SUMMARY OF KEY POINTS
LO 1 Accounting is a system for gathering data about an entity's economic activity,
processing and organizing the data to produce useful information about the entity, and
communicating the information to people who use it to make decisions. Communication is an
important but often challenging part of the process. Effective decision making requires
information and accounting is a crucial source of information. In addition, accounting matters
because it has economic consequences for stakeholders.
LO 2 Accounting doesn't operate in a vacuum. You can't sensibly use or provide accounting
information without considering the accounting environment, which includes the social,
political, legal, cultural, and economic environment of a society; the types of entities and the
characteristics of those entities; the different stakeholders that may have an interest in an
entity; and the constraints that limit the accounting choices an entity can make. The diversity of
the accounting environment makes it impossible for a single accounting report to be
appropriate for all situations. Accounting reports must be tailored to suit the circumstances of
an entity's accounting environment.
LO 3 An entity's stakeholders rely on the entity itself to provide accounting information. The
managers of an entity who prepare the information aren't neutral. They may be influenced by
their personal interests, and these interests may conflict with those of the stakeholders.
Managers often have considerable leeway and choice in how they do their accounting, which
makes it necessary for stakeholders to exercise a great deal of care to ensure they are aware of
the choices managers made and the economic consequences of those choices.
LO 4 A critical approach to accounting refers to this book's emphasis on critical thinking;
applying high-level mental skills such as analysis, application, evaluation, explanation,
inference, interpretation, judgment, and synthesis to decision making. Economic activity can be
complex so preparers need these skills to prepare accounting information and stakeholders
need them to use it effectively.
LO 5 Accounting standards are the principles, conventions, procedures, and rules that define
acceptable accounting practices and guide the preparation of financial statements in certain
situations. In Canada, IFRS must be used by public companies while private companies can use
a separate set of standards called GAAP for Private Enterprises. Most Canadian companies are
private and not obliged to follow either standard. GAAP and IFRS are flexible and require
managers to exercise judgment. The same transactions and economic events can sometimes
be legitimately accounted for in different ways. The accounting choices managers make can
significantly affect the amounts reported in the financial statements.
LO 6 Accounting is about measurement. Accountants face the challenge of developing
appropriate ways of measuring aspects of economic activity that are difficult or even impossible
to observe, and to make those measurements useful for stakeholders. There are often
alternative ways of measuring the same thing and stakeholders must be aware of the methods
being used and their economic consequences. Also, stakeholders have to realize that
accounting measurements are inherently imprecise and uncertain, and it's often not obvious
what, or if, there is a best way.
SUMMARY OF KEY POINTS
LO 1 A set of general purpose financial statements includes the balance sheet, the income
statement and statement of comprehensive income, the statement of retained
earnings/statement of equity, the statement of cash flows, and the notes to the financial
statements. The balance sheet summarizes the financial position of the entityits assets,
liabilities, and owners' equityat a point in time. The income statement provides a measure ofeconomic activity over a period. The statement of equity summarizes changes to equity over a
period while statement of retained earnings summarizes the changes to retained earnings
during a period. The statement of cash flows shows how cash during a period was obtained
from and used for operating, investing, and financing activities. The notes to the financial
statements expand and explain the information in the statements and provide additional
information that may be helpful in assessing an entity. General purpose financial statements
are designed to suit a broad set of users and uses and are usually prepared according to IFRS
(or GAAP for Private Enterprises).
LO 2 The accounting equation is the conceptual foundation of accounting and is defined as
All economic events entered into an accounting system must be summarized in terms of the
accounting equation. The equality between of the equation must always be maintained.
LO 3 There are five basic elements in the financial statements: assets, liabilities, owners'
equity, revenues, and expenses. Assets are economic resources that provide future benefits to
an entity. Liabilities are an entity's obligations to pay debts or provide goods or services.
Owners' equity represents the owners' investment in an entity. Owners' investments can be
made directly by contributing assets to the entity or indirectly by reinvesting profits. Revenues
represent economic benefits earned by providing goods and services to customers. Expenses
are economic sacrifices made to earn revenue.
LO 4 The two most commonly used methods of accounting are the cash basis and the accrual
basis. Cash accounting records only cash inflows and outflows. Under the cash basis revenues
are recorded when cash is received and expenses are recorded when cash is paid. Accrual
accounting attempts to measure economic activity rather than just cash fl