Chapter 1 Flashcards
define accounting
identifies and records the economic events of an organization and communicates to interested users
Who uses financial statements?
internal and external users
examples of internal users
management, board of directors, employees
examples of external users
investors, leaders, creditors, customers, taxing authorities, journalists, security analysts
what are the 3 forms of business organizations?
- proprietorship
- partnership
- corporation
describe a sole proprietorship
- business not legally separate from owner
- 1 owner
- unlimited liability
- all business profits and losses at owner’s expense
- no reporting requirements
- limited life
- easy and inexpensive to operate
describe a partnership
- more than one owner, shared control
- formalized in written agreement
- limited life
- each partner has unlimited liability
- income tax paid by individual partners
describe a corporation
- owned by shareholders
- indefinite life
- limited liability (can only lose investment, not personal assets)
- corporation pays income tax
- may be public or private
- ease of raising capital
- owners can sell their shares
what is the difference between a public and a private corporation?
- public if shares are publicly traded
- private if shares are not available to general public
what does IFRS stand for and who uses it?
- International Financial Reporting Standards
- Canada and Europe
- public corporations
what does ASPE stand for?
Accounting Standards for Private Enterprise
which types of businesses use ASPE?
private corporations, sole proprietorships, partnerships
what does GAAP stand for?
Generally Accepted Accounting Principles
-standard framework of guidelines for financial accounting used in any given jurisdiction
which two things make accounting info useful?
reliability and relevance
describe relevance
materiality, predictive, confirmatory value
describe reliability
faithful representation, neutrality, completeness
what are the 3 types of business activities?
- financing
- investing
- operating
dividends are an example of a ____ activity
financing
describe financing activities
obtaining and repaying funds to finance operations of the business
what is the term for borrowing money or repaying loans?
debt-financing
what is the term for selling or re-purchasing shares?
equity-financing
describe investing activities
purchase or sale of long-lived assets needed to operate the company
describe operating activities
main day-to-day activities of the company
Profit =
profit = revenues - expenses
what are the 4 financial statements under ASPE?
- statement of earnings
- statement of retained earnings
- balance sheet
- statement of cash flows
what are the 4 financial statements under IFRS?
- income statement
- statement of changes in shareholder’s equity
- statement of financial position
- statement of cash flows
what is retained earnings?
cumulative profit retained in the company less dividends paid to shareholders
what is an income statement?
- measures financial performance
- specific period of time
- revenues and expenses
what is a balance sheet?
- financial position
- specific point in time
- what is owned and what is owed
what is a statement of changes in equity?
shows changes in each component of shareholder’s equity for the period
-specific period of time
what is share capital?
amounts contributed by shareholders
what is a cash flow statement?
- reports effect of cash on company
- net increase or decrease in cash for period
- specific period of time
what is the correct order of preparation for the financial statements?
income statement –> statement of changes in equity –> statement of financial position –> statement of cash flows