MOS 1023 - First Exam - Lecture & Textbook Notes combined.docx

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Western University
Management and Organizational Studies
Management and Organizational Studies 1023A/B
Maria Ferraro

MOS 1023 Week #1: September 18/13 2. Why does accounting matter?  Accounting is the language of business  Global economic systems depend on reliable and accurate financial reporting 1. Measures business activities, 2. process data info reports (financial statements) 3. communicates results to decision makers. 3. Users and Uses of Accounting  Accounting identifies and records the economic events of an organization and communicates to interested users  There are two broad categories of users  Internal users -  External users 4. Users of Financial Information  Internal users  Managers plan, organize, and run a business  Various decisions: Pricing, Strategic, Marketing, Employee compensation, Capital budgeting, Resource allocation 5. Users of Financial Information  External users  Investors (primary user) –  Creditors (primary user) – ex. banks, loans  Others ▪ Tax authorities (Canada Revenue), Regulatory agencies (ensure land is up to code by environment ex. ), Customers (ex. Buying a new car), Labour unions, Economic planners, Communities 6. Ethical Behaviour  For accounting information to have value, preparers must have high ethical standards:  Actions are legal and responsible  Consider organization’s interests  Accountants, other professionals, and most companies have rules or codes of conduct to guide ethical behaviour  Companies have rules of conduct 7. Forms of Business Organizations  Proprietorship ex. Plumber, hairdresser  Owned by one person  Simple to set up  Owner has control over business  Unlimited liability  Separation of legal entity and financial entity (personal vs. business)  Partnership  Similar to proprietorship except owned by more than one person  Formalized in a written agreement  Each partner has unlimited liability (might be on hook for depts. of partner)  Financials for partnership but at end of year profit gets split and added to personal tax return  Corporations  Separate legal entity owned by shareholders (owners of shares)  Indefinite life  Get money from shares  Owners (shareholders) enjoy limited liability (ie. Shareholders don’t get in trouble if company went bankrupt- only lose shares, not house)  Incorporated - May be public (stock exchange) or private:  Depends on whether shares are publicly traded 9. 10. 11. Types of Businesses – Manufacturing, Merchandising, Service (no inventory) 12. 3 Types of Business Activities: Financing, Investing, & Operating 13. Financing Activities  Obtaining (and repaying) funds to finance the operations of the business  Examples: Borrowing money or repaying loans (debt), Selling or repurchasing shares (equity), shareholders investments – don’t want financing for paying phone bill – want it for large assets 14. Investing Activities  Obtaining the resources or assets needed to operate the business for the long term  Examples: Purchase or sale of investments, Purchase or sale of long-lived assets such as property, plant and equipment and intangible assets, RRSP 15. Operating Activities  Operating activities are the main day-to-day activities of the business  Examples: Revenues, Expenses, Related accounts (Accounts payable, accounts receivable, inventory etc.) 16. Financial Statements: are the business documents that companies use to report the results of their activities to various user groups. The system of accounting produces the following statements: income statement, statement of changes in equity, statement of financial position, statement of cash flows 17. Income Statement: Reports the results of operations for a specific period of time (From the Year ending September 16) (proprietorship, private corporations must do annually) (Publically traded must do quarterly). Fiscal year is 12 month cycle.  Revenues: Arise from the sale of a product or service and Result in an inflow of assets  Expenses: Costs of assets consumed or services used to generate revenues  Net earnings (loss)= Revenues – expenses 19. Statement of Changes in Equity  Shows the changes in each component of shareholders’ equity for the period  Share capital:  Amounts contributed by shareholders  May have common and preferred classes  Retained earnings / deficit:  Cumulative profit retained in the company  Less dividends paid to shareholders ▪ (Ignore text book reference to comprehensive income) 21. Statement of Financial Position (Balance Sheet)  Assets: Resources owned by a business  Liabilities: Obligations of the business  Shareholders’ equity: Share capital and retained earnings Accounting Equation: Assets = Liabilities + Equity 24. Statement of Cash Flows: Reports the cash receipts and payments for a specific period of time – how much cash did I receive or pay out in three activity areas  Changes in cash should be categorized as one of the following activities:  Operating, Investing, Financing  Reconcile the change in cash to the beginning and ending cash balances 26. The Accounting Equation: ½ assets ¼ liabilities ¼ shareholder equity economic resources=claims to economic resources 27. Assets are the economic resources of a business that are expected to produce a benefit in the future. Ex. Plant, property, vehicle, inventory Liabilities are “outsider claims” or economic obligations payable to outsiders. Shareholders (Owners’) equity represents the “insider claims” of a business. 28. For a corporation, shareholders’ equity is divided into two main categories.  Share capital and retained earnings Assets=liabilities + shareholders equity Assets= liabilities + share capital + retained earnings 29. Share capital is the amount invested in the corporation by its owners The basic component of contributed capital is common shares. Retained earnings is the amount earned by income-producing activities and kept for use in the business. 30. Net Income: Revenues are increases in retained earnings from delivering goods or services to customers. Expenses are decreases in retained earnings that result from operations. Revenues for the period + Shares – + Liabilities Retained Earnings Expenses for – the period Start of End of Assets Dividends the period = the period + Revenues balance of + (or Net loss) Dividends balance of Shareholders’ – retained or for the – for the = retained Expenses earnings – period period earnings Equity 1 - 31 2 - 32 Income Statement – Net Income Statement of Changes in Equity - Add net income Statement of Financial Position - Report equity Cash Flow Statement - Report cash balance from balance sheet 1 - 33 34. Financial Statements: The financial statements are a picture of the company in financial terms. Each financial statement relates to a specific date or covers a particular period. **** exam question Financial Financial Question Answer Statement Question Answer Statement 1. How well did the company perform Revenues Income 3. What is the company’s Assets Statement of (or operate) during – Expenses statement end of the period? at the + Owners’ equity Fposition the period? Net income (Net loss) 2. retained earningsny’s+ Net income (or – Net loss)tement 4. How much cash did Operating cash flows Cash change during - Dividends of Changes and spend duringrate ± Financing cash flows flow the period? = Ending R.E. In equity the period? Increase or decrease in cashatement 1 - 35 1 - 35 36. Annual Report:  Publicly traded companies must prepare an annual report each year  Includes financial and nonfinancial information about the company:  Financial: management discussion and analysis (“MD&A”) statement of management responsibility, auditors’ report, financial statements and notes- impact on economy and trends on industry  Nonfinancial: company’s mission and goals, products, people 37. Generally Accepted Accounting Principles (GAAP) • Rules and practices for the preparation of financial statements • Canada has adopted international accounting standards only to publically traded or publically funded organizations • Different for publicly-traded and private corporations: – Publicly-traded corporations use International Financial Reporting Standards (IFRS) – Private corporations may use IFRS or Accounting Standards for Private Enterprises (ASPE) • Proprietorships and partnerships do not have to use IFRS or ASPE as statements are prepared for internal users only MOS 1023 Lecture #2 Financial Statements – Framework, Presentation and Usage 1. Usefulness of a Conceptual Framework • The framework is like a constitution; it is a “coherent system of interrelated objectives” • Aids in creation of standards for the accounting profession • Increases financial statement users’ understanding of and confidence in financial reporting • Enhances comparability of financial statements of different companies 2. Objectives of the Conceptual Framework • The framework is the foundation for building a set of accounting concepts and objectives • The framework is a reference of basic accounting theory for solving new and emerging practical problems of reporting Conceptual Framework for Financial Reporting 4. Objective of Financial Reporting – Trueblood Committee (1970’s) – The Financial Standards Board USA • The overall objective of financial reporting is to provide information that is: 1. useful to users (e.g. Investors, creditors, etc), and 2. decision relevant about how to allocate resources • Resource allocation decisions are assumed to include assessment of management stewardship (i.e. management role in maximizing shareholder value) • Companies provide this info through general purpose financial statements (they give information that meets the key users to provide the most useful information possible in a manner whereby benefits exceed the costs) 6. Fundamental Qualitative Characteristics The Fundamental Qualitative Characteristics are: (what information needs to have for primary users) 1. Relevance – Makes a difference in a decision – Has predictive and feedback/confirmatory value – Materiality- info that makes a difference to the decision-maker - need to consider if the material will have affect upon sensitive numbers 2. Representational Faithfulness: it reflects the underlying economic substance of an event or transaction – referred to as transparency (what they can see beneath the numbers) – Complete – Neutral – Free from material error. Ie. Reliable – Substance over form 7. Enhancing Qualitative Characteristics are: 1. Comparability (Information measured and reported in similar way (company to company, and year to year) – Allows users to identify real economic similarities and differences 2. Verifiability – Similar results achieved if same methods are used (consensus- others have to agree) ex. Audits confirm the policies accountants have applied – Easy numbers to obtain are called “hard” numbers. Estimates and uncertain numbers are “soft” 3. Timeliness 4. Understandability – Users need to have reasonable knowledge of business measures – Provides “enough” information so that it is clear 8. Tradeoffs and Constraints • Trade-Offs – It is not always possible to have all fundamental and enhancing qualitative characteristics – give up one to get the other – Trade-offs happen when one qualitative characteristics is sacrificed for another. Ex. Errors for timeliness • Constraints – Materiality • If leaving or including information would influence/change the judgement of a reasonable person, then that information is considered material. Ex. Chairs must be fixed asset on balance sheet but its not going to be a game changed to a big decision • Quantitative guidelines for materiality – professional judgement – Cost versus Benefits • Cost benefit relationship: Benefits of using the information should outweigh the costs of providing that information. Ex. Private corps don’t use int acc standards because the benefits don’t out way the costs. Examples of costs: collecting, distributing, auditing, litigation, etc. 9. Elements of Financial Statements – Assets, Liabilities, Equity, Revenues, Expenses, Gains, Losses Assets have three key characteristics: 1. They involve some economic benefit to the entity- something owned 2. Entity has a control over that benefit 3. Benefit results from a past transaction or event Liabilities have three key characteristics: 1. They represent a present duty or responsibility - 2. Entity is obligated and has little or no discretion to avoid the duty or responsibility 3. Obligation results from a past transaction or event **You do not have to pay for liability is cash – ex. Service - Constructive obligation: arises through practice that signals the company acknowledges a potential economic burden - Equitable obligations: arise due to morals or ethics ex, retrain an employee who is being downsized Equity (net assets) represents residual interest that remains after deducting liabilities from its assets - common shares, preferred shares, retained earnings, and comprehensive income (only under IFRS Revenues: Increases in economic resources resulting from ordinary activities Expenses: Decreases in economic resources resulting from ordinary revenue- generating activities Gains: Increases in equity (net assets) resulting from incidental transactions. Ex. Gain on getting insurance money of 4000 on a vehicle valued 2000 Losses: Decreases in equity (net assets) resulting from incidental transactio
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