Mos 1023 Midterm 1

1. internal users

2. external users

internal users:

-people who work in the company

-plan, run & organize company

4 questions:

1. enough to pay bills?

2. how many employees can we afford?

3. what price maximizes profit?

4. which product line is more profitable?

1. investors

-is the company earning enough to give return on investment?

-should we buy, hold, or sell ownership?

2. lenders & other creditors

-will the company be able to pay its debts?

-risk assessment : will i get my money back in time?

1. sole proprietorship : single owner

2. partnership : multiple owners

3. corporation : legal entity owned by shareholders

no legal distinction between business & owner so:

-proprietorship limited to life of owner

+owner receives all profit

+small start-up capital & easy to set up

+full control

-unlimited liability (personally liable for all business debts

taxed on owner's personal income tax return

separation of personal and business records

applies to all business types

+greater economic resources, skills & knowledge

-sharing of profits ( in formal contract)

-+can have unlimited or limited liability (depends on contract)

each partner reports their share of profits as self-employment income & are taxed on each partner's personal income tax return

separate legal entity so:

+indefinite life

+easy to transfer ownership (trade stocks)

+easy to raise capital

+limited liability for shareholders (not responsible for corporate debts unless personal guarantee)

Publicly traded corporations use IFRS

private corporations have a choice between IFRS and Accounting Standards for Private Enterprises (ASPE)

1. financing

2. investing

3. operating

raising funds!

can be done in two ways:

1. debt financing (borrowing $$)

2.equity financing (issuing/selling shares)

no!

it is equity

no!

purchasing long lived/ fixed assets that the company needs in order to operate

no!

short run investments: operating activities

-incurred as revenue producing activities

day-to-day activities including revenue & expense related accounts

1. Manufacturing

2. Merchandising

3. Service

buy raw materials and make goods

-lots of money invested in production

buy goods from manufacturing business and sell them

no inventory!

where money came from and where it went/how it was used

income statement starts fresh, but statement of equity starts from previous year/statement's ending value

-resources that provide economic benefit

-what a company owns

-increase with debits

-outsider claims

-what a company owes

-increases with credits

-negative economic value

-insider claims

-increase with credits

-expenses decrease equity

-revenues increase equity

1. share capital

2. retained earnings

1. start with previous retained earnings/loss

2. add net income

3. subtract dividends

4. new retained earnings

revenue - expenses = net income/loss

tells us if the business is profitable

1. objectives ( the why)

2. elements + qualitative characteristics

3. foundational principles and conventions (the how)

to provide users information that is:

1. useful

2. decision relevant

equally informed users

accountants & managers use expert knowledge to act in self-interest

1. relevant

2. representational faithfulness (reliable)

-make an impact on decision

-predictive value

-feedback/confirmatory value

-materiality (importance: information that is included makes a difference)

-neutral (no bias/not manipulated)

-complete

-free from material error

-substance over form

1. Comparability

2. Verifiability

3. Timeliness

4. Understandability

measuring & reporting info in a similar way allows company to company (intercompany) and year to year (intracompany) comparisons

achieving similar results or a consensus regarding the accounting of a transaction

-hard numbers easy to verify

-soft numbers = more uncertainty

info available while it can still make impact

(on time, not late!)

-information of sufficient quality & clarity

-reasonably informed users should understand it

- enough info to be clear

-tough to achieve 100 % reliability & 100% relevance

-cost vs benefit

(benefit of using info must outweigh cost of providing it)

benefits are more difficult to quantify/measure and the benefits might not be very evident

relevance

(sometimes reliability)

reliability

relevance but decreases reliability

reliability

1. economic benefit

2. control over it

3. result from past transaction or event

(ex: purchase or donation)

1. represent duty or responsibility

2. obligation / no discretion to avoid it

3. results from past transaction or event

residual interest in assets

what is leftover after paying debts

1. contractual (contracts, ex: wages)

2. constructive (from guarantees/warranties/policies)

3. equitable (ethics)

revenue: increase in economic resources due to ordinary/regular activities

gains: increase in equity from incidental/peripheral activities

expenses: decrease in economic resources due to ordinary revenue generating activities

losses: decrease in equity (net asses) due to incidental activities

whether a company relies on debt or equity to finance assets

investing and crediting decisions

including something on statement/ taking something off statement

1. economic entity assumption

2. control

3. revenue recognization/ realizable principles

4. matching

1. probable

2. measurable

3. meet definition of an element ( A, L, E)

-unit of accountability

-business is separate & distinct from owners

-parent & subsidiary companies are separate legal entities but one economic entity

decides what should be included in the entity

1. power over investee

2. exposure to returns from involvement with investee

3. ability to affect amount of investee's returns

1. process is complete (risks & rewards passed)

2. measurable (doesnt have to be cash but must be valued in cash)

3. collectible

-expenses matched with revenues they incur

-demonstrates cause and effect relationship

-assets are expensed

1. product costs

-direct relationship to revenue

-material, labour, overhead

-recognize in period of revenue

2. period costs

-no direct relationship to revenue

-salaries, admin costs

-expense when incurred

reliable but not relevant

includes cash & non-cash transactions

-reliable & relevant

-but requires assumptions

when we sell it

1. Periodicity assumption

2. monetary unit assumption

3. going concern assumption

4. historical cost assumption

5. fair value principle

-accrual accounting involves assumptions

-cannot record things unless they are measurable

-need to determine acceptable level of uncertainty & disclose it

-use appropriate measurement tools

artificial time frame

-usually one year, one month, one quarter

-same time period enhances comparability

-but shorter the time frame, the more rushed & the more assumptions needed

-measured in money

-assume stability

-if cannot put monetary value, we do not include it

-assume the entity will continue to operate in forseeable future

-long enough to fulfill comittments

-value at liquidation value if this assumption cannot apply

reliable but not always relevant

1. value at a point in time

2. reciprocal exchange (2 way)

3. outside arm's length party (not related)

-price received to sell or paid to transfer at measurement date

-more relevant

-not always reliable

-inactive market: tough to come up with price

anything relevant to users should be included in:

-body of statements

-notes

-as supplementary info

*disclosure increases relevance but it is costly

expectation to be sold/used/paid within one year (current) or not (non current)

non-current assets with no physical substance

*represent privilege or a right

ex: goodwill, trademark, copyright, etc

when useful life is NOT indefinite (cant allocate cost over lifetime if we dont know lifetime)

cost of asset - accumulated depreciation

total amount asset has depreciated by until this date

* contra asset : deducted from asset btu still in asset section of balance sheet

investment by shareholders

money kept in the business

1. gross profit= sales - COGS

2. net profit= gross profit - expenses

1. gross profit % = gross profit/net sales x100

2. net profit % = net profit/net sales x100

3. return on assets = net profit/ avg total assets x 100

4. Earningsper share = Net Profit aftertax/ number of issued common shares

5. Price Earnings Ratio = market price per share/ earnings per share

ability to meet ST obligations & unexpected needs for cash

1. working capital= current assets - current liabilities

2. current ratio= current assets/current liabilities

3. quick test (acid test)= current assets -inventory - prepaids / current liabilities

ability to handle debt and pay interest

*long term ability to survive

1. debt to total assets= total liabilities / total assets x 100

2. Free Cash Flow = Net cash provided (used)by operating activities less dividends less net capital expenditures

1. receivables turnover= revenue/ accounts receivable

2. average collection period= 365/ receivable turnover

3. inventory turnover= COGS/ inventory

4. Days in inventory: 365/ inventory turnover

economic impact:

transactions that change assets, liabilities, or shareholder's equity

before financial statements

technically no, bc they do not appear on the income statement

the appear on the statement of changes in equity where they affect retained earnings

close them out each year so we can start fresh and see how much profit was made per year

Accounts receivable: transaction has occurred on account, notice has been issues

Accrued Receivable

d- dividends

e-expenses

a-assets

l-losses

g-gains

r-revenue

l-liabilities

s-shareholders' equity

legal entity: taxed together

economic entity: financial statements made together

product costs are matched

period costs are expensed

acrrued: no invoice

accounts: invoiced

end of the month

-keep accounts up to date

-some are only updated at end of month (ex: interest) instead of daily

1. Prepayments

-prepaid expenses

-unearned revenue

2. Accruals

-accrued revenues

-accrued expenses

accounts would be overstated & understated

(not reliable or accurate)

transfer temporary account balances to retained earnings

1. expenses

2. revenue

3. dividends

1. assets

2. liabilities

3. all shareholders' equity accounts

do opposite of normal balance and then transfer it to income summary

ex: debit revenue account and credit revenue on income summary

1. revenue

2. expenses

3. income summary

4. dividends

cr/dr income summary and then cr/dr retained earnings

balance of all permanent accounts