RSM219 Notes.docx

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Rotman Commerce
Elisa Zuliani

RSM219 Exam Notes RSM219 Exam Notes Introduction Accounting = info system that identifies and records the economic events of an organization and then communicates them to a wide variety of interested users Internal Users plan, organize, run company External Users buy/sell/hold stock, investors & creditors are main external users Fiscal year = 1 accounting period (1 year long) Comparative Statements = report info more than 1 period Annual Report = includes nonfinancial info and financial info Proprietorship = small set up cost, simple set up, owners receives profit/loss, responsible for debt, unlimited liability Partnership = small set up cost, simple set up, owners receives profit/loss, responsible for debt, unlimited liability, possible to have some limited liability for some partners Corporations = owners have shares/stock, easy to raise funds, limited liability, income tax paid, no loss for shareholders if debt o Public Corporation distribute financial statements to public and stock o Private Corporations no publically traded stocks Statement of Earnings = reports revenues and expense to show how successfully a company preformed during a period of time o Revenue Expense = Net Loss/Income o Note: issue of share & distribution does NOT affect net earnings Statement of Retained Earnings = indicates the portion of a companys earnings that was distributed to you and the other shareholders of a company in the form of dividends, and how much was retained in the business to all future growth o Basically earnings that have not been paid to shareholders o Used to evaluate dividend payment policies Balance Sheets = picture of what a company owns (assets), what it owes (liabilities), and its net worth (shareholders equity) at a specific point in time o Assets = Liabilities + Shareholders Equity Cash Flow Statement = show where a company obtained cash during period of time and how the cash was used o 3 business activities: Financing, Investing, Operation show net or in cash Relationship between Statements Statement of Earnings Statement of Retained Earnings Retained Earnings Balance Sheet Cash Flow Balance Sheet Order Completed: Statement of Earnings, Statement of Retained Earnings, Balance Sheet, Cash Flow 3 Business Activities 1. Financing o Raise funds: borrow, sell shares (share capital) 2. Investing o Purchase of long-lived resources (assets) 3. Operating o Create Rev & Expense 1 | P a g e RSM219 Exam Notes Conceptual Framework = a coherent system of interrelated objects and fundamentals that can lead to consistent standards and that prescribes the nature, function and limits of financial accounting statements Accounting Standards Board (AcSB) created by Canadian Institute of Chartered Accountants Accounting Standards Oversight Council, oversees and contributes to AcSB 2006 AcSB recommend to change to International Financial Reporting Standards (IFRS) by 2011 Non-profit & Private companies have simplified set of rules Sections of Accounting Framework 1. The Object of Financial Reporting o Help make decisions on loans/invest/allocations o Should b e provided info on amounts, timing, uncertainty of future cash flow, assets, liabilities, management explanation 2. The Qualitative Characteristics of Accounting Information = should have the following characteristics: a) Relevance = important info, about past/future to help make predictions Predictive value, feedback value, timely b) Faithful Representation = what really happened Verifiable, neutral, complete c) Comparability = similar company w/ same accounting standards Consistency d) Understandability = base level, average user is assume to have reasonable understanding of acc concepts & procedures as well as general business and economic conditions Clearly, concisely Assumptions 1) Monetary Unit Assumption = only in terms expressed in $ are included, unit of measure stays stable over time (inflation/deflation are minor) ex. Customer satisfaction not shown 2) Economic Entity Assumption = economic activity can be identified with a particular accounting unit which is separate and distinct from the activities of shareholders and all other economic entities 3) Time Period Assumption = life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for business 4) Going Concern Assumption = business remain in operations for the foreseeable future, linked to cost principle (only not used when liquidation of business likely) Accounting Principle Generally Accepted Accounting Principles 1) Cost Principle = assets recorded at cost at time of acquisition 2) Full Disclosure Principle = all circumstances events which make a difference to financial statements users be disclosed (include notes) 3) Revenue Recognition Principle = that revenue must be recognized in the accounting period in which it started o Merchandise company revenue when merchandise sold o Service Company earned when service preformed o General revenue recognized when sale or performance effort its substantially complete, the amount is determinable (measurable), and collection is reasonably assured 4) Matching Principle = efforts (expense) must be recognized with accomplishments (revenue) wherever possible 2 | P a g e RSM219 Exam Notes Constraints 1) Materiality = impact of item on a companys overall financial condition and operations Material when remove/include affect decision of investors Immaterial when remove/include will have no impact on decisions of investors Use professional judgement 2) Cost-Benefit = value of the info is greater than the cost of providing it Accounting Transactions Accounting Information System = collecting processing transaction data and communicating financial info to decision makers Accounting Transaction = occurs when assets, liabilities, or shareholders equity items change as a result of some economic event Asset Accumulated Depreciation Merchandise Inventory Allowance to Reduce Inv to Liabilities Unearned Revenue NRV Shareholders Equity Retained Earnings Common Shares Dividend Revenue/Sales Sales Return & Allowance Sales Discount Expenses Freight (FOB Destination) COGS Purchase Purchase Return & Allowance Purchase Discount Income Summary Steps in Recording Process 1) Analyze each transaction for its effect on the accounts 2) Enter transaction info in a general journal (book or original entries) 3) Transfer the info form the general journal to the appropriate accounts in the general ledger (book of accounts) The Journal Transactions recorded chronologically 3 | P a g e RSM219 Exam Notes General Journal = contributions to record process 1) It discloses the complete effect of a transaction in 1 place, including an explanation, indentifies the source document 2) Provides a chronological record of transactions 3) Helps to prevent and locate errors b/c the debit & credit amount for each entry can be quickly compared Journalizing = entering transactions in the general journal Compound Entry = more than 1 debit & credit The Ledger = contains all assets, liabilities, shareholders equity, revenues, expenses accounts Chart of Accounts = framework for the accounting database Posting = transfer of entry to general ledger chronologically Trial Balance = list of general ledger accounts and their balance at a specific time; normally prepare monthly or at end of each accounting period. Trial balance procedure: 1) list all account titles and their balances in the same order as the chart of accounts 2) total debit, total credit 3) debt = credit Limitations of trial balance: non journalized transactions, correct journal entry not posted, posted journal entry multiple times, incorrect accounts used, incorrect amount, errors that cancel each other out Accounting Cycle 1) Analyze Buiness Transactions 9) Prepare 2) Journalize Post-Closing the Trial Balance
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