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MGCR 211 (10)
Chapter 1

MGCR 211 - Chapter 1.docx

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McGill University
Management Core
MGCR 211
Julia Scott

CHAPTER 1 Accounting - Information system which records, summarizes, & reports the underlying economic conditions of an entity - Used by both those inside the entity & outside to understand the entity - Used to make decisions (e.g. costs, sale prices, expand, etc.) - Financial statements are prepared by the management who then reports to owners Forms of Organizations 1. Sole proprietor - Owner’s or partner’s capital – initial investment in the company 2. Partnership 3. Corporation - People who own the company are called shareholders - Equity in corporation is called shareholder’s equity o E.g. land, cash, money o Retained earnings o Its is the owner’s initial investment in a corporation o It can also come from the changes of the net assets  Net assets = Assets – liabilities - Types of corporations: o Small privately held company o Large privately help company  Private companies control who becomes a shareholder o Large publicly held company  Trades on stock exchange, has many shareholders, publicly available info  Often has professional management (different than owners)  Shareholders elect Board of Directors who hires management Financial Statements - Accounting system is reporting & summarizing information - Reports are prepared by management - For Internal users (more frequent) & External users (less frequent) - Annual report or more frequent - Or reports with different levels of details Users of Financial Statement Information Internal External Management Shareholders Board of Directors Potential investors Creditors (bankers and suppliers) Regulators (stock exchange) External Users of Financial Statements Shareholders - To see how well management has been running the company and if they’re doing an adequate job - Compare current share price with the original price that they paid for Creditors - Three groups: o Those who sell goods (short term cash level) o Financial institutions (short term of extend over several years) o Investors (long term debt) - They want to know: o The profitability o How much cash o How much the assets are worth o How much they owe - This information can be found in the balance sheet Regulators - Interested in ensuring that the company follows the regulations - Failure to follow regulations will greatly affect their ability to raise capital Management - Interested in profits, assets, and liabilities - They have the benefit of gaining private and internal financial statements Competitors Sources of Financial information - Financial Statements (4) and Notes o What the company chooses to tell the outsider about the company o But we want the information to be comparable, reliable  Need some guidelines. o Usually referred to as GAAP: Generally Accepted Accounting Principles  Set of accounting recommendations and guidelines used to prepare financial reports  GAAP provides acceptable alternatives for recording, measuring, summarizing and reporting accounting transactions & information. - Annual Report: Contains additional info provided by management o Message to Shareholders (Letter from the CEO or CFO) o Corporate profile o Management Discussion & Analysis (MD & A) o Financial Section: management’s statement of responsibility, audit report, the financial statements - Press Releases, Company Websites - Industry data or Government data
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