Class Notes (839,493)
Canada (511,364)
Rotman Commerce (1,103)
RSM225H1 (70)
Dan Shear (32)

chapter 2

6 Pages

Rotman Commerce
Course Code
Dan Shear

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CHAPTER 1 Accounting in Action 1. Accounting Defined 1.1 Accounting is an information system that identifies, records, and communicates economic events of an organization to interested users 1.1.1 Identifying involves selecting those events that are considered evidence of economic activity, relevant to a particular business organization. 1.1.2 Once identified and measured in dollars and cents, economic events are recorded to provide a permanent history of the financial activities of the organization. Recording consists of keeping a chronological diary of the measured events in an orderly and systematic manner. 1.1.3 The information is communicated through the preparation and distribution of accounting reports, the most common of which are called financial statements. 2. Users and Uses of Accounting 2.1 Internal users are those who manage the business and use accounting data in planning, controlling, and evaluating business operations. Examples include marketing managers, production supervisors, finance directors, and company officers. They require answers to questions such as: Is there sufficient cash to pay the bills this month? What price must be charged for this product in order to make a profit? 2.2 External users are those users outside of the business who need information about the financial position and performance of the company. Included in this group are: 2.2.1 Investors: Investors use accounting information to make decisions to buy, hold, or sell their shares. 2.2.2 Creditors: Creditors use accounting information to evaluate the risks of granting credit or lending money to a business. 2.2.3 Taxing Authorities: The Canada Customs and Revenue Agency wants to know whether the company respects the tax laws. 2.2.4 Others:Other interested parties include regulatory agencies, customers, and labour unions. 2.3Accounting must adapt and evolve to meet the needs of its various users. 2.4 Bookkeeping and Accounting Distinguished 1-1 2.4.1 Bookkeeping usually involves only the recording of economic events and is therefore just one part of the accounting process. 2.4.2 Accounting involves the entire process of identification, recording, and communication. Financial accounting provides information for external users primarily. Managerial accounting provides information for internal users primarily. This text deals mainly with financial accounting. 2.5The Accounting Profession There are 3 accounting designations available in Canada; CA, chartered accountant, CGA, certified general accountant, and CMA, certified management accountant. Accountants work in the following areas: 2.5.1 In public accounting, accountants offer expert service to the general public through the services they perform. Auditing—Auditors examine information, including the financial statements of companies, and express an opinion as to whether the information is presented fairly in accordance with generally accepted accounting principles, or another appropriately disclosed basis of accounting. Taxation—Tax specialists provide tax advice, and planning, prepare tax returns, and represent clients before governmental agencies. Business Advisory Services—Consultants provide advice to management on matters such as the installation of basic computerized accounting systems, managing human resources, executive remuneration, and acquisitions and dispositions. 2.5.2 In private accounting, managerial accountants are employees of individual companies and are involved in a number of activities including general, cost and tax accounting, budgeting, accounting information systems, and internal auditing. 2.5.3 Not-for-profit accounting includes reporting and control for government units, foundations, hospitals, labour unions, colleges/universities, and charities. 3. Ethics—A Fundamental Business Concept 3.1 Ethics are the standards of conduct by which one’s actions are judged as right or wrong, honest or dishonest. Accountants follow certain standards in reporting financial information. 3.2 In the process of solving an ethical dilemmas, the following steps should be applied: 1-2 3.2.1 Identify the ethical situation or issue that’s involved. 3.2.2 Identify and analyse the principal elements in the situation. 3.2.3 Identify the alternatives, and weigh the impact of each alternative on various stakeholders. 4. Generally Accepted Accounting Principles 4.1 GAAP is a common set of standards used by accountants in reporting economic events. The CICA is primarily responsible for establishing generally accepted accounting principles. GAAP has the status of law in Canada, for federally incorporated companies and for companies adhering to provincial securities commissions. 4.2 The cost principle states that assets should be recorded at their original historical cost. Cost is the value exchanged at the time something is acquired. 5. Assumptions 5.1 Going concern assumption. 5.1.1 Assumes that the firm will continue to operate in the foreseeable future. 5.1.2 Supports the cost principle as the most relevant value to record assets, since they have been acquired for use and not for resale. 5.2 Monetary unit assumption. 5.2.1 Requires that only transaction
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