Class Notes Acct 1220 class 1-5Class Notes Acct 1220 class 1-5Class Notes Acct 1220 class 1-5Class Notes Acct 1220 class 1-5Class Notes Acct 1220 class 1-5Class Notes Acct 1220 class 1-5Class Notes Acct 1220 class 1-5vClass Notes Acct 1220 class 1-5
Accounting is not only about numbers
Numbers reflect what is happening in the background
Financial Statements: Purpose and Use
Uses and Users of Accounting
Accounting identifies and records economic events of an organization and
communicates to interested users
There are internal and external users
Users of Financial Information
Internal users work for the company/organization and are involved in running the
company/organization (ie. managers)
External users don’t work for company. (ie. investors, customers, and taxing authorities)
Ethical behaviour
Accounting preparers must have high ethical standards for info to have value
o Actions are legal and responsible
o Consider organization’s interests
Accountants, other professionals, and most companies have rules or codes of conduct
to guide ethical behaviour
Proprietorship
Owned by one person
Simple to set up
Owner has control over business
Limited life
Unlimited liability
Income tax paid by owner
Partnership
Similar to propretiship, but is owned by more than one person
Formalized in a written agreement
Limited life
Each partner has unlimited liability
Income tax paid by individual partners
Corporation
Separate legal entity owned by shareholders
Indefinite life
Ease of raising capital
Shareholders enjoy limited liability
Corporation pays income tax
May be public or private
o Public if shares are traded on a stock market (ie. TSX)
, o Private if shares are not available to the general public
Generally Accepted Accounting Principles (GAAP)
Rules and practices for the preparation of financial statements
Different for publicly-traded and private corps
o Public use International Financial Reporting Standards (IFRS)
o Private may use IFRS or Accounting Standards for Private Enterprises (ASPE)
Proprietorships and partnerships generally follow ASPE for external reporting
o Not required to follow any particular standards for internal use
Types of Business Activities
Financing
Investing
Operating
Financing Activities
Obtaining funds to finance the operations of a business
o Examples
Selling or repurchasing shares (equity financing)
Borrowing money or repaying loans (debt financing)
Forms of debt
o Bank indebtedness, bank loans
o Long-term debt such as mortgages, bonds, finance leases
Investing Activities
Purchase or sale of long-lived assets needed to operate the company
o Examples
Purchase or sale of property, plant and equipment, intangible assets
Purchase or sale of investments (ie. shares or debt securities of other
companies)
Operating Activities
Main day-today activities of the business
o Examples
Sources of income
Expenses
Related accounts such as accounts receivable and accounts payable
Financial Statements
Statement of income
o Reports revenue and expense for a specific period of time
Statement of change in equity
o Reports changes in each component of shareholders equity during a period of
time
Statement of financial position
o Shows the assets, liabilities, and shareholders’ equity at a specific time
Statement of cash flows
o Shows how company obtained cash and how that was used
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