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COMMERCE 1AA3 Midterm: Accounting midterm

Course Code
Emad Mohammad
Study Guide

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Accounting midterm
Chapter 1 financial statements
Accounting is an information system that measures business activities, processes date
into reports, and reports results to decision makers
How accounting information is used and by who
o Managers sets goals, evaluate those goals, and take corrective action
o Investors where to invest in a business or evaluate an investment
o Creditors ealuate a ooe’s aility to ake euied payets
o Government and regulatory ensure organizations pay the correct amount of
o Individuals make investment decisions and/or manage a bank account
o Not for profit organizations which use accounting information in virtually the
same way as profit organizations
2 categories
o financial accounting internal and external use
o managerial internal use only
Types of business organizations
o Proprietorship single owner, unlimited liability owner assumes personal
responsibility for the debts of the business
o Partnership 2 or more owners, each partner has unlimited liability
o Corporation owned by shareholders who ownership is evidenced by the
number of shares held
Conceptual framework
o Generally accepted accounting principles (GAAP) guidelines that govern how
accountants record, measure and report financial information
o Canadian institute of chartered accountants (CICA) establishes GAAP
o Publicly accountable enterprises (PAEs) must apply International financial
reporting standards (IFRS)
o Private enterprises apply accounting standards for private enterprises (ASPE)
o Relevance characteristics ensure the financial statements provide information
to the user that is useful, must provide predictive/confirmatory value and must
be material that could affect the decisions in an informed user
o Faithful representation accounting records should be based on accurate data
o Comparability
o Verifiability
o Timelessness
o Understandability
o Going-concern assumption assumes that the entity will remain in operation for
the foreseeable future
o Separate-entity assumption each entity is an economic unit and is kept
separate from other entities including the activities of its owners
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o Historical-cost assumption that assets should be recorded at actual cost
o Stable-monetary-unit assumption allows accountants to ignore the effect of
inflation in the accounting records, value of the currency is stable
Income statement
o How well did the company perform during the year?
o Reports revenues, expenses and net income/net loss for a specified period of
o Net income/loss is used on retained earnings
Statement of retained earnings
o Why did the opay’s etaied eaigs hage during the year?
o Beginning retained earnings +/- net income/net loss dividends
o Ending retained earnings is used on the balance sheet
Balance sheet
o What is the opay’s fiaial positio at the ed of the yea?
o Moment in time
o Assets = liabilities + shaeholde’s euity
o Assets economic resources owned by a business that are expected to be of
benefit in the future (current assets consume during the next 12 months, long
term assets consume consume after the next 12 months)
o Liabilities debts that are payable
o Oe’s euity – oes’ eaiig iteest i the assets of the opay afte
deducting all its liabilities
Cash flow statement
o How much cash did the company generate and spend during the year?
o Operating activities transactions and other events that determine net
o Investing activities purchase/sale of long-term assets that a company uses to
conduct its operations
o Financing activities the way a company acquires the funds used for investing
and operating activities (by borrowing from a bank or lender, issuing shares,
paying dividends, retained earnings in financing activities)
Chapter 2
Recording business transactions
o Objective of financial reporting is to provide useful economic information to
external users
o Relevance predictive value, confirmatory value
o Faithful representation complete & neutral free from error
o Comparability, verifiability, timeliness, understandability
Recognitions & measurement criteria
o Assumptions unit of measurement, separate entity, periodicity, going concern
Historical cost assumption result of a going concern assumption
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o Principles historical cost, full disclosure, revenue recognition, matching
o Constraints cost-benefits, materiality
o Revenue recognition
Service performed
Amount known
Risk/reward transferred
Evidence of an arrangement
o Matching principle must record expense in period which its incurred (given) to
generate revenue, record depreciation periodically to show its been used (results
of going concern)
o Inputs (accounting transactions) processing (methods/guidelines) outputs
(financial statements)
o Must change financial position of company to be an accounting activity
Accounting cycle
o Journalizing
o Posting entries to ledger
o Trial balance
o End of period adjusting entries
o Adjusted trial balance
o Financial statement
o closing entries
o post-closing trial balance
o transaction which affect accounting equation are accounting transactions
o Debit assets/expenses/losses/declared dividends
o Credit liailities/eeue/shaeholde’s euity/gais/oo shaes
o Assets, liabilities, common shares can swap debit or credit
o Anything you do must affect two accounts
Posting in the ledger
o Ledger a book that has separate pages for each account (each has debit/credit
o Keeps balances of accounts
Trial balance
o List of all accounts and their balances at a given time (debit = credit)
Income statement
o Measures results of operations (net income = revenue expenses)
Conceptual framework & income statement
o Assumptions applied going-concern, time period (periodicity)
o Principles applied revenue recognition, matching
For trial balance, order is assets liabilities/SQ revenue expenses
Chapter 12 statement of cash flow
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