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BUS 251 (101)
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Chapter 1

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Business Administration
BUS 251
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BUS 251 CHAPTER 1 SUMMARY (Textbook) Business entity – accounting business, earn profit for owners (individual or multiple) through the sell of products or services Accounting – information system that record, summarize, report and understand underlying economic conditions of organizations  Financial statement: summary of company’s financial performance in a particular period o Tells users what the company owes and owns o Produced at the end of an accounting period  Annual reports: shows financial results of the company for a year Forms of organizations  In business organizations: o Owner invests money (cash) + property = entity o Partnership or individual o Shareholder’s equity: owners make similar investment in the company (shares)  Shares only show that the owner has a small part of the ownership o Owners of the company are called shareholders  Publicly traded corporations: large numbers of individuals/entities are traded each day  Private held corporations: held small numbers of individuals (partnership) o More difficult to transfer ownership (shares)  Shareholders typically doesn’t involve in everyday transactions of the company so they elect board of directors to represent them o Board of directors hire/fire senior management o Senior management and directors make up the management team o Together they make reports to update the shareholders on quarterly basis (4 quarters a year = 3 months  annual reports)  Users of Financial Statements 1. Internal users = people in the company a. Management b. Board of directors  Make decisions about pricing, expansion, operations…etc.  Have many sources of financial statements that the external users don’t have  Managerial accounting/cost accounting and financial accounting 2. External users = communication of information to them a. Shareholders and potential investor: access how the company is running and decide whether they would like to buy more shares and they can compare prices and access the board of directors efficiently b. Creditors: sells and provides services for the company (suppliers, government). Financial institutions (bank) access loans and payment abilities. Long-term debt purchases (bond holders) access cash flow BUS 251 CHAPTER 1 SUMMARY (Textbook) c. Regulators: making sure that the company is following the regulations some such as environmental regulators and stock exchange investigators d. Taxing authorities: access how much tax the company has to pay e. Others: competitors, labour unions  strength of investments, negotiate labour contracts, media  expose expected earnings…etc. Development of Accounting Standards  Guidelines to help read and access financial statements  Canada’s international accounting standards board follow sthe CICA handbook  GAAP – generally accepted accounting principles (set of accounting recommendations and standards) o Conceptual framework = a set of underlying objectives/concepts o Inductive vs. deductive concepts Qualitative characteristics and constraints of accounting information  4 qualitative characteristics 1. Understandability: understandable to users  Users are reasonably well informed of the accounting terms 2. Relevance: would the info make a difference in a decision? There is no clear standard so management must judge what is relevant and what is not a. Predictive value: use the past useful info to predict the future b. Confirmative value: evaluate the outcomes of past decisions-feedback c. Affected materiality: misstatement of info can affect the decisions 3. Reliability: free from errors and bias a. Faithful representation: shows that the attribute, characteristics, economic event that it claims to represent b. Substance over form: required to convey underlying economic reality instead of only recording the info because of structural standards c. Neutrality: no bias d. Prudence: caution when making judgments that doesn’t overstate revenues and assets and understate liabilities and costs e. Completeness: contains all information needed for decision making, weigh the usefulness of info should/not outweigh the cost of producing it 4. Comparability: comparable ability of financial statements to different companies and of the same company at different fiscal period  3 constraints – affect info provided by the management 1. Timeliness: lose ability to make difference in decision as time period increase 2. Balance between benefit and cost: benefit from info > cost to produce it 3. Balance between qualitative characteristics: emphasis underlying objective of financial statements, reduce emphasis on one and increase another Business Activities BUS 251 CHAPTER 1 SUMMARY (Textbook) Financing Activities  Obtain funds = buy assets from creditors and investors  Creditors: must be repaid on a regular basis (interests incurred)  fixed amount  Investors: give them back profit (dividends) o There are gains and loss o Investors may choose to sell their shares  Retained earnings: pro
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