retail and service type of businesses. - Not a separate legal entity, partners - Ownership is divided in shares of stock. - A separate legal entity, the personal assets of the shareholders are not Downloaded by Ishani Kalra ([email protected]) lOMoARcPSD|17234971

personally liable for all debts. - Not a separate legal entity, the personal assets of owner at risk in the event of a legal action - Taxed? No, profits taxed in the hands of the owner. - Least expensive to establish and maintain. personal assets are at risk in the event of legal action. - Taxed? No, profits taxed in the hands of owners. - Moderately expensive to maintain and establish. at risk in the event of legal action. - Taxed? Yes, separately . - Most expensive to establish and maintain. ACTIVITIES OF A BUSINESS Learning Objective 4: Explain the three categories of business activities and identify examples of transactions related to each other. (a) What are three categories of business activities? ● The three categories of business activities are (1) Financing Activities, (2) Operative Activities, (3) Investing Activities. (b) What are examples of financing activities? ● Operating activities are related to the company's revenues and expenses, such as sales to customers, collections from customers, purchases of inventory, and payments of wages and other expenses. (c) What are examples of investing activities? ● Investing activities include buying and selling property, plant, and equipment and buying and selling the shares of other companies. (d) What are examples of operating activities? ● Financing activities include borrowing money, issuing shares, repaying the loan principal, and paying dividends. FINANCIAL ACCOUNTING Learning Objective 5: Identify and explain the content of reporting objectives of the four basic financial statements and notes to the financial statements. ● There are four basic financial statements: (1) the statement of income, (2) the statement of changes in equity, (3) the statement of financial position, and (4) the statement of cash flows. ● ( 1) Statement of Income Downloaded by Ishani Kalra ([email protected]) lOMoARcPSD|17234971

○ measure the company's operating performance (its profit) for a period of time. This is measured by subtracting the expenses incurred during the period from the income earned (revenues) in the same period. ● (2) Statement in changes in Equity ○ provide details on how each component of shareholders' equity changed during the period. The components of shareholders' equity include share capital (the shares issued by the company) and retained earnings (the company's earnings that have been kept and not distributed as dividends). ● (3) Statement of Cash Flows ○ enable financial statement users to assess the company's inflows and outflows of cash related to its operating, investing, and financial activities for a period of time. ● (4) Statement of Financial Position ○ present information on a company's assets, liabilities, and shareholders' equity at a specific date. ○ Assets: ■ Resources controlled or owned by a business ■ Provides future services or benefits ■ Cash, Supplies, Equipement, etc. ■ Current Assets: Assets that will be converted into cash, or paid out, within a year. ■ Non-current Assets: an asset that is not expected to be consumed in one year. ○ Liabilities: ■ The debt or obligation of a company ■ Liabilities represent a claim on assets on the balance sheet ■ Accounts Payable, Notes Payable, Wages and salaries Payable, Taxes Payable, etc. ■ Current Liability: Debts expected to be paid within one year on the operating cycle, whichever is longer. ■ Non-current Liability: long-term debt, obligations listed on a company's balance sheet that are not due for settlement within one year. **** Assets and liabilities are listed in order of liquidity ( speed to turn into cash, or require payment in cash). **** Liquidity: an organization's ability to convert its assets into cash and meet short-term obligations/liabilities. ● Shareholder's Equity: ○ Ownership claim on total assets ○ Referred to as residual equity Downloaded by Ishani Kalra ([email protected]) lOMoARcPSD|17234971

○ The overall value of the organization belonging to its owners. This is measured at accounting value. ○ Share Capital: amounts originally invested in the business by shareholders(also known as"common shares" or "capital stock") ○ Retained Earnings: Income of the organization that has accumulated and belongs to the owners, but has not been distributed to the owners. ○ Companies choose to pay dividends to investors when the company has accumulated cash, and has no plans to use the cash to expand the company. INCREASES DECREASES ● Investment by shareholder represent the total amount paid in by shareholders for the shares they purchase. ● Revenues: is an increase in economic benefit, resource, or money that flows into a company as a result of business activities. ○ Common sources of revenues: Sales, fees, services, gains, commissions, interest, royalties, and rent ● Expenses: a decrease in economic benefit, or money and resources that flow out of a company in the course of generating revenue, including any losses. ○ Common expenses are; Salaries expense, rent expense, utilities expense, tax expense, etc ● Dividends: are the distribute of cash or assets to shareholders ○ Dividends reduce R/E. However, dividends are not an expense. Downloaded by Ishani Kalra ([email protected]) lOMoARcPSD|17234971