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Chapter 1

COMMERCE 1AA3 Chapter Notes - Chapter 1: International Financial Reporting Standards, International Accounting Standards Board, Relate

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Aadil Merali Juma

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Chapter 1 Notes
: Explain why accounting is the language of business
A. Accounting
- info. System that measures business activities, processes data into reports.
- Reports results to decision makers. 1.1 illustrates the flow of info in an accounting
system. Financial statements report this info. To users.
B. Accounting info is used by
βž”Managers to set / evaluate goals and take corrective action.
βž”Investors to decide whether to invest in a business or evaluate an investment
βž”Creditor to evaluate a borrower's ability to make required payments
βž”Government & regulatory bodies such as Canada Revenue Agency
to ensure
organizations pay the correct amount of taxes.
βž”Individuals to make investments decisions and/or manage a bank account
βž”Not-for-profit organizations which use accounting info. In virtually the same way as
profit organizations
C. Accounting info can be classified into 2 categories
a. Financial accounting provides info for managers inside the business and for decision
makers outside the organization (e.g investors/creditors)
b. Managerial accounting generates inside info for internal use by management.
D. Types of business org.
1. Proprietorship :
- An unincorporated business w/ a single owner.
- The owner has unlimited liability which means that they assumed personal
responsibility for the debts of the business.
2. Partnership
- An unincorporated business with 2 or more owners.
- Each partner has unlimited liability.
3. Corporation
- An incorporated business owned by shareholders whose ownership is evidenced by the
number of shares held.

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Chapter 1 Notes
- Shareholders elect the members of the board of directors to set policy for the
corporation and appoint officers.
- A shareholder has limited liability.
●A corporation is distinct from its owners and has many of the rights entitled to a person.
: Explain accounting's conceptual framework & underlying assumptions
A. Generally Accepted Accounting Principles (GAAP)
Professional guidelines that govern how accountants record, measure & report financial info.
1. The Canadian Institute of Chartered Accountants (CICA) establishes GAAP
2. There are multiple sets of GAAP, each is applicable according to the type of entity /
a. Publicly accountable enterprises (PAEs) must apply International Financial Reporting
Standards (IFRS - effective Jan 1 2011 for Canadian public co. ) standards set by
International Accounting Standards Board (IASB) to enhance the comparability of
financial info. Reported by public enterprises around the world.
b. Private enterprises apply the Accounting Standards for Private Enterprises (ASPE).
However, private enterprises have the option of using IFRS or ASPE.
c. Other sets of GAAP are applicable to not-for-profit orgs., pension plans & government
B. The overall objective of financial reporting is to provide useful info., to users to make
investing and lending decisions. Characteristics of useful info., include:
1. The relevance characteristic
β—‹Must be considered to ensure the financial statements provide info., to the
user is useful.
β—‹Must provide predictive and/or confirmatory value.
β—‹Must be material in nature / magnitude that omitting / misstating it could
affect the decisions of an informed user.
2. The faithful representation (reliability) characteristic
β—‹Accounting records should be based on accurate data.
β—‹The actual cost of assets / services is usually more reliable than market value.
C. There are 4 accounting assumptions underlying the conceptual framework.
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