MOS 1023 Notes
Jan 16 - Introduction: Accounting. Why does Accounting matter?
– Language of business
– Global economic systems depend on reliable and accurate financial
– Accounting has changed on how business programs and are structured due
to recent crises – more important for all people in business to understand
1. Measures business activities eg. Customers buying products, paying bills
2. Processes data into reports (financial statements)
3. Communicates results to decision makers
Accounting identifies and records the economic events of an organization and
communicates to interested users.
– Two broad categories of users of financial information:
1. Internal users
- Managers plan, organize and run a business. Decisions such as prices,
strategic, marketing, employee compensation, budgeting, resource
2. External Users
Primary users: investors, creditors
- Others: tax authorities eg. Revenue Canada, regulatory agencies eg. Check
to see if there is money to follow regulations they set out, customers, labour
unions eg. to see if workers get the proper salary, economics planners,
communities eg. A large company's closure that employs a large amount of
people will effect the town in a huge way financially
Forms of Business Organizations
– Proprietorship – owned by one person
– Partnership – owned by more than one person – each person's different
strengths contribute to the overall business. Financial issues tied to parties
if there is a small amount. Limited partnership – liability is limited to what
was invested in the business.
– Corporation – separate legal entity having ownership held by shareholders.
- May be public or private: if you are a public corporation, you are trading on
stock exchange – anybody can buy shares in the company
- More costly to set up and organize than proprietorship or partnership due
to lawyer help needed or other help.
- Limits liability the most – wouldn't have to pay anything than what person
Types of Businesses
1. Manufacturing business: completes a product that people want to pay more
than the cost of manufacturing
- GM – cars, trucks, vans. - Intel – computer cips
- Nike – shoes
2. Merchandising business – sells products, but doesn't make it.
- Wal-Mart – General merchandise
3. Service business – provide things that are often not tangible. Revenue
comes from service they provide
- Rogers – telecommunication: provides this service
Three Types of Business Activities
- Is the company better or worse off?
- Obtaining (and repaying) funds to finance the operations of the business
- eg. Borrowing money, repaying loans (debt)
- Selling or repurchasing shares (equity)
2. Investing Activities
- Obtaining the resources or assets needed to operate the business for the
- eg. Purchase of sale or investments
- purchase or sale of long-lived assets such as property, plant and
equipment and intangible assets. Buying a factory – hope that factory will
generate future revenue
3. Operating activities
- Main day-to-day activities of the business
- eg. Revenues - sales, expenses, related accounts – accounts payable,
accounts receivable, inventory etc.
- Financial Statements
- Income Statement
- Statement of Retained Earnings
Assets, liabilities, shareholders' equity (share capital, retained earnings)
Cash Flow Statement
– Shows decision makes where the money came from or went
The Accounting Equation
'Owners' equity – proprietary
**Shareholders' equity is divided into two main categories:
1. Contributed capital
2. Retained earnings
*** Assets = liabilities + shareholders' equity
– Assets are economic resources that benefit the business now and in the
Revenues and expenses are part of equity.
– Increase equity by getting investors or increase retained earnings through
– Decrease equity by paying out dividends etc.
Components of Retained Earnings
Assets Prepaid expense
– something you paid in advance, and you will get the benefit of it in the
future eg. Paying two years' worth of rent – using the building for two years.
– Not a reduction of equity, but an increase in the asset
Intangible assets. eg. Trademark: has an economic benefit in the future as well.
Liabilities – debts of the company
– eg. Bank loans, notes payable, accounts payable, deferred revenue -
revenue not provided until the service occurs
Jan 23 – Financial Statements – Framework, Presentation and
The Need for a Conceptual Framework
– To develop a coherent set of standards and principles
– To solve new and emerging practical problems.
– Framework provides investors and creditors information to make
comparisons with other companies
Conceptual Framework of Accounting
Objective of Financial Reporting
– Committee formed to determine what the objectives are
What is useful to them? The ability to assess the amount, time and certainty of
future cash flow.
– Predictive value: ability to decipher future cash values
– Substance over form: Look at substance of transaction and determine if it's
an asset, liability etc.
eg. Apartment Rent Payment
eg. Lease: Photocopier
Equipment – Asset goes up
Cr - Payable
Substance over form
– Look at the true substance of the economic situation – not what it says
Enhancing Qualitative Characteristics
Comparability: the more estimates, the less reliable it tends to be
– If you change something, it must be because it provides better information
Verifiability: Estimates required. Would another professional person come to the
same conclusion? Consensus.
Understandability: whether an investor who is reasonably informed can
comprehend the information Tradeoffs and Constraints
Tradeoffs: giving up one characteristic over the other eg. Being timely, giving up
Cost vs. Benefits: eg. The cost of giving information, rounding money up.
Elements of Financial Statements
1. Assets have two key characteristics:
– Involve a present economic resource: will get a future benefit from it
– Entity: has a right or access: restriction of use to other parties
– Economic obligation or burden
– Present obligation
3. Equity (net assets): if a company doesn't do well, their liabilities get paid