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Lecture

ACC110 - Essential Business Concepts for Accounting (MacMaster) v3.pdf

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Department
Accounting
Course
ACC 110
Professor
Marla Spergel
Semester
Fall

Description
Essential Business Concepts for Accounting ACC110 Supplementary Lecture Notes – 1v3 © 2011, 2012 Bradley MacMaster ,BSc, MBA, CA, CMC, PhD(abd) [email protected] (Lecturer in Accounting, Finance, Venture Planning, Marketing Research & Leadership) C ONTENTS 1 | CONCEPTS NECESSARY TO UNDERSTAND FINANCIAL STATEMENTS (‘F/S’).......................... 1 2 | BUSINESS PERFORMANCE CRITERIA...................................................................................... 3 3 | INFO IN THE FINANCIAL STATEMENTS FOR EVALUATING PERFORMANCE........................... 4 Illustration Caveats...................................................................................................................5 Some Questions to Test Your Understanding.............................................................................5 A Note fromBrad: Hey - If you 'get this', the rest of the course willbe easy! I refer to this stuffoften, so you need to understand these concepts for other things we cover in the course to have relevance and meaning. Read it as if it was thebeginning of a 'story ofa business entity'. This is your frame of reference for why accounting has value and makes any sense at all … and will hopefully assist you in distinguishing yourselves from others in the pursuit of your financial services career. Read this! Discuss it! Learn it! Question it! Understand it well enough to use it by thinking like an 'external user' (defined inside)! Work with me here! But avoid spewing forth the concepts at parties and hangouts if you wish to avoid friends' eye-rolling. 1 | C ONCEPTS N ECESSARY TO U NDERSTAND FINANCIAL S TATEMENTS (‘F/S’) Business Entity – an organization of people and other resources (all of which have a cost) assembled to achieve a purpose with the expectation of economic gain (i.e. over and above the various costs) by conducting various activities. Purpose – market purpose is entity specific – relates to providing something of value (goods or services) to a market. Intent – expectation of economic gain – providing value for a price that exceeds cost and provides a reasonable return-on-investment. Activities – operating, investing, financing Transaction – an economic exchange (two sides to it) … youget something and give something up in return. Stakeholders – organizations and individuals that have an interest (a 'stake') in the particular business entity’s success; this includes internal and external users of financial information, and others; in some cases (e.g. organizations or individuals that provide capital to finance the business) their stake is their investment or loan of money to the entity, which is at risk. External Users (of financial information) – providers of capital and anyone else interested in the entity’s financial performance that do not work within the business. Consequently, they do not have ready access to internal information. Usually, they are strongly interested in CASH (now and later)! Also, be aware of the agency problem (ethics). Shareholder – an owner (or part-owner); holds shares in (owns a share of) an incorporated business; acquires these shares in exchange for an investment in thebusiness entity (usually in the form of cash). As owners, they are entitled to the net or residual financial gain from the business enterprise!!! – a share in proportion to theirrelative shareholdings. Shareholders areone class of capital provider, and therefore both external users and stakeholders. Agency Problem – capital providers are generally not involved in running the business day-to-day; they appoint management to do so, to generate planned or expected performance; but management gets to write their own report card (the financial statements) … so they have a potential conflict inmaking themselves look good. Why? To keep their job, get raises and bonuses; this is at the root of most ethics issues in accounting and what creates the need for transparency, full disclosure and audits! Financial Decisions – (1) buy / invest / lend / get-in; (2) hold / “let itride” / stay-in; (3) sell / divest / get-out / take your winnings (losses). ACC110 – Supp. Lecture Notes 1v3 ©B. MacMaster – 08/12 1 / 5 ESSENTIAL BUSINESS CONCEPTS Performance (VERY BASIC CRITERIA) to substitute for the lame question: “How is the business doing ?” and avoid the possible answers of “Good !”, “Ok”, “Not so good”, or “I have no idea”, none of which helps users to make financial decisions ! (see section 2 following) Resources, are primarily "economicresources" for accounting purposes. Remember from Economics, these are principally factors of production (inputs) – commodities, capital goods or services (labour) used to produce goods and services (outputs). But in a broader, and more specific sense, these include all factors that help the entity achieved its intended purpose (e.g. people, capital [$], equipment, property, information, etc.). Note that resources are scarce and therefore decisions need to be made about allocating them to their 'best' use. ACC110 – Supp. Lecture Notes 1v3 ESSENTIAL BUSINESS CONCEPTS ©B. MacMaster – 08/12 2 / 5 2 | B USINESS PERFORMANCE C RITERIA WHY is it important to assess a business entity’s financial performance ?  Capital providers put cash into a business and they desire cash back in two forms:  return-on-investment (e.g. dividends, interest, rent, royalties)  return-of-investment (e.g. share capital, loan principal, cost of real property, cost of certain intangibles)  This can only happen if the business entity generates favourable net cash flow (i.e. more cash flowing into the entity than flows out). The most important criteria employed by external users to assess a business entity’s performance include: Primary /common Secondary *  Growth  Cost management  Profitability  Productivity (efficiency)  Liquidity  Financial leverage  Solvency  Stock valuation * Equally as important in comprehensive financial analysis, but not typically emphasized in introductory courses. Let’s gain a better understanding of where the primary performance evaluation criteria come from (when your cu
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