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COMMERCE 1AA3 Midterm: 1AA3 Midterm Review


Department
Commerce
Course Code
COMMERCE 1AA3
Professor
A.M
Study Guide
Midterm

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COMM 1AA3: Accounting Review Chapters 1, 2, 3, 4, 5 & 12
Chapter 1: The Financial Statements
Financial Statements: which are business documents that companies use to report
the results of their activities to various user groups. These groups then use this
information to make a variety of decisions, such as whether to invest in or loan
money to the company.
The Basic Objective of Accounting: is to identify and measure the activities of a
business entity in order to evaluate its performance and to assess its financial
health, then communicate this information to stakeholders through a set of
accounting reports that contain useful information so as to help them make rational
economic decisions.
Financial Statements Include:
o The Income Statement
o The Statement of Retained Earnings
o The Balance Sheet
o The Statement of Cash Flows
Organizing a Business:
o Proprietorship: has one owner, therefore the proprietor is personally liable
for the businesses debts. If the business goes down so does the owner, they
can come after your personal property.
o Partnership: there are two or more partners, and both partners are
personally liable.
o Corporation: there are usually many stockholders, who are not personally
liable for the business.
How Accounting standards Are Set
o The rules that govern accounting are called GAAP, Generally Accepted
Accounting Principles. They specify the standards for how accountants must
record, measure and report financial information.
CICA Handbook, is the official source.
In Canada, the Canadian Institute of Chartered Accountants (CICA),
establish GAAP.
International Financial Reporting Standards (IFRS): one of the many
challenges of conducting global business is the adopted accounting
standard that different countries have adopted for their business
transactions makes it difficult for comparison. Therefore, they
developed the International Financial Reporting Standards (IFRS),
which is being used by most countries around the world.
The International Accounting Standards Board (IASB) was set
up in 2001 to issue IFRS. The first year Canada started to
report using IFRS in 2011.
The overall objective of accounting is to provide financial information
about the reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions.
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To be useful information it must have the fundamental qualitative
characteristics. Those include relevance and faithful representation.
Relevant: information must be capable of making a difference
to the decision maker, having predicative or confirming value.
The information has to be material, which means it must be
important enough to inform the user.
Qualitative Characteristics:
Comparability: means the accounting information for a
company must be prepared in such ways that you can compare
it with information from other companies in the same period,
as well as with similar information for that company in
previous periods.
Verifiability: means that the information must be capable of
being checked for accuracy, completeness and reliability. This
task can be completed both internally and externally through
auditors. This enhances reliability, which in turn makes it the
best representation of the economy.
Timeliness: means that information must be made available to
users early enough to help them make decisions, thus making
the information more relevant to their needs.
Understandability: means that the information must be
sufficiently transparent so that it makes sense to reasonably
informed users of the information.
Accounting information is costly to produce. The cost of disclosure
should not exceed the expected benefits to users.
Assumptions and Principles
o Entity Assumption: the most basic accounting assumption is the entity, which
is that any organization that stands apart as a separate economic unit.
o Continuity (Going-Concern) Assumption: In measuring and reporting
accounting information, we assume that the entity will continue to operate
long enough to use existing assets, such as land, buildings, equipment and
supplies.
o Historical Cost Principle: states that assets should be recorded at their actual
cost, measured on the date or purchase as the amount of cash paid plus the
dollar value of all non-cash consideration also given in exchange. Fair value is
the amount that the business could sell the asset for, or the amount that the
business could pay to settle the liability.
o Stable Monetary Unit Assumption: under stable monetary unit assumption,
accountants assume that the dollar’s purchasing power is stable overt time.
The Financial Statements
o Income Statement: how well the company preformed during the year.
Revenues Expenses = Net Income (Loss)
The income is the only financial statement that records revenues and
expenses. It also displays net income or net loss.
Also known as the Statement of Operations of Statement of Earnings
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Mainly reports gains and losses
Contains the bottom line, net income or net loss for the period.
Net income is the most important item in the financial statements.
Revenue and Income are both positively increased. Arises out of
businesses doing business. Revenue is consistent.
Gains are incidental to the business. For example finding $5 on the
ground is not revenue, but a gain.
This is why businesses report revenues separate from gains.
Expenses are necessary to run a business. For example paying for gas.
Losses reduce income, such as having to pay to get your car fixed.
o Statement of Retained Earnings: why the companies retained earning
changed during the year.
Beginning Retained Earnings + Net Income (-Net Loss) Dividends =
Ending Retained Earnings
The statement opens up with a beginning retained earning balance.
Add net income or subtract net loss.
Subtract dividends
Report ending retained earnings.
Retained Earnings is income that is kept in the business for
investment purposes, which is also known as equity.
For any account, Ending Balance = Beginning Balance + In Out
In increases the account balance
Out decreases the account balance.
If you have small beginning earnings, then you could have a negative
returned earnings. Which in turn, will reduce all equity.
Businesses that keep incurring losses year after year could potentially
end up having negative retained earnings, which could lead to
negative equity.
o The Balance Sheet: also known as the Statement of Financial Position, reports
Assets, Liabilities and Stockholder’s Equity.
Assets = Liabilities + Shareholder’s Equity
Assets
o Current Assets: expected to be converted to cash, sold
or consumed in the next year or within the business’s
operating cycle. This includes: cash and cash
equivalents, short-term investments, accounts and
notes receivable, inventory and prepaid expenses.
o Long-term Assets: will be held longer than one year.
This includes property and equipment (land, buildings,
computers etc.) Intangibles and Long-term investments.
Liabilities
o Current Liabilities: debts payable in the next year or
within the business’s operating cycle. This includes,
current maturities of long-term debt, accounts payable,
income taxes payable and accrued expenses payable.
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