Module 1: Chapter 1 - Proprietorship and Partnership generally follow

ASPE for external; not required to follow any for

USERS AND USERS OF ACCOUNTING internal

o ACCOUNTING – identifies and records economic TYPES OF BUSINESS ACTIVITIES

events of an organization and communicates to
interested users
CATEGORIES OF USERS
Internal Users works FOR the company; manages
the company, non-profit, and
government orgs.
(ex. company officers, managers &
directors in finance, marketing,
human resources, production)
External Users DO NOT work for the company.
(ex. investors, creditors, customers,
employees, labour unions, taxing
authorities & regulators)
1. FINANCING – obtaining and repaying funds
to finance the operations of the business.
[ex. selling or repurchasing shares (equity
financing); borrowing money or repaying
loans (debt financing)]
o FORMS OF DEBT – bank
indebtedness, bank loans, long-
term debt (mortgages, bonds,
finance leases).
2. INVESTING – purchase or sale of long-lived
assets needed to operate the company.

[ex. purchase or sale of property, plant, and

equipment, and intangible assets; purchase
ETHICAL BEHAVIOUR or sale of investments (shares or debt
securities of other companies)]
- have rules or codes of conduct to guide ethical
behaviour. 3. OPERATING – main day-to-day activities of
o FOR ACCOUNTING INFO TO HAVE the business
VALUE:
 Actions are legal and responsible, [ex. sources of income (revenue and
and income); expenses; related accounts
 Consider organization’s interests (accounts receivable and accounts payable)]

FORMS OF BUSINESS ORGANIZATIONS FINANCIAL STATEMENTS

Characteristic Proprietorshi Partnershi Corporation 1. STATEMENT OF INCOME (INCOME

p p STATEMENT) – reports of revenues and
No. of 1 2 or more Shareholders expenses
Owners ; 1 or more o REVENUES – sales from products
Owner’s Unlimited Unlimited Limited or services; INFLOW of assets
Liability o EXPENSES – cost of assets
Separate No No Yes
consumed or services used;
Legal
OUTFLOW of assets
Entity
Taxation of Owner Partners Corporation/
Net Income (loss) = Revenue - Expenses
Profits Organization
Life of Limited Limited Unlimited 2. STATEMENT OF CHANGES IN EQUITY –
Organizatio
reports the changes in each component of
n
shareholder’s equity
o SHARE CAPITAL – amounts
contributed by shareholders
GENERALLY ACCEPTED ACCOUNTING
 Common and preferred
PRINCIPLES (GAAP)
share classes
- rules and practices for the preparation of financial o RETAINED EARNINGS/ DEFICIT –
statements cumulative net income retained in
- different for public and private corporations. the corporation LESS any dividends
o PUBLIC – International Financial paid to shareholders
Reporting Standards (IFRS) o OTHER SHAREHOLDERS’
o PRIVATE – IFRS or Accounting ACCOUNTS
Standards for Private Enterprises
(ASPE)
CHANGES IN COMMON SHARES

IFRS vs. ASPE

Key Standard IFRS ASPE

Differences
CHANGES IN RETAINED EARNINGS Accounting Used by publicly Normally used by
Standards traded corp.; can private corp.;
also be used by must be
private corp. consistently
applied.
Generally
followed by
proprietorship and
partnership.
3. STATEMENT OF FINANCIAL POSITION Statement of Statement of Statement of
(BALANCE SHEET) – assets, liabilities, and Changes in changes in equity retained earnings
Equity vs. must be presents is presented
shareholders’ equity
Statement of showing changes showing change
o ASSETS – resources owned and
Retained in all components in only one
controlled by a business Earnings of shareholders’ component of
o LIABILITIES – claims of lenders equity. shareholders’
and other creditors equity (retained
o SHAREHOLDERS’ EQUITY – claim earnings).
of shareholders

Assets = Liabilities + Shareholder’s Equity

Module 1: Chapter 2
4. STATEMENT OF CASH FLOWS – how
cash is obtained and used CLASSIFIED STATEMENT OF FINANCIAL
- reports the effect on cash related to POSITION
the company’s:
- generally contains the following standard
 Operating activities
classifications:
 Investing activities
 Financing activities ASSETS LIABILITIES &
- shows net increase or decrease in SHAREHOLDERS’
cash for the period. EQUITY
Current assets: Current Liabilities:
PRIMARY PURPOSE: - Cash - Bank Indebtedness
Information about cash receipts and - Trading Investments - Accounts Payable
cash payments of a company. - Accounts Receivable - Deferred Revenue
- Inventory - Notes Payable
RELATIONSHIPS BETWEEN STATEMENTS - Supplies - Current portion of Long-
- Prepaid Expenses term Debt
THE STATEMENTS ARE INTERRELATED Non-current Assets: Non-current Liabilities:
- Long-term Investments - Bank Loan Payable
- results from some statements are used as
- Property, Plant and Shareholder’s Equity:
data in other statements. Equipment - Share Capital
- Intangible Assets - Retained Earnings
ANNUAL REPORT - Goodwill
- public corporations must produce an annual
report each year containing
 Financial Statements CURRENT ASSETS
 Management discussion and
- expected to be converted to cash, sold, or used
analysis
in the business within one year or operating
 Auditor’s report
cycle.
 Notes on financial statements
o OPERATING CYCLE – the average time it
takes to go from cash to cash in producing
revenue.
- usually listed in order of liquidity (North America)

NON-CURRENT ASSETS SHAREHOLDERS’ EQUITY

- aka long-term assets o SHARE CAPITAL – investment of cash in

- not expected to be converted to cash, sold, or
used in the business within one year or operating
cycle.
- all assets not considered current
LONG-TERM INVESTMENTS
- multi-year investments in:
o DEBT SECURITIES:
 Loans
 Notes
 Bonds
 Mortgages
o EQUITY SECURITIES:
 Shares of other companies
- assets that are normally not intended to be sold
(and converted to cash) within one year.
PROPERTY, PLANT & EQUIPMENT
- tangible assets with long useful life
- used in operating a business
- usually listed in order of permanency
DEPRECIATION
- allocation of cost of property, plant, &equipment
over estimated useful lives
- cost of long-lived assets with indefinite lives = not
depreciated
o ACCUMULATED DEPRECIATION – shows total
amount of depreciation recorded to date; a contra
asset account [less]
o CARRYING AMOUNT – difference between cost
of the asset and accumulated depreciation.
INTANGIBLE ASSETS
[copyright, patents, etc.]
- non-current assets without physical substance
but has significant value
o a privilege or a right held by the company
- generate a future value to the company
- amortized if no indefinite life
CURRENT LIABILITIES
- obligations to be paid or settled within one year
or one operating cycle
NON-CURRENT LIABILITIES
- obligations to be paid or settled after one year
- usually accompanied by extensive notes to the
financial statements
the company by shareholders in exchange
for preferred or common shares
o RETAINED EARNINGS – cumulative net
income kept for use in the company
CONCEPTUAL FRAMEWORK OF
ACCOUNTING
- guides decisions about:
o what to present in financial statements
o alt ways of reporting economic events
o appropriate ways of communicating info
CONCEPTUAL FRAMEWORK FOR
FINANCIAL REPORTING
OBJECTIVE OF GENERAL-PURPOSE FINANCIAL
REPORTING
- provide financial information that is useful to
existing and potential investors, lenders, and
other creditors
- who makes decisions about providing resources
to a company:
 buying, selling, holding equity and debt
 providing or settling loans or other credit
- financial info provided by general purpose
financial statements
QUALITATIVE CHARACTERISTICS OF USEFUL
FINANCIAL INFORMATION
- QUALITATIVE CHARACTERISTICS OF
ACCOUNTING INFORMATION
o RELEVANCE – info is relevant if it makes a
difference in user’s decision; may have
predictive value and/or confirmatory value
 MATERIALITY – nature of info or dollar
value; info is considered material if its
omission or misstatement could
influence the decisions of users
o FAITHFUL REPRESENTATION – info
should reflect economic reality; must be
complete (no omissions), neutral, and free
from error.
- ENHANCING QUALITIES OF USEFEL
INFORMATION
o COMPARABILITY – users can identify and
understand similarities and differences
among items
o VERIFIABILITY – independent consensus
that information is faithfully represented
o TIMELINESS – available before it loses its
usefulness in decision-making
 o UNDERSTANDABILITY – classified, recorded and reported
characterized, and presented clearly and at fair value.
concisely In choosing between these two, apply the concepts of
relevance and faithful representation.
PREDICTIVE VALUE

- helps users make predictions about future ACCURAL vs CASH BASED ACCOUNTING
events.
ACCURAL BASED transactions and other
CONFIRMATORY VALUE ACCOUNTING events recorded in the
period they occur,
- helps users confirm or correct their previous
rather than when the
predictions or expectations.
cash is received.
COST CONSTRAINT
CASH BASED revenue is recorded
- ensures that value of information provided by ACCOUNTING when cash is received;
financial reporting is greater than the cost of can be simple but
providing it misleading as revenues
- benefits of financial reporting should justify the are not “matched” with
costs of providing and using it expenses therefore
- GOING CONCERN ASSUMPTION profits misrepresented;
can be lower cost.
o business will continue operating in the
foreseeable future
o key assumption – provides a foundation for REVENUE RECOGNITION PRINCIPLE
accounting and justification for using cost as
the value of certain assets o REVENUE – recognized when service has
been performed or goods have been sold
ELEMENTS OF FINANCIAL STATEMENTS and delivered, regardless of the timing of
o ASSETS cash; amount of assets created from the sale
of goods or services.
o LIABILITIES
o EQUITY
NET INCOME = revenues - expenses
o INCOME
o EXPENSES ASSETS are listed in the order in which they are
expected to be converted into cash.
MEASUREMENT OF THE ELEMENTS OF
FINANCIAL STATEMENTS o EXPENSES – amount of assets consumed
through business operations
- accountants have developed principles that
describe which, when, and how the elements of
financial statements should be:
 Recognized,
 Measured, and
 Reported
- known as Generally Accepted Accounting
Principles (GAAP)

GENERALLY ACCEPTED ACCOUNTING

PRINCIPLES (GAAP)

HISTORICAL COST Assets and liabilities

should be recorded at
their cost when
acquired.
Not only at time of
purchase, but
throughout the life of
each asset and liability
FAIR VALUE Certain assets and
liabilities should be