Chapter 1 - Introduction

• Why is accounting important?

– Who uses accounting information
– Forms of business organizations
• Building blocks of accounting
– Ethics
– Conceptual framework
• Using the building blocks
– Perform transactional analysis
– Prepare financial statements
 Accounting Survival
Guide
P – pre-read
A – associate to stuff already known
P – practice
Q – ask questions
R – review
G – group study
H – help: instructor, students, tutors,
course/textbook/WileyPLUS website
Chapter 1 2
 Chapter 1 - Assignment
Complete the following problems from
chapter 1:
•Problem 1 – 3A (page 1 – 52)
•Problem 1 – 9A (page 1 – 54)
Complete on WileyPlus before the start of
next class.
 Bookkeeping

Bookkeeping dates back thousands of

years. Written languages evolved from
bookkeeping records.
5,100-year-old
clay tablet from
Iraq recording malt
and barley
entries
 Investors Need Good Accounting
Information
• Investors depend on timely, high-quality
information to make investment decisions.
• Corporate fraud causes investors to lose
trust and can destroy companies. Trust
when lost is hard to regain.
• Video - Impact of Enron Fraud
2 minutes, 121K views
• Video - Overview of the Enron Scandal
10 minutes, 1.7 M views
Chapter 1 5
Why is Accounting Important?

Restatement of
financial statements

Nortel Stock prices

 Complaint of Securities Fraud
Securities Exchange Commission
Ex-Nortel Executives Accused of Fraud
New York Times, June 20, 2008

• RCMP brought criminal charges against three

former Nortel executives.
• Charged – Frank Dunn, CEO, Douglas Beatty,
CFO, and Michael Gollogly, Controller.
• Charges relate to a scandal that set off a series
of accounting restatements that undermined
confidence in the company.
 Wal-Mart

• Globe and Mail, April 29, 2012

• Wal-Mart alleged 444 improper payments of
$24 million to Mexican Officials.
• Tried to cover up evidence and hired
lobbyists to try to water down the US Foreign
Corrupt Practices Act.
 Consequences

• 5% reduction in stock price

• The Economist – a multi-billion bottom line
impact.
 Accounting is an Information
System
Communication

Accoun
Identification Recording ting
Report
s
Ge r
7 M a ld T r
e
Fre acCau nholm
de r l
icto y Driv
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B

200
0
Prepare
accounting
reports
SOFTBYTE
Select economic Record, classify, Annual Report

events and summarize

(transactions)

Analyse and interpret

for users
 Users of Accounting Information

1. Internal users – data is needed

by management to plan and as
feedback on performance
Can we pay our bills?
2. External users – creditors,
investors, regulatory agencies,
tax authorities, customers,
suppliers, etc. How does our business
compare to competitors?

Video - Internal versus External Users

7 minutes, 75K views
 Data Analytics

• Analyze data to draw inferences

• Used by business decision makers to make
better business decisions
• Accounting information is used to support
business decisions using data analytics
 External Financial Reporting

 Financial statements to communicate accounting

information to external users
 Objective - to provide useful information to investors
and creditors to assist them in decision making.
 Accounting standards – consistency in how
transactions are recorded and presented in financial
statements
 Management is responsible for preparing financial
statements. Public accountants, through an external
audit, express a professional opinion on whether they
meet accounting standards and describe reality.
 CPA (Chartered Professional
Accountant) Designation

1. University degree and completion of 14

preparatory courses (which transfer from
KPU’s accounting program)
2. Six module Professional Education
Program
3. 30-month practical experience
4. Common final examination
5. Apply for membership
Information: www.cpawsb.ca/
Chapter 1 15
 What if you already have a University
Degree

• Post – Diploma in Accounting helps you

complete the 14 preparatory courses
(which transfer from KPU’s accounting
program)
• For students with a bachelor degree from
an accredited university, CPA Western
School of Business can evaluate
transcripts for equivalency.

Chapter 1 16
Chartered Professional Accountant
14 Preparatory Courses

Chapter 1 17
 Ethical Behaviour
• All professional accountants in
Canada must be members of CPA
Canada.
• Accountants and other
professionals have rules or codes
of conduct to guide their
behaviour.
• Accountants who violate ethics or
codes of conduct can lose their
memberships.

Chapter 1 18
 Types of Business Organizations

• An unincorporated business owned by one person

is a proprietorship (owner’s equity).
• An unincorporated business jointly owned by two
or more persons is a partnership (partners’
equity).
• A business organized as a separate legal entity
under corporation law with ownership divided into
shares is a corporation (shareholders’ equity).
 Types of Business Organizations

Video – Basic Forms of Ownership

3.5 minutes, 113K views
Video – Starting a Business in Canada
5 minutes, 52K views
20
 Generally Accepted Accounting
Principles (GAAP)
• Common set of generally accepted accounting
standards
• Developed from principles, assumptions and
concepts.
 Who Creates Accounting Standards?

• Accounting standards are created and enforced

by professional associations.
• ASPE (private enterprise) standards are created
by the Accounting Standards Board of CPA
Canada.
• IFRS standards are created by the International
Accounting Standards Board.
• Publicly listed companies must follow IFRS.
• Private companies can choose either ASPE or
IFRS standards.
Chapter 1 22
Conceptual Framework

Framework designed to
provide guidance to
accountants.
1.Objective
2.Elements of
statements
3.Qualitative &
recognition and
measurement
4.Concepts,
assumptions and
constraints
 Conceptual Framework

Video - Conceptual Framework in Canada

10 minutes, 58K views
•Coherent system that guides the
development and application of
accounting standards.
•Top – Objective – to provide
information to assist users in making
decisions
Elements of Financial Statements

Each element, such as assets, has a precise accounting

definition.
1.Assets
2.Liabilities
3.Equity
4.Revenues
5.Expenses

Chapter 2 25
 Foundational Concepts & Assumptions

Fundamental Qualitative Characteristics

•Relevance, faithful representation, neutrality
Enhancing Qualitative Characteristics
• Comparability, consistency, verifiability,
timeliness, understandability
Fundamental Qualitative Characteristics

1. Relevance – information should make a

difference in decisions.
2. Faithful representation – information
accurately describes what happened
3. Neutrality – unbiased presentation of
information. Must be complete and free
from error.
 Recognition and Measurement
When reviewing a transaction, we follow a two-
step process
1.Recognition – the process of deciding whether
to record a transaction
• Revenue recognition principle – report revenue
in the period when the performance obligation is
met.
• Matching concept – attempt to recognize
expense in the same period when related
revenue is earned
 Recognition and Measurement

2. Measurement – determining the dollar

amount to be recorded
• Historical cost – report original cost.
reliable and verifiable but perhaps not
relevant.
• Fair value – what is the current market
price? more relevant but less reliable
 Recognition and Measurement
2. Measurement – determining the dollar
amount to be recorded
• Monetary unit concept – only
transactions that can be expressed in
dollars are included in financial records.
 Enhancing Qualitative
Characteristics
1. Comparability – accounting information can be
compared between companies.
2. Consistency–
Consistency same accounting policies are used
over time.
3. Verifiability – independent observer sing the same
methods, obtain similar results.
4. Timeliness – information is available before it
loses its ability to influence decisions.
5. Understandability – information is presented in a
clear and concise fashion.
 Foundational Concepts and
Assumptions
1. Reporting Entity Concept – the activities of
each organization should be kept separate
from those of their owners and other
organizations.
2. Going Concern Assumption - assumes
organization will continue to operate for
foreseeable future.
3. Periodicity concept – Organizations divide
up economic activities into time periods.
 Brief Exercise 1 – 6 (page 1-44)
Match the following term with the descriptions:
1.Historical Cost
2.Revenue recognition
3.Reporting entity concept
4.Monetary unit concept
____ transactions are recorded in units of money.
____ transactions are recorded based on the actual
amounts received or paid.
____ Personal and business records are separate.
____ Performance obligations are satisfied.
____ Business is expected to operate indefinitely.
Brief Exercise 1 – 6 (page 1-44)
Match the correct term to the statement.
(a) 5. Monetary unit
(b) 1. Historical cost
(c) 4. Reporting entity
(d) 2. Revenue recognition
(e) 3. Going concern assumption
 Four General Purpose Financial
Statements

1. Income Statement
2. Statement of Owner’s Equity
3. Balance Sheet
4. Cash Flow Statement

35
Chapter 1
 1. Income Statement
The results of operations during a period of time
(e.g. month, quarter, year)
•Revenues – sale of a product or service
•Expenses – assets or services used to earn
revenues
•Profit (loss) = revenues - expenses
Profit revenues > expenses
Loss revenues < expenses

Chapter 1 36
 Income Statement
SOFTBYTE
Income Statement
Month Ended September 30, 2024
Revenues
Service revenue $ 4,700
Expenses
Salaries expense $ 900
Rent expense 600
Advertising expense 250
Utilities expense 200
Total expenses 1,950
Net income $ 2,750

Net income of $2,750 shown on the income statement is

added to the beginning balance of owner’s capital in
the statement of owner’s equity .
 2. Statement of Owner’s Equity

Owner’s claim on the assets of the company is

known as owner’s equity
Owner’s equity = assets - liabilities
Reports the changes in owner’s equity, over a
period of time.

Chapter 1 38
 Components of Equity
1. Investments – Cash or other assets invested
by its owners. Increase owners equity.
2. Drawings – withdrawals of cash or other
assets by owner for personal use.
- Decrease owner’s equity
3. Revenues – business activities designed to
earn income. Increase owner’s equity.
4. Expenses – cost of assets and services
used to earn income. Decrease owner’s
equity.
 Effects of Transactions on
Owner’s Equity

INCREASES DECREASES

Investments
Investments Drawings
Drawingsby
by
by
byOwner
Owner Owner
Owner
Owner’s
Equity

Revenues
Revenues Expenses
Expenses
 Equity Equation

Beginning + Profit + equity – Drawings = Ending

Capital (loss) investment Capital

Chapter 1 41
 Statement of Owner’s Equity
SOFTBYTE
Statement of Owner's Equity
Month Ended September 30, 2024

M. Leonid, Capital, September 1 $ -

Add: Investments $ 15,000
Net income 2,750 17,750
$ 17,750
Less: Drawings 1,300
M. Leonid, Capital September 30 $ 16,450

Net income of $2,750 is carried forward from the income

statement to the statement of owner’s equity.
 3. Balance Sheet

• Reports assets and the claims on those assets

at a specific date.
• Assets – resources owned by a business
• Liabilities – debts of the business
• Owner’s equity

Chapter 1 43
 Basic Accounting Equation

Assets = Liabilities + Owner’s

Equity
 Balance Sheet
SOFTBYTE
Owner’s
capital of Balance Sheet
$16,450 at the September 30, 2024
end of the Assets
reporting Cash $ 8,050
period – Accounts receivable 1,400
shown in the Supplies 1,600
statement of Equipment 7,000
owner’s equity Total assets $ 18,050
– is also
shown on the Liabilities and Owner's Equity
balance sheet. Liabilities
Cash of Accounts payable $ 1,600
$8,050 on the
Owner's Equity
balance sheet
A. Leonid, Capital 16,450
is reported on
Total liabilities and owner's equity $ 18,050
the cash flow
statement.
 All Four General Purpose Financial
Statements are Interconnected

Income Balance Sheet

Statement
Change in cash as
Reports in the balance
Ending
Net Income sheets is explained
balance
reported by …

Statement of Statement of
Equity Cash Flows
 Annual Financial Report

• Publicly traded companies must give their

shareholders an annual financial report each year
• Management is responsible for preparing the
financial statements.
• Audited statements – a public accounting firm
audits the statements and expresses a professional
opinion on whether it follows GAAP and fairly
describes the reality of the business.
• Samples on the course website

Chapter 1 47
 Preparing Financial Statements

Video - Financial statements explained (11 minutes,

251K views)
Video - Financial statements (13 minutes, 36K views)
Video - Preparing financial statements (10 minutes,
85K views)
Video - What is a financial audit? (4 minutes, 22K
views)
Video - Income Statement (6 minutes, 171K views)
Exercise 1.6 (page 1-48)
Exercises 1.15 & 1.16 (page 1-51)