Chapter 1 - Financial Statements and Business Decisions

Question 1

Defineaccounting.

Answer 1

Collecting and processing useful financial information about an organization, then reporting it to decision makers

Question 2

Briefly distinguish financial accounting from managerial accounting.

Answer 2

One provides periodic financial statements for external decision makers to evaluate a company and Other provides detailed plans and performance reports for the Internal decision makers to run the company

Question 3

The accounting process generates financial reports for both internal and external users. Identify some of the groups of users.

Answer 3

Creditors, Investors, Managers

Question 4

Creditors, Investors, Managers

Answer 4

Investors invest money into the business expecting a profit, creditors loan money to the business expecting they will get their money back
-Both have claims on business assets

Question 5

What information should be included in the heading of each of the four primary financial statements?

Answer 5

Name of Company, Title of Statement, Specific Date, Units of Measure ($, millions)

Question 6

What are the purposes of (a) the statement of earnings, (b) the statement of financial position, (c) the statement of cash flows, and (d) the statement of changes in equity?

Answer 6

• Companies must prepare 4 financial Statements each accounting period
• a) To evaluate the performance of a company (profit margins), revenues - expenses*
• b) The financial position of an accounting entity. A = L+SE*
• c) Divides company cash (inflows (receipts) and outflows (payments)) into CFO, CFI, CFF*
• d) All changes to the SE during the accounting period (net earnings, other income, less: dividends, plus: net equity*

Question 7

Explain why the statement of earnings and statement of cash flows are dated, for example, “For the Year Ended December 31, 2020,” whereas the statement of financial position is dated, for example, “At December 31, 2020.”

Answer 7

One shows for a specific moment in time, Other shows for a length of a period of time

Question 8

One shows for a specific moment in time, Other shows for a length of a period of time

Answer 8

One shows for a specific moment in time, Other shows for a length of a period of time

Question 9

Briefly definenet earningsandnet loss

Answer 9

One is sales (revenues) greater than expenses and Other is expenses greater than revs

Question 10

Explain the accounting equation for the statement of earnings. Define the three major items reported on the statement of earnings.

Answer 10

Revs - Expenses = Net Earning/Net Loss

Question 11

Explain the accounting equation for the statement of financial position. Define the three major components reported on the statement of financial position.

Answer 11

A = L+SE.

Question 12

Explain the accounting equation for the statement of cash flows. Explain the three major components reported on the statement of cash flows.

Answer 12

CFO, CFI, CFF+ beginning cash = ending cash

Question 13

How do we find income tax expenses?

Answer 13

• Briefly describe how accounting standards are determined in Canada, including the role of the AcSB and the IFRS.
  
  • The AcSB (Accounting Standard Board) determines the detailed rules which are published in CPA Canada Handbook in accordance with the IFRS*

Question 14

Explain the accounting equation for retained earnings. Explain the major items that affect the ending balance of retained earnings.

Answer 14

• Retained Earnings are the profits that get reinvested into business activities*
• On SE statement, not an asset

RE = Beginning RE - Net Income Profit/Loss - Dividends

Question 15

Briefly describe how accounting standards are determined in Canada, including the role of the AcSB and the IFRS.

Answer 15

The AcSB (Accounting Standard Board) determines the detailed rules which are published in CPA Canada Handbook in accordance with the IFRS

Question 16

Why are accounting standards important?

Answer 16

• Financial information affects companies, managers and owners*
• Economic consequences; Changes to the selling price of company shares, changes in bonuses received by management and employess and loss of competitive advantage

Question 17

Briefly explain the responsibility of company management, the board of directors, and the independent auditors in the internal control and financial reporting process

Answer 17

Prevent and detect unethical behaviours within management. 3 Steps, 1. System of internal controls over records and assets of company 2.hire outside independant auditors to evaluate fairness of statements 3. Committee of the board of directors oversee the first 2.

Question 18

List and briefly explain the three primary services that accountants in public practice provide.

Answer 18

Audit , management consulting, tax services