Textbook Notes (368,434)
Canada (161,878)
Administration (1,247)
ADM1340 (150)
Chapter 1

Chapter 1 Lecture Notes

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Department
Administration
Course
ADM1340
Professor
Lamia Chourou
Semester
Winter

Description
Chapter 1 ­ The Purpose and Use of Financial Statements Learning Objectives • Identify the users and uses of accounting. • Describe the primary forms of business organization. • Explain the three main types of business activity. • Describe the content and purpose of each of the financial statements. Users and Uses of Accounting • Accounting is the information system that: o 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. Note: • Managers (Internal) • Investors (External) Internal Users External Users • Users within the organization. • Users who are outside of the  • Accounting information helps to  organization. make decisions: • Accounting information helps to  o Whether to purchase new  make decisions: equipment o Is the company earning  o Whether to hire new  enough to give me my  employees required return on  o Determine the price to sell  investment? products o Will the company be able to  repay its debts as the debts  come due? Forms of Business Organization A business may be organized as a: 1. Proprietorship: A business owned by one person. 2. Partnership: A business owned by two or more people. 3. Corporation: A separate legal entity owned by shareholders (Eg. Bombardier,  Loblaw). Proprietorship Advantages Disadvantages • Simple to establish • Unlimited liability (proprietor  • Owner controlled personally liable for all debts of the  business) • Financing may be difficult • Limited life • The proprietor pays personal income tax on the company’s profits. Depending on  the circumstances, this may be an advantage or disadvantage. Partnership Advantages Disadvantages • Simple to establish • Partners personally liable • Broader skills and resources • Transfer of ownership may be  • Shared financial resources difficult • Shared control • Partners pay personal income tax on their share of profits. Depending on the  circumstances, this may be an advantage or disadvantage. Corporation Advantages Disadvantages • Easy to sell or transfer ownership • More expensive and complex to set  • Greater capital raising potential up • Legal liability limited to the net  • Must file corporate income tax  assets of the corporation returns annually • Indefinite life • Corporations are taxed as a separate legal entity. This may be an advantage or a  disadvantage. Public Corporations Private Corporations • List and trade their shares on public  • Do not list or trade their shares on  stock exchanges public stock exchange • GAAP: IFRS • GAAP: ASPE or IFRS, once the  • Broad group of users of financial  selection has been made, it must be  statements consistently applied • Eg. Bombardier, Research in  • Small group of users of financial  Motion statements • More than 2 million private  corporations in Canada • Eg. McCain Foods Types of Business Activity Three types of business activity: 1. Financing activities 2. Investing activities 3. Operating activities 1. Financing Activities • Obtaining (and repaying) funds to finance the operations of the business. • The two primary sources are: o Debt: Borrowing money from lenders and other creditors, which creates a  liability. o Equity: Issuing (selling) ownership interests in the corporation to  shareholders. Notes: • Debt (bonds) • Equity (shareholders) • Must compare return on investment and risk • Higher return on equity but h
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