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Chapter 1

ADM 1340 Chapter Notes - Chapter 1: Cash Flow, Accounts Payable, Retained Earnings

Course Code
ADM 1340
Lamia Chourou

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Chapter One: the purpose and use of financial
Summary of Study Objectives
- Identify the uses and users of accounting
- Describe the primary forms of business organization
- Explain the main types of business activity
- Describe the purpose and content of each of the financial statements
Users and Uses of Accounting
Accounting is the information system that
- identifies and records the economic events of an organization,
o Communicates them to a wide variety of interested users.
- It is “the language of business”.
- It helps users to make decisions.
- Recording events
- Analyzing and interpreting financial statements
- Accounting provides information system
- Users within the organization.
- Accounting information helps to make
oWhether to purchase a new
oWhether to hire new employees,
- Determine the price to sell products
- Users who are outside the
- Accounting information helps to make
oIs the company earning enough
to give me my required return
on investment?
oWill the company be able to
repay its debts as the debts
come due?
Forms of Business Organization
A business may be organized as:
- Proprietorship: a business owned by one person.
- Partnership: a business owned by two or more people.
- Corporation: a separate legal entity owned by shareholders. Could be:

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oPublic: list and trade their shares on public stock exchanges (Example:
Bombardier, Research in motion)
oPrivate: do not list or trade their shares on
- Simple to establish
- Owner controlled
- Unlimited liability
- Financing may be difficult
- Limited life
- If there is bankruptcy the bank
can take the owners own assets
- Getting money is harder from
creditors and banks
Partnership - Simple to establish
- Broader skills and resources
- Shared financial resources
and control
- Partners personally liable
- Transfer of ownership may be
- Limited life
Corporation - Easy to sell or transfer
- Greater capital raising
- Limited liability: the
maximum you can lose is the
amount you put in
- Indefinite life
- Easy to buy and sell shares
- Easier for the company to get
funding from creditors and
- More expensive and complex
to set up
- Must file corporate income tax
return annually
Rules and practices for the preparation of nancial statements
- Different for publicly-traded and private corporations
oPublicly-traded corporations use International Financial Reporting Standards
(IFRS) this began in 2011 before this it was Canadian GAAP (generally accepted
accounting principles)
oIn the US they use the US GAAP which is prepared by the FASB (financial
accounting standard board)
oIASB (international accounting standard board) prepares the IFRS
oPrivate corporations may use IFRS or Accounting Standards for Private
Enterprises (ASPE) once they make the choice they have to remain consistent
- Proprietorships and partnerships generally follow ASPE for external reporting
oNot required to follow any particular standards for internal use
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