Financial Accounting I: Course Notes P1

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Financial Accounting
Douglas Kong

13 September 2012 What is Accounting? Accounting is an information system that identifies, records, communicates the economic events of an organization to interested users. Economic events are activities related to the production and distribution of goods & services in an organization. The information communicated through accounting reports, the most common of which are called financial statements. Internal Users are those who plan, organize, and run a business (IE: Marketing Managers. Production Supervisors. Finance Directors & Company Officers). External Users are those who work for other organizations but who have an interest in and need for information about the company’s financial position and performance (IE: Investors, Creditors, Government (CRA). Business owners (called investors or shareholders) look for two sources of possible gain:  Sell ownership interest in the future for more than they paid  Receive a portion of the company’s earnings in cash (dividends) Investors are individuals who buy small percentages of large corporations—make their purchases hoping to gain in two ways. They hope to receive a portion of what the company earns in the form of cash payments called dividends, and they hope to eventually sell their share of the company at a higher price than they paid. Creditors lend money to a company for a specific length of time. They gain by charging interest on the money they lend. When a company exchanges money with its lenders and owners, these are called financing activities. When a company buys or sells property, such as roasting equipment used in producing coffee products, these are called investing activities. Financial Accounting refers to the field of accounting that provides information to people who are external to an entity. Managerial Accounting refers to the field of accounting that provides information to the managers of the entity and other decision makers who work for the entity. IFRS (International Financial reporting Standard) A set of globally accepted accounting standards used in over 100 countries designed to provide consistent financial reporting internationally. Replace the various country specific generally accepted accounting principles. More principles based. We use IFRS because of consistency, comparability, flexibility, accessibility and as it is one set of books. Canadian publicly accountable enterprises (public corporations, crown corporations, an enterprise that holds assists in a fiduciary capacity for a broad group of outsiders) government business enterprises, will be required to adopt IFRS on January 1, 2011 for fiscal periods beginning on or after this date. For comparative figures, these companies will be required to present their 2010 financial statements in accordance with IFRS as well. IFRS1 provides detailed guidance on the procedures to follow when adopting IFRS for the first time. Private Enterprises A profit oriented enterprise that has not issued debt or equity instruments that are or will be outstanding and traded in a public market; and does not hold assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. They can choose to adopt IFRS OR to adopt a set of accounting standards for Private Enterprises. The Four Basic Financial Statements 1. STATEMENT OF FINANCIAL POSITION – reports the amount of assets (resources owned), liabilities (amounts owed), and shareholders’ equity of an accounting entity at a point in time. 2. INCOME STATEMENT – reports the revenues less the expenses of the accounting period. 3. STATEMENT OF CHANGES IN EQUITY – reports the way that profit, distribution of profit (dividends), and other changes to shareholders’ equity affected the financial position of the company during the accounting period. 4. STATEMENT OF CASH FLOWS – reports inflows (receipts) and outflows (payments) of cash during the accounting period in the categories of operating, investing, and financing. The statement of financial position has the following elements:  Assets are economic resources controlled by the entity as a result of past business events from which future economic benefits may be obtained.  Liabilities are debts or legal obligations of the entity that result from past business events.  Shareholders’ Equity is amounts of financing provided by owners of the corporation and from earnings over time. Assets (Economic Resources) = Liabilities + Shareholder’s Equity (Sources of Financing for Economic Resources, Liabilities: From Creditors, Shareholders’ Equity: From Shareholders) Revenue is the earnings from the sale of goods or services. It is recognized in the period in which goods and services are sold, not necessarily the period in which cash is received. Expense is the dollar amount of resources used up by the entity to earn revenues during a period. It is recognized in the period in which goods and services are used, not necessarily the period in which cash is paid. When revenues exceed expenses for the period, the company has earned profit (also called net income or net earnings). If expenses are greater than revenues in the period, the company incurred a net loss. Statement of Changes in Equity is to report the reinvestment of earnings from the company gained during the current period (profit and other comprehensive income) less the dividends paid to shareholders of the company plus or minus any other changes in equity. Equity, beginning of the period Plus: Profit for the year Plus: Other comprehensive income Less: Dividends Plus/Less: Other changes, net Equity, end of the period The Statement of Cash Flows reports inflows and outflows of cash during the accounting period using three categories: operating, investing, and financing activities.  Operating Activities involve the cash provided and used in the normal business operations of the company. This section of the statement includes cash collected from the sale of products to customers, cash paid to suppliers for materials and to employees for the labor to manufacture and distribute the product. In addition, we show cash paid for interest and taxes.  Investing Activities involve the purchase or sale of long-term productive assets, the lending of monies to others, and the receiving principal payments back from those loans. When we purchase a long-term productive a
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