Chapter 1 Summary

Question 1

What is the purpose of accounting?

Answer 1

To provide useful information for decision-making

Question 2

What are the two types of decision-makers who use accounting information?

Answer 2

1. Internal users
2. External users

Question 3

Who are the primary internal users and what do they use accounting information for?

Answer 3

Managers who work for the business and need internal accounting information to manage and run its operations

Question 4

Who are the primary external users?

Answer 4

Investors and creditors

Question 5

What do investors use accounting information for?

Answer 5

Investors (existing and potential shareholders) use accounting information to help decide whether to buy, hold, or sell shares.

Question 6

What do creditors use accounting information for? Give examples of different types of creditors as well.

Answer 6

Creditors, which include lenders such as bankers and suppliers, use accounting information to evaluate the risk of lending money or granting credit to a business

Question 7

Other than the primary ones, what are some other examples of external users?

Answer 7

Other external users include non-management employees, customers, regulators, and taxing authorities

Question 8

What are the 3 types of business organizations?

Answer 8

1. Proprietorships
2. Partnerships
3. Corporations

Question 9

What is a proprietorship?

Answer 9

A business owned by one person

Question 10

What is a partnership?

Answer 10

A business owned by two or more people

Question 11

What is a corporation?

Answer 11

A separate legal entity whose shares provide evidence of ownership

Question 12

What are the 2 different types of corporations?

Answer 12

1. Public
2. Private

Question 13

What is a public corporation?

Answer 13

Corporation whose shares trade on a stock exchange

Question 14

What is a private corporation?

Answer 14

Corporation whose shares are closely held and do not trade on a stock exchange

Question 15

What are generally accepted accounting principles?

Answer 15

A common set of guidelines that are used to record and report economic events

Question 16

How do GAAPs differ?

Answer 16

Depending on the form of business organization

Question 17

What type of GAAPs do public corporations use?

Answer 17

Follow International Financial Reporting Standards (IFRS)

Question 18

What type of GAAPs do private corporations use?

Answer 18

Have the choice of using Accounting Standards for Private Enterprises (ASPE) or IFRS

Question 19

What type of GAAPs do proprietorships and partnerships use?

Answer 19

Generally use ASPE

Question 20

What are financing activities?

Answer 20

Financing activities involve obtaining the necessary funds (through the issue of equity or the assumption of debt) to support the business

Question 21

What are examples of financing activities?

Answer 21

• Repayments of debt
• Declaration and payment of dividends
• Share repurchases are also financing activities.

Question 22

What are investing activities?

Answer 22

Investing activities primarily involve purchasing the long-term assets (such as property, plant, and equipment) that are needed to run the business, but also include the disposition of these items.

Question 23

What are operating activities?

Answer 23

Operating activities involve using the business’s resources to generate net income. They involve the business’s day-to-day activities as it earns revenues and incurs expenses.

Question 24

What is the statement of income?

Answer 24

Presents the revenues and expenses of a company for a specific period of time

Question 25

What is the statement of changes in equity?

Answer 25

Summarizes the changes in shareholders’ equity that have occurred for a specific period of time including those related to the issue of shares, generation of net income, and declaration of dividends

Question 26

What is the statement of financial position?

Answer 26

Reports the assets, liabilities, and shareholders’ equity of a business at a specific date

Question 27

What is the statement of cash flows?

Answer 27

Summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time

Question 28

What is the purpose of notes to the financial statements?

Answer 28

Add explanatory detail where required

Question 29

What’s included in an annual report?

Answer 29

The financial statements, along with the management discussion and analysis (MD&A), the auditor’s report, and the notes to the financial statements

Question 30

How is the statement of changes in equity different in IFRS than it is in ASPE?

Answer 30

A statement of changes in equity must be presented that shows the changes in all components of shareholders’ equity (for example, share capital and retained earnings)

Question 31

How is the statement of retained earnings different in ASPE than it is in IFRS?

Answer 31

A statement of retained earnings is presented that shows the change in only one component—retained earnings—of shareholders’ equity.

Question 32

What information is needed to answer “are the company’s operations profitable?”

Answer 32

Statement of income

Question 33

What tools are used for the decision “are the company’s operations profitable?”

Answer 33

The statement of income indicates the success or failure of the company’s operating activities by reporting its revenues and expenses.

Question 34

How are results evaluated for the question “are the company’s operations profitable?”

Answer 34

If the company’s revenues exceed its expenses, it will report net income; otherwise it will report a net loss.

Question 35

What information is needed to answer “is the company expanding or contracting its share capital?”

Answer 35

Statement of changes in equity

Question 36

What tools are used for the decision “is the company expanding or contracting its share capital?”

Answer 36

Did the company issue or repurchase shares?

Question 37

How are results evaluated for the question “is the company expanding or contracting its share capital?”

Answer 37

If share capital is increasing, the company may be gathering the funds for future expansion plans or to repay debt. If share capital is decreasing, the company has surplus cash and is returning it to shareholders by repurchasing some of their shares.

Question 38

What information is needed to answer “what is the company’s policy on dividends and growth?”

Answer 38

Statement of changes in equity

Question 39

What tools are used for the decision “what is the company’s policy on dividends and growth?”

Answer 39

How much of the company’s retained earnings was paid out in dividends to shareholders?

Question 40

How are results evaluated for the question “what is the company’s policy on dividends and growth?”

Answer 40

A company needing to finance growth or the repayment of debt will preserve the cash it generates from its operations and pay little or no dividends.

Question 41

What information is needed to answer “does the company rely mainly on debt or on equity to finance its assets?”

Answer 41

Statement of financial position

Question 42

What tools are used for the decision “does the company rely mainly on debt or on equity to finance its assets?”

Answer 42

The statement of financial position reports the company’s resources and claims to those resources. There are two types of claims: liabilities and shareholders’ equity.

Question 43

How are results evaluated for the question “does the company rely mainly on debt or on equity to finance its assets?”

Answer 43

Compare the amount of liabilities as a percentage of total assets with the amount of shareholders’ equity as a percentage of total assets to determine whether the company relies more on creditors or on shareholders for its financing.

Question 44

What information is needed to answer “does the company rely mainly on debt or on equity to finance its assets?”

Answer 44

Statement of cash flows

Question 45

What tools are used for the decision “does the company rely mainly on debt or on equity to finance its assets?”

Answer 45

The statement of cash flows shows the amount of cash provided or used by operating activities, investing activities, and financing activities.

Question 46

How are results evaluated for the question “does the company rely mainly on debt or on equity to finance its assets?”

Answer 46

Compare the amount of cash provided by operating activities with the amount of cash used by investing activities. Any deficiency in cash from operating activities must be made up with cash provided by financing activities.