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Financial Accounting
Mark Fitzpatrick

Chapter 1 - Ethics are standards used to judge someone’s actions as right or wrong - Analyzing an ethical dilemma: Recognize the situation, Identify and analyze the elements of the situation, Identify the alternatives and their effects - Internal users: finance, marketing, human resources, production - External users: investors, creditors, labour unions, customers - Information systems do 3 things: identify, record, and communicate economic activities - GAAPs are the common set of standards implemented by the Canadian Institute of Chartered Accountants which guide the methods of accounting - GAAPs are now becoming the IFRS - Cost Principle: assets should be recorded at their original historic cost - Assumptions: create a foundation for the accounting process - Going Concern Assumption: assumes the company will continue to operate in the near future - Monetary Unit Assumption: only transactions that can be expressed through money is included in records - Economic Entity Assumption: the economic activities of an entity must be kept separate from the owner - Proprietorship: business owned by a single person - Partnership: business owned by two or more persons - Corporation: owned through transferable shares - Public corporation: a corporation of which shares can be purchased publically - Private corporation: a corporation of which shares can not be purchased publically - Income trust: special/limited purpose corporation set up to invest in assets - Accounting equation: Assets = Liabilities + Owner’s Equity - Assets: resources owned by a business - Liabilities: claims against assets – existing debts and obligations - Owner’s equity: owner’s claim on total assets - Investments may be put in by the owner and may be cash or other assets - Drawings are withdrawals taken out by the owner - Net income is when revenues are greater than expenses - Net loss is when expenses is greater than revenues - Revenues: any activities done to earn income - Expenses: costs of assets and services used to earn revenue - Owner’s Equity = Owner’s Investments – Drawings + Net Income - In order to record a transaction, there must be some sort of change in the economic status of the business - Annual reports are documents that include important non-financial and financial information about a company - Cash Flow Statements: financial statement that provides information about the cash inflows and cash outflows Chapter 2 - An account is an individual accounting record of increases/decreases in a specific asset, liability, or owner’s equity account - Debit means left, credit means right - Double-entry system: every transaction must have debits equal credits - Steps in the recording process: Analyze each transaction, Enter the transaction in a journal, Transfer the journal information to the correct accounts in the ledger - Journal = Book of original entry - Ledger = Book of accounts - Journals serve many purposes: it keeps complete effects of transactions in one place, it provides a chronological order of transactions, it helps to prevent errors because debits and credits can be easily compared, and it gives explanations for each transaction - Recording data in the journal is known as journalizing - Transactions involving more than 2 accounts are known as compound entries - General ledgers contain all asset, liability, and owner’s equity accounts - A chart of accounts lists the accounts and the account numbers that identify where the accounts are in the ledger - Trial balances are lists of accounts and their balances at a specific time Locating Errors - If the error is an amount such as 1, 100, or 1000, re-add the trial balance columns - If the error can be evenly divided into 2, search for half of the difference - If the error can be divided by 9, look for transposition errors - If none of the above apply, look for missing posts in the ledger Chapter 3 - Managers want monthly statements - Investors want quarterly statements - The Canada Revenue Agency requires annual statements with income tax returns - Revenue Recognition Principle: revenue must be recognized/recorded in the accounting period in which it is earned - Matching Principle (Expense Recognition): expenses be recognized/recorded in the accounting period in which the revenue it helped earn exists – matches efforts (expenses) with accomplishments (revenues) - Accrual basis
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