MOS 1023 textbook notes for first midterm

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

MOSO CTOBER MIDTERM NOTES Chapter 1 Accounting: information system that identifies and records the economic events of an organization Internal users: plan, organize and run companies External users: investors and creditors are main external users of accounting information Forms of business organization o Proprietorships Simple to set up and gives you control over business Operated by owner Only need small amount of money to start business Own receives any profits, suffers any losses and personally liable for all debts of business No legal distinction between business as economic unit and the owner o Partnerships Similar to proprietorship but more than one owner Any owner may be forced to use personal assets to pay debt of another Sometimes, limited liability formed for selected partners o Corporations Investor of corporation receive shares to indicate ownership claim Easy to raise funds Shares are easy to sell Shareholders enjoy limited liability; losing only amount they invested into company Produce far greater revenue Public corporations: commonly distribute financial statements Private corporations: dont issue publicly trades shares Business activities o Financing activities Borrowing money and selling shares in exchange for cash -> main ways to raise funds Shareholders have no claim to corporate resources until claims of creditors are satisfied o Investing activities Purchasing/selling long-lived resources o Operating activities Amount earned from sale of goods: revenues Transactions which create revenue and expenses Common expenses: COGS, operating expenses, depreciation expense, interest expense and income taxes Communicating with users o Comparative statements: reports information for more than one period o Statement of earnings: reports revenues and expenses to show how successfully a company performed during a period of time Shares and distribution of dividends to dont affect net earnings Determines success or failure of operating activities o Statement of retained earnings: indicates portion of companys earnings that was distributed to you and shareholders of company in form of dividends and how much was retained in business to allow future growth Dividends reported here o Balance sheet; presents snapshot of what company owns, owes and its net worth at specific point in time Determines likelihood that creditors will be repaid Managers look for whether cash on hand is sufficient, inventory is adequate for future sales and whether relationship between total liabilities and equity re best proportion of debt and equity financing o Cash flow statement: show where company obtained cash during period of time and how cash was used Provides answers to Where did cash come from during period? How was it used? What was change in cash balance? Relationship between statements o Statement of retained earnings depends on statement of earnings o Balance sheet and statement of retained earnings are interrelated o Cash flow and balance sheet are interrelated Elements of annual report o Publicly traded companies must give shareholders annual report o Includes useful nonfinancial information about company and financial information o Normally include management discussion and analysis statement of management responsibility for financial statements, auditors report, comparative financial statements, notes to financial statements and historical summary of key financial ratios and indicators Chapter 2 Conceptual framework of accounting o Objective: ensures existing standards and practices are clear and consistent o Easier to solve and identify problems o Makes financial statements more relevant, objective and easier to compare International accounting standards Board (IASB) used to reduce differences and unify global standard setting o Canada uses Accounting Standards Board (AsBC) Conceptual framework of accounting o The objective of financial reporting Provide information that is useful to individuals who are making investment and credit decisions Should provide: timing, amounts and uncertainty of future cash flows, assets and liabilities/ equity o Qualitative characteristics of accounting information Relevance Make difference in users decision Confirm and correct previous expectations Timely, must be available to decision makers before it loses ability to influence decision Faithful representation Must present economic substance of transaction, not just legal form Verifiable: same answer after several people review o Values are estimates Neutral: no bias Complete: all info needed to represent economic reality Comparability Similar business circumstances use same accounting standards Enables users to identify similarities and differences Should be able to compare financial results over time Can change standards only if change is required by AcSB o if itll provide more relevant info Understandability One standard: more global users can understand Financial reports focus on info needs of creditors and investors Users without understanding and ability need professionals Greater when info is classified characterized, presented clearly and concisely Elements of financial statements o Assets, liabilities, equity, revenues and expenses Recognition and measurement criteria o Classify recognition and measurement criteria: assumption, principles and constraints o Assumption: create foundation of accounting process Monetary assumptions: requires only things that can be expressed in money Economic entity assumption: identified with particular accounting unit which is separate and distinct from activities of shareholders and all economic entities Transactions should be kept separate even if companies are related Time period assumption: life of business can be divided into artificial time periods and useful reports covering periods can be prepared Publicly traded companies report to shareholders every 3 months Interim periods: essential for timely and relevant decisions Going concern assumption: states business will remain operation for foreseeable future Makes short/long-term assets/liabilities Should not be used when liquidation of business is likely o Principles: indicate economic events Cost principle: dictates assets be recorded at cost at time of acquisition Full disclosure: all circumstances and events that make difference to financial statement be disclosed Respected by providing data contained in financial statement o Constraints: make possible to relax principles under circumstances Materiality: related to financial statement items impact on companys overall financial condition/operations Should include all information that is material Immaterial if including or not will not impact decisions International standards does not include quantitative decision Cost benefit: ensures value of info is greater than cost of providing it Balance sheet: snapshot of companys financial position o Classification helps determine whether company has enough assets to pay debts o Claims of short/long-ter
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