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MOS 1023 Chapter 1: The Purpose and Use of Financial Statements > Chapter 1 (1.1, 1.2) > Flashcards

Chapter 1 (1.1, 1.2) Flashcards

Uses and Users of Accounting Information, Forms of Business Organization

1
Q

How does North West Company Inc in the feature story, rely on accounting as its key decision-making tool?

A
  • Whether to expand into a new market, change its product categories, or operate as a franchisee
  • What types and quantities of inventory should be carried at each store
  • Pricing decisions made given the significance of transportation costs and changing foreign currency values
  • Track consumer demands in the disparate markets it serves
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2
Q

Besides the management and the company itself, who else needs the financial information for making decisions?

A

External audiences, such as:
- Banks
- Potential shareholders
- Suppliers
also need to see the company’s financial information

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3
Q

Why do external audiences need to also see the company’s financial information?

A

To see before deciding whether to lend to, invest in, or sell to the retailer

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4
Q

What is the way the North West Company and other businesses communicate their financial information?

A

Through financial statements

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5
Q

What is accounting?

A

The information system that identifies, records, and communicates the economic events of an organization to users interested in that information.

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6
Q

Why does accounting matter to its users?

A

Because the world’s economic systems depend on highly transparent, reliable, and accurate financial reporting

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7
Q

What has accounting long been named/labelled as?

A

“The language of business” because the world’s economic systems depend on it

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8
Q

Why do many Canadians, even those who do not plan on becoming accountants, study accounting?

A

Because it is the “language of business” (aka used in many business practices)

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9
Q

What are some examples of Canadians who have studied accounting in depth and their current roles?

A
  • Mike Cassidy: pres of Maritime Bus
  • Sabrina Geremia: managing director of Google Canada
  • Monique Leroux: chair of the board of Investissement Québec
  • Craig Reynolds: CEO Saskatchewan Roughriders
  • Elizabeth Marshall: senator
  • George Melville, chairman and owner Boston Pizza International
  • Joe Resnick: NHL hockey player agent
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10
Q

Why is a working knowledge of accounting relevant and useful whether you’re an accountant or not?

A

Accounting is important in whatever role you assume as a user of accounting information: owner of your own business, working for someone else’s business, investing in a business, or understanding your own personal finances.

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11
Q

What 2 types can users of accounting information can be divided broadly into?

A
  • Internal users
  • External users
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12
Q

What types of organizations and companies do internal users of accounting info work for?

A

Manage companies, whether for-profit or not-for-profit or government organizations. They work for and manage these organizations

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13
Q

What are internal users?

A

Users of accounting information, including company officers, managers, and directors, who have access to an organization’s internal accounting information

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14
Q

By virtue of their position in management, what do internal users have access to and what does it help them do?

A

Have access to internal accounting information to help them make the decisions required to run the company.

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15
Q

What are examples of positions in
a company that internal users have?

A
  • Company officers (senior management)
  • Managers and directors in finance, marketing
  • HR
  • Production
  • Other functional areas within a company
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16
Q

Anyone who works for a company and has access to accounting information to assist them in managing and operating the company is considered to be an _________

A

internal user

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17
Q

What kinds of questions do internal users in finance ask?

A

Is there enough cash to pay the bills?
Do we need to borrow more money?

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18
Q

What kinds of questions do internal users in human resources ask?

A

How many employees can we afford to hire this year?
Can we afford to negotiate salary increase?

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19
Q

What kinds of questions do internal users in marketing ask?

A

What price should we sell tablets for to maximize profits?
Did our advertising campaign increase sales?

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20
Q

What kinds of questions do internal users in production ask?

A

Which product line is the most profitable?
Should we contract out some of our production or distribution operations?

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21
Q

What is required in order to answer the important questions asked by internal users in a business?

A

Users need detailed accounting information on a timely basis; that is, it must be available when it is required

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22
Q

What types of internal reports does accounting provide to internal users?

A

Financial comparisons of operating alternatives, projections of income from new sales campaigns, analyses of sales costs, and forecasts of cash needs

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23
Q

In what form do companies present summarized financial information and for what type of use (internal or external)?

A

In the form of financial statements for both internal and external use

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24
Q

What are external users?

A

Users of accounting information that are not involved in managing the organization and do not have access to accounting information other than that which is publicly available, including investors, lenders, and other creditors.

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25
Q

There are several types of external users of accounting information, what 2 types are considered to be the primary users of financial accounting information?

A

Investors and creditors

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26
Q

What are investors (owners)?

A

Users of accounting information that have an ownership interest (own debt or equity securities) in the organization.

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27
Q

What do investors use accounting information for?

A

Use accounting information to make decisions to buy, hold, or sell their ownership interest

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28
Q

What are creditors?

A

Users of accounting information, including suppliers, that grant credit (sell on account) to a customer.

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29
Q

What are examples of creditors?

A

Such as bankers (which are also known as lenders) and suppliers

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30
Q

What are lenders?

A

Users of accounting information, including bankers, that extend credit to borrowers

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31
Q

What do creditors use accounting information for?

A

To evaluate the risks of lending money or of selling on credit

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32
Q

What is an alternative term for investors?

A

Shareholders

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33
Q

What is an alternative term for creditor?

A

Lenders

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34
Q

What kinds of questions do investors (external user) ask about a company?

A

Should I purchase shares of this company?
What is the return from my investment?

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35
Q

What kinds of questions do creditors (external user) ask about a company?

A

Will the company be able to pay its debts as they come due?
How does the amount of funds invested by shareholders compare with the amount borrowed by creditors?

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36
Q

Are there other external users other than investors and creditors?

A

There are many other external users with a variety of information needs and questions.

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37
Q

What are examples of external users that aren’t investors or creditors?

A
  • Potential employees
  • Current employees
  • Labour union
  • Taxing authorities
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38
Q

How do potential employees (external user) use accounting information?

A

Potential employees use both financial and non-financial info to learn about the company and evaluate job prospects

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39
Q

How do current employees and labour unions (external user) use accounting information?

A

Current employees WHO ARE NOT DIRECTLY INVOLVED in managing the company, as well as any labour union that may represent them, use financial info to bargain for better salaries and benefits.

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40
Q

How do taxing authorities (external user) use accounting information?

A

authorities, such as the Canada Revenue Agency, use info from a company’s financial statements in assessing a company’s income tax return

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41
Q

What kinds of data do accounting systems collect?

A

Vast amounts of data about the economic events experienced by a company and about the users with whom the company engages, such as suppliers and customers

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42
Q

How do business decision-makers take advantage of the data collected by accounting systems?

A

By using data analytics to make more informed business decisions.

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43
Q

What does data analytics involve?

A

Analyzing data, often employing both software and statistics, to draw inferences

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44
Q

As both data access and analytical software improve, how does the use of data analytics change?

A

Data analytics to support decisions becomes increasingly common at virtually all types of companies

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45
Q

What must be done to financial info in order for it to have value to its users (external or internal)?

A

Must be prepared by individuals with high standards of ethical behaviour.

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46
Q

Who and what is ethical decision making important for?

A

Ethical decision-making is critical in the preparation of accounting information and to the decision makers who rely on this information.

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47
Q

Are most individuals in businesses ethical? What makes their actions ethical?

A

They are.
Their actions are both legal and responsible. They consider the organization’s interests when they make decisions.

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48
Q

How are accountants and other professionals held to standards?

A

They have extensive rules of professional conduct to guide their behaviour with each other and the public

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49
Q

What do most companies have to ensure their behaviour is ethical?

A

They have codes of conduct that outline their commitment to ethical behaviour in their internal and external relationships

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50
Q

Identify the type of user who would most likely ask:
“Will I be able to obtain enough cash to finance this month’s cash?”
and are they an internal or external user?

A

Chief financial officer, Internal

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51
Q

Identify the type of user who would most likely ask:
“Will the company be able to repay the money we lend them when the loan comes due?”
and are they an internal or external user?

A

Creditors, External

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52
Q

Identify the type of user who would most likely ask:
“What was the labour cost for the production of 1,000 board feet of lumber”
and are they an internal or external user?

A

Production manager, Internal

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53
Q

Identify the type of user who would most likely ask:
“Will the company stay in business long enough to service the products I buy from it?”
and are they an internal or external user?

A

Customers, External

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54
Q

Identify the type of user who would most likely ask:
“Will the company’s share price go up or down in the near future?”
and are they an internal or external user?

A

Investors, External

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55
Q

Identify the type of user who would most likely ask:
“In which geographical areas and age demographics are our sales increasing?”
and are they an internal or external user?

A

Marketing manager, Internal

56
Q

What is the difference between internal and external users?

A

Internal: work for the company at a mngmnt level and require access to internal accounting information to help manage and operate the company
External: not involved in running the company and do not have access to accounting information other than that which is available to the general public

57
Q

Do accounting standards vary depending on the type of organization?

A

Yes because businesses can be organized in different ways which effects the standards used

58
Q

What are the 3 common forms of business organization?

A
  1. Proprietorships
  2. Partnerships
  3. Corporations
59
Q

What is a proprietorship?

A

A business owned by one person, known as a proprietor.

60
Q

Why is a proprietorship often called a “sole” proprietorship?

A

Because there is a single owner

61
Q

What are the benefits of a proprietorship?

A
  • Simple set up & gives owner control
  • Only a relatively small amount of money (capital) is needed to start in business
62
Q

What is unlimited liability in a proprietorship?

A

The owner receives any income, suffers any losses, and is personally liable (responsible) for all debts of the business

63
Q

Is there legal distinction between the owner and the business in a proprietorship?

A

No legal distinction between the business as an economic unit and the owner

64
Q

What is the life of the proprietorship limited to?

A

The life of the owner

65
Q

How is business income in a proprietorship reported and taxed as?

A

As self-employment income and taxed on the owner’s personal income tax return

66
Q

For accounting purposes how must business records for the proprietorship be kept?

A

Kept separate from those related to the owner’s personal activities

67
Q

What is the separation of business and personal records known in its simplest form as?

A

The reporting entity concept

68
Q

What is the reporting entity concept?

A

The concept that economic activity that can be identified with a particular company must be kept separate and distinct from the activities of the owner(s) and of all other economic entities.

69
Q

What is the objective of the reporting entity concept?

A

To ensure that the entity’s financial statements faithfully represent only its economic activities

70
Q

What types of business organizations does the reporting entity concept apply to?

A

Not only to proprietorships, but also to partnerships and corporations

71
Q

What are examples of proprietorships?

A

Small service businesses such as hair salons, plumbers, mechanics,
many small-scale farms and small retail stores.

72
Q

What is a partnership?

A

A business owned by more than one person

73
Q

In most respects what type of business organization is a partnership similar to?

A

A proprietorship except that there is more than one owner

74
Q

Why are partnerships often formed?

A
  1. One person does not have enough economic resources to start or expand the business
  2. Partners bring unique skills or other resources to the partnership
75
Q

How are partnerships normally formalized?

A

In a written partnership agreement

76
Q

What does a written partnership agreement outline?

A
  • The formation of the partnership
  • Partners’ contributions
  • How net income and losses are shared
  • Provisions for withdrawals of assets and/or partners
  • Dispute resolution
  • Partnership liquidation
77
Q

What makes establishing a partnership more complex and costly than establishing a proprietorship?

A

The need to develop a partnership agreement

78
Q

Although there are advantages to working with others, what are the disadvantages of a partnership?

A

Each partner generally has unlimited liability for all debts of the partnership, even if one of the other partners created the debt

79
Q

Is there a way to avoid both partners in a partnership to have unlimited liability?

A

There are certain situations where partnerships can be formed with limited liability for selected partners.

80
Q

How is income of a partnership reported as?

A

Similar to a proprietorship, reported as self-employment income and taxed on each partner’s personal income tax return

81
Q

What does the reporting entity concept require for partnerships?

A

That partnership records be kept separate from each partner’s personal activities.

82
Q

When are partnerships typically used, and give examples of partnership businesses?

A

Typically used to organize professional service businesses, such as the practices of lawyers, doctors, architects, engineers, and accountants

83
Q

What is a corporation?

A

A company organized as a separate legal entity, owned by shareholders, with most of the rights and privileges of a person. Shares are evidence of ownership.

84
Q

What is a drawback of corporations?

A

Most complex and costly form of business to establish

85
Q

What do you receive as as an investor in a corporation?

A

You receive shares (aka stock) to indicate your ownership claim. Often possible for individuals to become shareholders by investing relatively small amounts of money.

86
Q

If you are a shareholder of a corporation, what types of information are not reported in the corps financial statements?

A

The amount of cash that you have in your personal bank account and the balance you owe on your personal car loan

87
Q

How is a corporation similar to proprietorships and partnerships?

A

You and the company are separate reporting entities under the reporting entity concept

88
Q

Because a corporation is a separate legal entity, how does it affect its life?

A

Indefinite; it continues on regardless of who owns its shares. It is not affected by the withdrawal, death, or incapacity of an owner, as is the case in a proprietorship or partnership.

89
Q

What is North America’s oldest corporation and when was it formed?

A

The Hudson’s Bay Company, was formed in 1670

90
Q

What do you need to consider if you choose to organize as a proprietorship or partnership?

A

You are personally liable for all debts of the business

91
Q

Are shareholders responsible for corporate debts?

A

Not responsible for corporate debts unless they have provided a personal guarantee to the lender for them

92
Q

What is a significant advantage for the corporate form of organization?

A

Shareholders enjoy limited liability; their risk of loss is limited to the amount they have invested in the company’s shares.

93
Q

What are all the advantages of a corporation that make it easier for a corporation to raise capital (cash) compared to proprietorship and partnership?

A

All of these advantages taken together: indefinite life, ease of transferring ownership when selling shares, and limited liability—can make it easier for corps, especially large corps

94
Q

What is another potential advantage corps have when it comes to taxes?

A

May receive a more favourable income tax treatment than other forms of business organization such as proprietorships and partnerships

95
Q

Why would it be wise to seek professional advice on taxation matters before choosing any form of business organization

A

Because of the wide variety of income tax issues that apply to different companies in different jurisdictions

96
Q

Although the combined number of proprietorships and partnerships in Canada is more than the number of corporations, the _____ produced by corporations is far greater

A

Revenue

97
Q

What do most of the largest businesses in Canada: Alimentation Couche-Tard, Royal Bank of Canada, Power Corporation of Canada, Loblaw Companies, Great-West Life, Suncor, Imperial Oil, and Empire Company have in common?

A

They are corporations specifically public corporations.

98
Q

Recently, the top 15 of Canada’s largest corporations each reported annual revenues ranging from how many billions of dollars?

A

Ranging from $34.7 billion to $78.8 billion.

99
Q

What is a public corporation?

A

A corporation whose shares are publicly traded on a stock exchange.

100
Q

Where are shares for Canadian public corporations listed on?

A

On Canadian stock exchanges such as the Toronto Stock Exchange (TSX)

101
Q

Why are public corporations said for their shares to be “widely held”?

A

Because these companies have thousands of shareholders

102
Q

What are examples of Canadian corporations that have many shares?

A

Shareholders have purchased more than 1.4 billion shares of Royal Bank of Canada, while Alimentation Couche-Tard has issued 564 million shares

103
Q

What is the result of shareholders buying lots of shares in public corporations?

A

Public coorps are able to raise large amounts of capital.

104
Q

How is the ownership of public corps constantly changing?

A

Because millions of shares are being bought and sold on stock exchanges each day

105
Q

Do shares of a public corporation being bought and sold involve the corp or impact it’s financial statements?

A

No, these transactions are between the shareholders that are selling and purchasing these shares.

106
Q

Do shareholders who invest in public corporations have any personal involvement in the management of the company?

A

No, while the shareholders legally own the corporation, they manage it indirectly through a board of directors they elect

107
Q

How does the board of directors manage a public corporation?

A

Shareholders elect board directors, the board, in turn, sets the broad strategic objectives for the company and hires the company’s officers, such as the CEO, to execute policy and perform the daily management functions.

108
Q

What does CEO stand for?

A

Chief executive officer

109
Q

What are public corporations required to do with their financial statments?

A

Make their financial statements available to the public on a quarterly (every three months) and annual basis.

110
Q

Where do public corporations publish their financial statements?

A

On their own websites, as well as that of the System for Electronic Document Analysis and Retrieval (SEDAR), which posts financial statements for all public corporations in Canada

111
Q

What is a private corporation?

A

A corporation whose shares are not traded on a public stock exchange.

112
Q

Why are shares of a private corporation said to be “closely held”?

A

Because they issues shares, but it does not make them available to the general public (therefore few shareholders)

113
Q

What is the result on capital due to private corporations not issuing lots of shares to the public?

A

Do not have the same advantages of raising capital as do large corporations.

114
Q

Would a small, local incorporated business have as much difficulty raising funds as a proprietorship or partnership would?

A

Yes it would likely

115
Q

What are examples of very large private corporations?

A

Irving Group of Companies, the Jim Pattison Group, and McCain Foods

116
Q

Can private corporations be as large as public corporations?

A

Some of these private corporations are equal in size to or larger than many public corporations.

Ex: the Pattison Group reported annual revenue of $10.1 billion = top 50 of Canada’s largest public corporations by annual revenue

117
Q

What is a similarity between private corps and proprietorships & partnerships?

A

They seldom distribute their financial statements publicly

118
Q

What is a difference between private and public corps when it comes to releasing financial statements?

A

Unlike public corps, private corps are under no obligation to release financial statements and most private corps do not wish to disclose financial information to their competitors and the public.

119
Q

Why is Sobeys an interesting example of a private company when it comes to releasing financial statements?

A

Private company that does publish its financial information: not publicly traded due to acquisition by Empire Company, but must still disclose its financial information annually as a result of its outstanding public debt

120
Q

Is the form used to initially organize a business set in stone?

A

No, it is not permanent and can be changed as the needs of the business and its owners change

121
Q

What do many businesses start as?

A

Start as proprietorships or partnerships and eventually incorporate

122
Q

What are examples of major Canadian companies that started as proprietorships and eventually incorporated as they grew?

A

George Weston, Sobeys, Bombardier, and Dollarama

123
Q

How do businesses decide on the amount of financial information to disclose? In what format should financial information be presented?

A

The answers to these questions can be found in accounting rules and practices that are recognized as a general guide for financial reporting purposes

124
Q

What is GAAP (generally accepted accounting principles)?

A

A general guide, having substantial authoritative support, that describes how economic events should be recorded and reported for financial reporting purposes.

125
Q

What are other terms for “accounting principles”?

A

Accounting standards or accounting policies

126
Q

How do GAAPs differ?

A

Depending on the form of business organization

127
Q

What GAAPs must publicly traded corps use?

A

International Financial Reporting Standards (IFRS), a set of global accounting standards developed by the International Accounting Standards Board

128
Q

What GAAPs must Private corporations (whose users can have different needs than those of public corp) use?

A

Have a choice between using IFRS or Accounting Standards for Private Enterprises (ASPE), developed by the Canadian Accounting Standards Board

129
Q

Why was ASPE developed?

A

To reduce the complexity and cost of financial reporting for private companies, recognizing that there are normally fewer users of private company financial statement

130
Q

How does access to financial information differ for users of private companies vs public?

A

Generally, the users of private company financial statements also have access to financial information beyond that available to the users of public company financial statements.

131
Q

What are the 3 reasons why a private company may adopt IFRS?

A
  • It is considering accessing public debt or equity markets in the future
  • It wants to be able to compare its financial results with competitors that use IFRS
  • It has foreign subsidiaries that are required to use IFRS and it wants a common set of accounting standards across the company.
132
Q

What GAAPs do proprietorships and partnerships generally follow for external financial reporting purposes?

A

They are privately owned (even though they are not private CORPS, these businesses generally follow ASPE for external financial reporting purposes

133
Q

Why (and when) do proprietorships and partnerships not follow any particular set of accounting standards?

A

Because they often prepare financial statements only for the internal use of the owner(s)

134
Q

How can you tell whether a company is a corporation or not in Canada and the US?

A

Identified by “Ltd.” (“Ltée” in French), “Inc.,” “Corp.,” or in some cases, “Co.” following their names.

135
Q

How can you tell whether a company is a corporation or not outside of North America?

A

In Brazil and France, the letters used are “SA” (Sôciedade Anonima, Société Anonyme); in Japan, “KK” (Kabushiki Kaisha); in the Netherlands, “NV” (Naamloze Vennootschap); in Italy, “SpA” (Societá per Azioni); and in Sweden, “AB” (Aktiebolag)

136
Q

How does the UK and Germany differentiate public and private corporations with letters?

A

UK: “plc” (public limited company), while private corporations are denoted by “Ltd.
Germany: “AG” (Aktiengesellschaft) for public corporations and “GmbH” (Gesellschaft mit beschränkter Haftung) for private corporations

137
Q

Are there any name distinctions between public and private corporations in Canada?

A

None

MOS 1023 Chapter 1: The Purpose and Use of Financial Statements (6 decks)

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