MOS1023

Wednesday, September 12, 2018

What is Accounting
• Accounting identi es and records the economic events of an organization and communicates
to interested users

Why dose accounting matter

• Accounting is the language of business

• Global economic systems depend on reliable and accurate nancial reporting

• There are two broad categories of users

• Internal users : plan, organize, and run companies (work for the companies: nancial
directors, marketing managers… )

• Internal reports: nancial comparisons of operating alternatives, projections of pro t from

new sales campaigns, analyses of sales costs, and forecasts of cash needs

• External users (investors, lenders, government, creditor, competitor )

• Others( Tax authorities; Regulatory agencies; Customers; Labour unions; Economic

planners; Communities; potential employees )

• investors = shareholders; creditor=lenders

Ethical behaviour
For accounting information to have value, preparers must have high ethical standards:

• Actions are legal and responsible

• Consider organization’s interests

• Accountants and other professionals have rules or codes of conduct to guide ethical
behaviour

• Companies have rules of conduct

Forms of business organizations ( accounting standards vary)

• Proprietorship (sole)

- Owned by one person

- Simple to set up

- Owner has control over business

- Receive any pro t, su ers any losses, personally liable for all debts

- Unlimited liability (business asset & personal asset)

- Business pro t are reported as self-employment income and tax on the owner’s personal
income tax return

- Business records of proprietorship must be kept separate from those related to the
owner’s personal activities ——reporting entity concept (&partnerships & corporations)

• Partnership

- Similar to proprietorship except owned by more than one person

- Formalized in a written partnership agreement

- Each partner has unlimited liability(business asset & personal asset) (joint or several)

- Business pro t are reported as self-employment income and tax on each partner’s
personal income tax return

- Used to organize professional service businesses : practices of lawyers, doctors,

architects, engineers, and accountants.

• Corporation (public or private)

- Organized as a separate legal entity owned by shareholders

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 - Inde nite life (i.e, continues on regardless of who owns its shares)

- Ease of transferring ownership

- Shareholders enjoy limited liability (only risk is the money that one invests)

- May be public or private (Depends on whether shares are publicly traded)

- Pay income tax as separate legal entities on any corporate pro ts

• All 3 organizations are reporting entities, but only 2 of them are taxable entities
(proprietorship & corporation) partnership:partner itself pay the tax from his income

Types of businesses
• Service Business

• Manufacturing Business

• Merchandising Business

3 Types of Business Activities

• Financing (issue share, provide funds)

• Investing

• Operating

Financing Activities
• It takes money to make money.

• Obtaining (and repaying) funds to nance the operations of the business

• Examples – External Financing

• Borrowing money or repaying loans (debt nancing )

• Selling or repurchasing shares (equity nancing )

• Bank indebtedness: when a company uses its operating line of creditor to cover cash
shortfalls and overdraws its bank account

• Short term debt: loan payable

• Long term debt: mortgages payable, bonds payable, nance lease obligations

• Common shares: the amount paid by investors for shares of ownership in a company

• Dividends: payments to shareholders (normally cash)

• Example – Internal Financing

• Choosing to use “retained earnings” (equity) to reinvest in the business rather than paying
dividends

Investing activities
• Obtaining the resources or assets needed to operate the business for the long term

• Examples

• Purchase or sale of investments

• Purchase or sale of long-lived assets such as property, plant and equipment and intangible
assets

Operating Activities
• Operating activities are the main day-to-day activities of the business

• Examples

• Revenues (income): sales/service/interest/rent revenue

• Expenses

• Related accounts

• Accounts payable, accounts receivable(the right to receive money in the future), inventory,
expenses etc.

• Revenues - Expenses = Pro t (Loss)

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 • The primary focus for nancial accounting information is to provide information useful for
investing and credit decisions.

Financial statements
• Financial Statements are the business documents that companies use to report the results of
their activities to various user groups. The system of accounting produces the following
statements:

Under IFRS (International Financial Reporting Standards);Under ASPE (Accounting Standards

for Private Enterprises)

• Statement of income ; income statement

• Statement of changes in Equity ; statement of retained earnings

• Statement of nancial position ; balance sheet

• Statement of cash ow ; Cash Flow statement (operating; nancing; investing)

Statement of income (Income Statement)—predict the future by pro t

• Reports the results (success or failure) of operations for a speci c period of time

• Revenues

• Arise from the sale of a product or service in the regular course of operations.

• Expenses

• Costs of assets consumed or services used to generate revenues

• Gains & Losses

• Extra income or expenses arising from one time (or unusual) events that are not in the
regular course of operations

• Net earnings or net pro t (loss)

• =Revenues + gains – expenses – losses

• Note that cents are not included in the dollar gures recorded in nancial statements.
However, the cents should be and used in recording transactions in a company’s internal
accounting records.

Statement of changes in equity

• Shows the changes in total and each component of shareholders’ equity for the period

• Share capital:

• Amounts contributed by shareholders in exchange for shares of ownership

• May have common and preferred classes

• Retained earnings / de cit:

• Cumulative pro t retained in the company

• Less dividends paid to shareholders

• (Ignore text book reference to comprehensive income)

Statement of Financial position

• Assets

• Resources owned by a business

• Liabilities

• Obligations of the business

• Shareholders’ equity

• Share capital and retained earnings

Accounting Equation: Assets = Liabilities + Equity

Statement of cash ows

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 • Reports the cash receipts and payments for a speci c period of time

• Changes in cash should be categorized as one of the following activities:

• Operating

• Investing

• Financing

• Reconcile the change in cash to the beginning and ending cash balances

Economic resources = claim to Economic resources

• Assets are the economic resources of a business that are expected to produce a bene t in the future
• Liabilities are “outsider claims” or economic obligations payable to outsiders
• Shareholders (Owners’) equity represents the “insider claims” of a business

For a corporation, shareholders’ equity is divided into two main categories

• Share capita
• Retained earning
Assets = Liabilities + Share capital + Retained earning

Components of retained earning

Annual Report
• Publicly traded companies must prepare an annual report each yea
• Includes nancial and non nancial information about the company
• Financial: management discussion and analysis (“MD&A”) , statement of management responsibility,
auditors’ report, nancial statements and note
• Non nancial: company’s mission and goals, products, peopl

Management Discussion and Analysis (“MD&A”

• Management’s explanation of the nancial information and the signi cance of the informatio
• Five key elements that should be included
1. Company’s vision, core businesses, and strateg
2. Key performance driver
3. Capital and other resource
4. Historical and prospective result
5. Risk

Generally Accepted Accounting Principles(GAAP

• Rules and practices for the preparation of nancial statement
• Different for publicly-traded and private corporations
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 – Publicly-traded corporations must use International Financial Reporting Standards (IFRS

– Private corporations may use IFRS or Accounting Standards for Private Enterprises (ASPE
• Proprietorships and partnerships do not have to use IFRS or ASPE as statements are prepared for
internal users onl
• ASPE does not have earning per share however IFRS doe

Comparing IFRS and ASPE

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