Chapter 1 Flashcards
What is accounting
a record of all economic events of an organization
What should accounting be
Transparent, reliable, and accurate financial reporting
Internal users
Manage organizatinos (profit.non profit/governmental orgs_
Examples of internal users
managers
directors in finance mktg hr
What info is more detailed, info for internal users or external users?
internal users! the info is used to make decisions requried to run the compan
what makes internal users special
they are able to access accounting information readily, external users only recieve info when ever it is made publically avialable PERIODICALLY
External users
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.
MAIN EX of external users+what they do with accounting info
investors (owners)= choose to buy hold or sell ownership interest
Creditors (lenders)= use accoutning info to evaluate risk of lending money or selling on creedit
INVESTORS ARE ALSO KNOWN AS
SHAREHOLDORS
CREDITORS ARE OFTEN KNOWN AS
LENDERS OR DEBTHOLDERS
Other examples of external users
1) non management employees (any union that represents them)
2) potentnail employees (looking for job prospects)
3) taxing orgs (cra)
4) regulatory orgs (checking if ocmpany is up to standard)
5) customers
Ethics
- Accounting info should be up to standards, legal, responsible, and you must consider the organizations’ interests, they should protect users
- “Accounting Code of Ethical Conduct”- every large org will have this code of conduct
- Unethical Conduct: Management portrays a better performance on the financial statement to get more stakeholders or the managers want higher bonuses, maybe they can portray worse financial performance to reduce the leverage of labour unions or maybe to reduce tax payments]
4 types of data analytics
EIES
Descriptive
Diagnostic
Predictive
Prescriptive
Descriptive Data Analytics
What happened?
Diagnostic Data Analytics
Why did it happen
Prescsriptive
What should we do to fix this
Predictive
What is likely to happen
Proprietorships
business owned by one person, known as a proprietor
pros of proprietorship
simple to set up, total control, small amount of money to start business
cons of propreitorship
UNLIMITED LIABILITY, owner bears all loss,
no legal disctinction betwen business and owner, so life of proprietorship is limited to the life of owner
how is a proprietorship business income reported?
on the owners personal income tax return
Reporting Entity Concept
economic activity of a specific company must be kept separate and distinct from all owners other economic activities
basic example of reporting entity concept
keeping the records of a proprietorship separate!
why should we have reporting entity concept
because of ethics and representing ONLY businesses’ activities- easier to judge
What is a partnership
business with 1+ person; like proprietorship but not rlly
Why are partnerships formed?
because one person does not have enough money/ different skills/resources
Why are partnerships more complex than proprietorships
need to make agreement that lays out the rules
who has liability in partnerships
ALL partners have unlimited liability for all debts of the partnership (Even if they did not create the debts themselves)
Where is the business income reported from a partnership
on each partners’ personal income tax return
examples of partnerships
lawyers doctors architects practices
what is corporation
SEPARATE LEGAL ENTITY owned by shareholders, most costly and most complex business entity
synonym of stock
shares
Characteristics of a Corporation
1) indefinite life (exists regardless who owns its shares)
2)easy to sell shares and transfer
3) shareholders have limited liability (less risk)
When can shareholders have unlimited liability
IF THEY provided personal guarantees to lenders for the debts of a corporation, which would mean their liability would extend beyond the amount of their investment
Why do corporations raise money easier
1) indefinitie life
2) easy to transfer ownership via shares
3) limited liability
Who is treated better with income taxation
CORPORTATIONS
existing wise
Proprietorships + partnerships > Corporations
but
money wise
Proprietorships + partnerships < Corporations
When is a corporation public
-Shares are publically traded on stock excange
- required to make financial statements avaiable to the public quarterly and annually (ON SEDAR)
Private corporation
-issue shares but are not traded publically
- EX: MCCAIN FOODS, JIM PATTISON GROUP
- CANT RAISE MONEY AS EASILY
-dont need to publish their papers
Verb: to create a corporation
Incorporate
GAAP (Generally Accepted Accounting Principiles)
broad policies and practices as well as rules and procedures about how to record and report economic events.
GAAP- Public corps must use —-
IFRS Standards (International Financial Reporting Standard)
GAAP- Private corps can choose between — —
IFRS (intl financial reporting standards) or ASPE (Acct standards for private enterprise)
Why do PRIVATE companies CHOOSE IFRS
1) want to access public debt or equity markets in the future
2) wants to be able to compare fiancial resutls w/ compeititon who use IFRS
3) has foreign subsidiaries & wants common standard
PUBLIC EQUITY MARKETS???
THESE ARE STOCKS
privately owned but not private corproations
Propreitorships and Partnerships
What gaap principles do proprietroships and partnerships use
ASPE when need be
Fo rinternal accounting standards, do private/public corps stick to any standards
DONT HAVE TO
3 types of economic activity
1) financing
2) investing
3) operating
What do the 3 economic activites result in
Cash inflow
Cash Outflow
Financing Activities
ALL ACTIVITES RELATED TO: DEBT financing [LOANS] or EQUITY Financing [Selling/buying stock]
ex:
-borrowing or repaying cash from (to) lenders,
-and issuing or reacquiring shares or paying dividends to investors.
Investing Activites
purchasing long lived assets (land building equipment)
ourchasing or selling shares or debt OF OTHER COMPANIES
Operating Activities
day to day operations, including cash flows erlated to revenue and expenses
What are shareholders called
Investors
Types of Share capital
common share= reprenting shareholders ownership of a company
If funds are borrowed, how much claim do shareholders have on the assets of a corp?
ONly residual claim!
means that if a company stops operating, all the debt needs to be repaid before shareholders get any returns on their capital
Dividends
payments distributing a protion of company income to shareholders
Fiscal year
accounting time period tha tis one year in length
Fiscal year ending in Jan 31 2022 is called
2021
When you repurchase company shares is it inflow or outflow?
outflow of cash
What are the people that a company borrows money from called
CREDITORS/LENDERS
Liabilities
Amounts OWED to creditors, must be repaid with interest
Types of liabilities
1) Operating lne of credit: pre arranged bank loan for a max amount allowing company to withdraw more money then it has
2) Bank loan payable (note payable) [SHORT TERM LOAN]
3) Long term debt ( mortgages payable, bonds payable, finance lease obligations)
When a company draws on operating line of credit it is caleld
BANK INDEBTEDNESS
— payable?
LIABILTIY!! YOU OWE THIS
Long term debt synonym
NON CURRENT DEBT OR NON CURREN TLIABILITIES
Paying interest on borrowed funds and paying dividens to shareholders is what activity
EITHER FINANCING OR OPERATING
but interest will be used as operating activity, dividens as financing activity
investing activities
purchasing/selling long lived assets a company needs
buying furniture equipment computers vehicles
OR
ourchasing or selling shares or debt OF OTHER COMPANIES
asset
resources a company owns or controls; asset provides future economic benefits that can be short- or long-lived
What is the general name of assets
propert, plant, equipment; capital assets; fixed assets
intangible assets
goodwill and intandible assets
goodwill (when a company buys another company when paying a price that is higher than the value of the purchased company’s net identifiable assets)
Goodwill menaing
BRAND VALUE that people respect
Intangible assets
dont have physical substance
COPYRIGHT TRADEMARK PATENTS
what sort of cash flow is investing
OUTFLOW
TWO TYPES OF INVESTMENT ACTIVITIES
relating to long term assets ; ORRRR in other compaies debt and shares
income
either an increase in asset or decrease in liability
from sale of aproduct or service
gains comes from
interest and dividendsr
(things that are not a commanies principal operation)
revenue comes from
sales of goods or services
Account recievable
ASSET! this is the right to recieve money in the furtre (owed money)
short term assets generally come from — activity
operating
ex of short term assett
supplies (short term asset used in day to day operations lIKE CLEANING SUPPLIES -» THESE ARE NOTTTT SOLD TO CUSTOMERS)
What are short terms assets that are stored to sell to customers called
Inventori
inventory vs supplies
inventory= for sale to customers
supplies= for day to day use
cost of inventory sold is
COST OF GOODS SOLD
expenses
decrease economic resouces
interest expense synonnym
finance cost (Cost of using debt)
accounts payable
the money you have to pay
interest payable
unpaid liability amount owed to crediots
salaries payable
unpaid salary owed t oemployees
Deferred tax liabilities are another example of a liability. They result from differences in how items are recorded for accounting and tax purposes.
Deferred tax liabilities are another example of a liability. They result from differences in how items are recorded for accounting and tax purposes.
When revenue - expenses = +#
Net income or net earning or profit
Revenue - expenses = -#
net loss
what is th eflow of business activiites
financing, investing, operating
Issuing a share is cash inflow
WORD
SUPPLIES ARE AN
ASSET NOT EXPENSE
