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COMMERCE 1AA3 Quiz: 1AA3 TB Notes

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COMM 1AA3 2014-09-09 5:22:00 PM
Chapter 1
Financial Statements
Income Statement: the statement of profit or loss, measures a company’s
operating performance for a specified period of time. The period of time
covered by an income statement is typically a month, a quarter (3
Months), or a year
Retained Earnings: represent the accumulated net income (or net
earnings) of the company since the day it started business, less any net
losses and dividends declared during this time. The statement of retained
earnings reports the changes in a company’s retained earnings during the
same period covered by the income statement.
Balance Sheet: represents a company’s financial position as at a specific
date, which always falls on the last day of a monthly, quarterly, or annual
reporting period.
Cash Flow: How much did the company generate and spend over a year.
Financial Statements: are the reports that companies use to convey the
financial results of their business activities to various user groups which
can include managers, investors, creditors, and regulatory agencies.
These parties use the reported information to make a variety of decisions,
such as whether to invest in or loan money to the company.
Net Income: is the excess of revenues over expenses.
Accounting: is an information system that measures and records business
activities, processes data into reports and reports results to decision
There are two kinds of Accounting: Financial Accounting and Management
Accounting. Financial is used by both internal and external users, where
as managerial accounting is only used by internal users.
Financial Accounting: provides information for managers inside the
business and for decision makers outside the organization, such as
investors, creditors, government agencies, and the public.
Management Accounting: generates inside information for the managers
of the organization (budgets, forecasts, projections).
Forms of Business: proprietorship, partnership and corporation.
Proprietorship: is an unincorporated business with a single owner, called
the proprietor. They tend to be small businesses or individual professional
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organizations. The proprietor is personally liable for all business debts.
Personal finances are not included.
Partnerships: is an unincorporated business with two or more parties as
co-owners and each owner is a partner. Each partner is personally liable
for all partnership debts.
Corporations: a corporation is an incorporated business owned by uts
shareholders who own shares representing partial ownership of the
corporation. One of the major advantages of a corporation is the ability to
raise large sums of capital by issuing shares to the public. Corporations
have no personal obligation for its debts; therefore shareholder shave
limited liability as do partners. They also pay income taxes. In the other
two cases they are paid personally.
GAAP, Generally Accepted Accounting Principles: specify the standards for
how accountants must record, measure and report financial information.
This is established by the Canadian Institute of Chartered Accountants
Publically Accountable Enterprises (PAE): which are corporations and
other organizations that have issued or plan to issue shares of debt in
public markets such as the TSX, must apply International Financial
Reporting Standards (IFRS).
Private Enterprises, which have not issued and do not plan to issue
shares or debt on public markets, have the options of applying IFRS.
However this can be costly, so they may apply another form of GAAP
known as Accounting Standards for Private Enterprises (ASPE), which
have been set by the CICA.
The overall objective of accounting is to provide financial information
about the reporting entity that is useful to current and future investors
and creditors when making investing and lending decisions.
To be useful information, there are two qualities required, relevance and
faithful representation.
To be relevant, information must have predicted value, confirmatory
value, or both.
Information has predicted value if it can be employed by users to predict
an entity’s future business or financial outcomes.
It has confirmatory value if it confirms or changes prior evaluations of an
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For accounting information to provide a faithful representation to users, it
must reflect the economic substance of a transaction or event, which may
not be the same as its legal form.
To be useful, accounting information must be comparable, verified,
timeliness and understandable.
Comparable: is must be reported in a way that makes it possible to
compare it to similar information being reported by other companies.
Verifiable: when it can be checked for accuracy, completeness, and
Timeliness: means reporting accounting information to users in time for it
to influence their decisions.
Understandable: when it is clearly and concisely classified and presented
to reasonably knowledgeable and diligent users of the information.
Conceptual Framework: has only one explicit underlying assumption, the
going-concern assumption. Along with, separate-entity, historical-cost
and stable-monetary-unit assumptions.
Going-Concern Assumption: meaning we expect to continue operating
normally for the foreseeable future. A company that is not a going
concern is at risk of going bankrupt.
Separate-Entity Assumption: so we do not mix the assets, liabilities,
income or expenses of the entity with those of its owners when reporting
the entity’s operating performance and financial position. There is clear
separation here.
Historical-Cost Assumption: states that assets should be recorded at their
actual cost, measured on the date of purchase as the amount of cash paid
pulls the dollar value of all non-cash consideration
Cost is a verifiable measure that is relatively free from bias.
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.
Stable-Monetary-Unit Assumption: Regardless of the reporting currency
used, financial information is always reported under the assumption that
the value of the currency is stable, despite the fact that its value does
change due to economic factors such as inflation.
Income: a company’s income includes both revenue and gains. Revenue:
consists of amounts earned by a company in the course of its ordinary
day-to-day business activities. Gains: represent other items that result in
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