MOS Jan 16

MOS 1023 Notes Jan 16 - Introduction: Accounting. Why does Accounting matter? – Language of business – Global economic systems depend on reliable and accurate financial reporting – Accounting has changed on how business programs and are structured due to recent crises – more important for all people in business to understand accounting Steps: 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 allocation 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 originally invested. 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? 1. Financing - 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 long term - 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 future Revenues and expenses are part of equity. – Increase equity by getting investors or increase retained earnings through revenue – 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 Usage 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. Qualitative Characteristics – 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 Cr Cash $1000 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 some completeness 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 2. Liabilities: – Economic obligation or burden – Present obligation 3. Equity (net assets): if a company doesn't do well, thei