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BUS 251 (92)
Chapter 1-3

BUS 251 - Financial Accounting: A User Perspective SIXTH Canadian edition - Chapters 1-3

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Simon Fraser University
Business Administration
BUS 251
Steve Gibson

Chapter 1 Overview of Corporate Financial Reporting What is Business? - Business plan to profit from selling a product or service. - Can be an individual or thousands of owners (investors). What is Accounting? - Accounting is an information system in which the underlying economic conditions of organizations and of individuals are recorded, summarized, reported, and understood. - Financial statements: managements reports to the companies owners that summarize how the company performed during a particular period. Also tells users what the company owns, to whom it has obligations (debts), and what is left over after the obligations are satisfied (paid). - Annual report: the main method that management uses to report the results of the companys activities during the year. - In January 1 , 2011, Canada changed the underlying standards that are used to collect, record, and report accounting information. From Canadian standards to international financial reporting standards (IFRS). Forms of Organization - Profit-seeking entities such as corporations; governing organizations - Service entities such as hospitals and academic institutions - Not-for-profit entities such as charities - We will be concentrating on profit-seeking entities. - Other forms of business include sole proprietorships, partnerships, limited partnerships, and Crown corporations. - In all business organizations, the owners make the initial investment by contributing either cash or property or both. - In sole proprietorships and partnerships, this ownership interest is called the owners or partners capital. - In a corporation, owners (aka shareholders or stockholders) make similar investment, but their ownership interest is called shareholders capital represented by documents known as shares. Shares are easily transferred between investors Large number of individuals or entities and that are traded on a public stock exchange are called publicly traded corporations. Corporations whos shares are held by a small number of individuals are sometimes called privately held corporations. Shareholders elect board of directors who hires or fires the management. User of Financial Statements - Internal Users Management and the Board of Directors Use accounting data to make many decisions, such as pricing products, expanding operations, deciding whether to buy or lease equipment, and controlling costs. They also use other financial data found in managerial accounting. - External Users Shareholders and Potential Investors Need information that makes it possible to assess how well management has been running the company. Make decisions about buying more shares are selling some or all of the shares they already own. Analyze the current share price and compare it with the original price that they paid for the shares. Consider whether the people currently sitting on the board of directors are doing an adequate job of overseeing the management team they have selected. Creditors First group: those who sell goods and services to the company and are willing to wait a short period of time for payment, i.e. suppliers, employees. Second group: financial institution, such as banks, that have loaned money to the company. Third group: investors who have purchased long-term debt instruments such as corporate bonds from the company. Regulators Government has regulations for how a business becomes incorporated and for its conduct after incorporation. Taxing Authorities Parliament, the federal taxing authority in Canada has established the Canada Revenue Agency (CRA) as its collection agency. Other Users Other companies, security analysts, credit-rating agencies, labour unions, and journalists. Development of Accounting Standards - For Canada, the International Accounting Standards Board (IASB) sets accounting recommendations and standards. These accounting recommendation and standards are in the Canadian Institute of Chartered Accountants (CICA) Handbook and have the force of law in Canada, as they are recognized in both federal and provincial statutes that regulate business corporations. - For United States, the Financial Accounting Standards Board (FASB) sets accounting standards for American corporations. - Qualitative Characteristics and Constraints of Accounting Information Qualitative Characteristics Understandability Relevance predictive value or confirmatory value Reliability faithful representation, substance over form, neutrality, prudence, completeness Comparability Constraints Timeliness Balance between benefits and cost Balance between qualitative characteristics Business Activities - Financing Activities Financing refers to the activity of obtaining funds (cash) in order to buy major assets, such as the buildings and equipment that almost every business uses. Funds are obtained from two primary sources outside the company: creditors and investors. Creditors expect to be repaid on a timely basis and often charge the business, in form of interest. For the use of their money, goods, or services. Investors invest in the company in the hope that their investment will generate a profit. They earn profits either by receiving dividends (payments of funds from the company to the shareholders) or by selling their shares to another investor. Retained earnings: internal source of new funds for any company is the profit it makes that is not paid out to shareholders in dividends. Typical financing activities: borrowing money, repaying loans, issuing shares, repurchasing shares, paying dividends on shares - Investing Activities Typical investing activities: purchase or sale of property, plant, and equipment; purchase or sale of the shares of other companies - Operating Activities Typical operating activities: sales to customers, collections of amounts owed by customers, purchases of inventory, payments of amounts owed to suppliers, payments of expenses such as wages, rent, and interest, payment of taxes owed to the government. Annual Report - Corporate Profile Describes the companys business activities during the year. Important to understand what kind of business the company is running to know the risks of investing. - Message to Shareholders Senior executive Brief overview of past events that have affected the company and provides some insights in the companys future plans. - Management Discussion and Analysis Required of all publicly traded companies in Canada and the United States. Provides an overview of the previous year, a discussion of the risks facing the company, and some information about future plans. Includes information about significant events and about sales, profits, and cash flow during the year. Focuses on the financial aspects of the business, including pricing, strategies, expenses, earnings, liquidity, environmental and corporate social responsibility, expansion and future development, taxes, events after the end of the current year, and executive compensation policies. - Board of Directors and Management List of companys board of directors - Financial Section Components of the financial section: statement of managements responsibility, auditors report, financial statements: statement of comprehensive income, statement of financial position, statement of changes in equity, statement of cash flows, notes to the financial statements, statement on corporate governance. STATEMENT OF COMPREHENSIVE INCOME AKA income statement, the statement of earnings or statement of profit or loss. Describes the results of the operating activities from the beginning to the end of the current period. The results of those activities add up to the net earnings (net income or net profit/loss), defined as income less expenses. Income is money or resources that flow into the company as a result of such ordinary activities as sales (aka revenues) and from gains (selling items for more than their original cost). Expenses are money or resources that flow out of the company to enable the inflow of income, such as the cost of the goods that are sold in sale transactions. Depreciation: recognizing that only a portion of the machine as an expense. Report of the companys operating performance during the year; it measures the inflow of revenues and the outflow of expense. (sometimes called flow statement) Revenue: broken into different types to forecast how the company is doing. Expenses: Cost of goods sold (or cost of sales, or cost of merchandise sold), selling expenses (or operating expenses), and administrative expenses. Tax is also an expense. Earnings per share is the companys net income divided by the average number of common shares that are outstanding during the year. STATEMENT OF FINANCIAL POSITION AKA Balance sheet Canadian balance sheets will list current assets first. Canadian bala
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