RSM225H1 Lecture Notes - Certified General Accountant, Financial Accounting, Accounting

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20 Apr 2012
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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.
2.3 Accounting must adapt and evolve to meet the needs of its various users.
2.4 Bookkeeping and Accounting Distinguished
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
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
3.2 In the process of solving an ethical dilemmas, the following steps should be applied:
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
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 data that can be expressed in terms of money be
included in the accounting records. In Canada, we use the dollar to measure and
record transactions. This assumption prevents such relevant information as the
health of the owner, the quality of service, and the morale of employees from
being included in the accounting records because they cannot be quantified in
terms of money.
5.2.2 An important part of the monetary unit assumption is the added assumption that
the unit of measure remains sufficiently constant over time. Inflation is considered
a non-issue for accounting purposed in Canada.
5.3 Economic entity assumption.
5.3.1 Requires that the activities of the entity be kept separate and distinct from the
activities of its owners, and all other economic entities.
5.3.2 A business owned by one person is generally a proprietorship.