chapter 1 Flashcards
what is accounting?
it identifies and records the economic events of an organization and communicates to interested users
who are the 2 broad users of accounting?
internal users
external users
what are the 4 external users of accounting?
investors
creditors
customers
governments
what are the 2 internal users of accounting?
employees
managers
how to investors use accounting?
to decided if they should invest in a company
how to creditors use accounting?
to decide if they should extend credit to a company or make a loan to a company
how do customers use accounting?
for warranty
how do governments use accounting?
for GST and corporate tax as well as making sure all source deductions are done properly (taxes taken off of paycheques)
how do employees use accounting?
to make sure the firm they work for is doing good and can continue to pay them
how do managers use accounting?
to track the performance of the company to see if they will get any performance based compensation
what are internal users of accounting?
anyone inside to company using the companies accounting
what are external users of accounting?
anyone outside the company using the companies accounting
what must happen for accounting information to have value?
the preparers of the accounting forms must have high ethical standards
what are the 2 things that the prepares of accounting forms must keep in mind when making the financial statements?
actions are legal and responsible
consider the organizations interests and need to reflect the true economic outlook of the firm
what is data analytics?
involves analyzing data using software and statistics to draw inferences
what are the 4 most common types of data analytics?
descriptive (what happened)
diagnostic (why it happened)
predictive (what is likely to happen)
prescriptive (what should we do about it)
what is an example of descriptive data analytics?
a company stating they lost 20 M in revenues
what is an example of diagnostic data analytics?
the company lost 20M in revenues due to outdated equipment
what is an example of predictive data analytics?
what will continue to happen if we use the outdated equipment
what is an example of prescriptive data analytics?
we should invest in to better equipment to stop the loss of profits
what are the 6 characteristics of a proprietorship?
owned by one person
simple to set up
owner has control over business
limited life
unlimited liability
income tax paid by owner
what are the 5 characteristics of a partnership?
owned by more than one person
formalized in a written agreement
limited life
each partner has unlimited liability
income tax paid by individual partners
what are the 6 characteristics pf a corporation?
separate legal entity owned by shareholders
indefinite life
ease of raising capital
shareholders enjoy limited liability
corporations pays income tax
may be public or private:
public of share are traded publicly
private of share are not available to public
what are the 3 form of business organizations?
proprietorship
partnership
corporation
what is the generally accepted accounting principles (GAAP) for business organizations?
accounting rules for the preparation of financial statements
are there generally accepted accounting principles for publicly traded and private corporations?
yes
what rules for creating financial statements do publicly traded corporations use?
international financial reporting standards (IFRS)
what rules for creating financial statements do private corporations use?
they may use international financial reporting standards (IFRS) or they can use accounting standards for private enterprises (ASPE)
what is international financial reporting standards (IFRS)?
a standardized framework for financial statements that is used in 100 countries
why was the international financial reporting standards (IFRS) created?
to help allow more access to capital markets so more people in different countries could read the standardized financial statements
what rules do proprietorships and partnerships usually follow when creating their accounting statements?
they typically follow accounting standards for private enterprise (ASPE) for their external reporting and they are not required to follow any particular standards for internal use
what are the 3 types of business activities on a statement of cash flow?
financing
investing
operating
what is financing activities?
obtaining and repaying funds to finance the operations of the business
what are 2 examples of financing activities?
issuing or repurchasing shares (equity financing)
borrowing money or repaying loans (debt financing)
what are the 2 kinds of financing?
equity financing
debt financing
what are the 5 kinds of debt?
bank indebtedness
bank loan payable
longterm debt like mortgages
bonds payable
finance lease obligations
what is debt financing?
using debt to fund operations
what is equity financing?
issuing shares to fund operations
what are investing activities?
purchase or sale of long-lived assets needed to operate
what are 2 examples of investing activities?
purchase or sale of long lived assets such as property, plant and equipment and intangible assets
purchase or sale of investments such as shares or debt securities of other companies
what are long lived assets?
assess that will benefit you for more than a year
what are operating activities?
the main day-to-day activities of the business
what are 3 examples of operating activities?
sources of income (revenue and income)
expenses
related accounts such as accounts receivable and accounts payable
what are the 4 kinds of financial statements?
statement of income
statement if changes in equity
statement of financial position
statement of cashflows
what is the statement of income?
reports reveries and expenses for a specific time period
what does the statement of income measure?
it measures the profitability of a company for a certain time period not the cash of that company
what are 2 other terms for a statement of income?
profit and loss
statement of earnings
what is the statement of changes in equity?
it reports the changes in each component of shareholders equity during a period of time
what are the 2 components of shareholders equity?
contributed capital (the sale of shares)
retained earnings ( the earnings that the owners can keep)
what is the statement of financial position?
shows the assets, liabilities and shareholders equity at a specific point in time
what is another term for the statement of financial position?
balance sheet
what is the equation for the statement of financial position?
assets= liabilities+shareholders equity
what is the statement of cash flows?
shows, for a specific period of time (typically 12 months), how a company obtained cash and how that cash was used
what is order of preparation for the 4 financial statements?
1) statement of income
2) statement of changes in equity
3) statement of financial position
4) statement of cash flows
what the the 3 things on statement of income?
revenues
expenses
net income
what are revenues?
arise from the sale of products or services and result in an inflow of assets
what are expenses?
costs of assets consumed or services used to generate revenues
what is net income?
net income/loss= revenues-expenses
what are the 5 things on the statement of changes in equity?
share capital
retained earnings/deficit
other shareholders accounts
changes in common shares
changes in retained earnings
what is share capital?
amounts contributed by shareholders and may include common and preferred share classes
what are retained earnings/ deficit?
cumulative net income retained in the corporation minus any dividends paid to shareholders
what is changes in common shares?
common shares at the beginning of the period+ common shares issued - common shares repurchased= common shares at the end of the period
what is changes in retained earnings?
retained earnings at beginnings of period+ net income/loss - dividends declared= retained earnings at end of period
what are the 3 things on a statement of financial position?
assets
liabilities
shareholders equity
what are assets?
resources owned or controlled by a business
what are liabilities?
claims of a lender and other creditors
what is shareholders equity?
claims of shareholders
what is the accounting equation?
assets= liabilities+ shareholders equity
what is the income sheet equation?
revenue- profit= net income
does corporation following IFRS need to produce a statement of changes in shareholders equity?
yes they do
does a corporation following ASPE need to make a changes a shareholders equity?
no they do not, they have to make a statement of retained earnings
how would a statement of retained earnings be made?
beg. retained income+ net income - dividends =end. retained earnings
what is the statement of cash flows?
it reports the effect on the corporations cash related to operating, investing and financing activities and show net increase or decrease in cash for the period
are the different financial statements interrelated?
yes, results from some statements are used as data in other statements
what are some examples of financial statements being intertwined?
net income from statement of income is reported in statement of changes in equity
endings balances of each shareholders equity account is reported in both statements of financial position and changes in equity
statement of cash flows is related to statement of financial position
what must public corporations produce every year?
an annual report
what are the 6 things an annual report contains?
audited financial statements
statements of management responsibility for the financial statements
management discussion and analysis and strategy going forward
auditors report done by a third party to get a sense of how the company is doing
notes to financial statements
historical summary of the key financial ratios and infdicators
what are the accounting standards between IFRS and ASPE?
IFRS: publically traded corporations must use IFRS; private corporations normally use ASPE but can choose to use IFRS
ASPE: private corporations normally use ASPE but can choose to use IFRS. once the choice is made, it must be applied consistently
what accounting rules do proprietorships and partnerships generally follow?
accounting standards for private enterprise (ASPE)
what determines if a corporation has to produce a statement of changes in equity or a statement of retained earnings?
if they follow IFRS they have to produce a statement of changes in equity, if they follow ASPE they have to produce a statement of retained earnings
what is the difference between a statement of retained earnings and a statement of changes in equity?
statement of changes in equity: shows the changes in all components of shareholders equity (share capital and retained earnings)
statement of retained earnings: show the change in only one component of shareholders equity (retained earnings)
