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Chapter 1

MGM221H5 Chapter Notes - Chapter 1: Net Income, Cash Flow Statement, A Question Of Balance

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Catherine Seguin

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MGT120 Chapter 1
Financial statements: are the reports that companies use to convey the financial results
of their business activities to various user groups, which can include managers, investors,
and regulatory agencies
Using Accounting Information
Helps company managers make decisions
Accounting: is an information
system that measures and records
business activities, processes data
into reports, and reports results to
decision makers
Produces the financial statements
that reports information about a
business entity
Bookkeeping: is a mechanical part
of accounting
Who Uses Accounting Information?
oHave to make many business decisions
Investors and Creditors:
oProvide money to finance a business’s activities
oInvestors want to know how much income they can expect to earn on their
oCreditors want to know if and how a business is going to pay them back
Government and Regulatory Bodies:
oFederal gov’t requires businesses, individuals, and other organizations to pay
income and sales tax
oCanada Revenue Agency ensures organizations pay the correct amount of taxes
oThe Ontario Securities Commission requires companies whose stock is traded
publicly to provide the commission with many kinds of periodic financial reports
oManage bank accounts and decide whether to rent or buy
oDetermine monthly income to decide how much to save and spend
Not-for-Profit Organizations:
oBase decisions on accounting information
oIs the basis of reporting on the organization’s stewardship of funds received and
its compliance with the reporting requirement of the Canada Revenue Agency
Two Kinds of Accounting: Financial Accounting and Management Accounting

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MGT120 Chapter 1
Both internal and external users rely on financial accounting information, whereas
management accounting information is used by internal users only
Financial accounting: provides information for managers inside the business and for
decision makers outside the organization
oInvestors, creditors, government agencies, and the public
Management accounting: generates inside information for the managers of the
oBudgets, forecasts, and projection to make strategic business decisions
Organizing a Business
oProprietorship: is an unincorporated business with a single owner, called the
oPartnership: is an unincorporated business with two or more parties as co-
owners, and each owner as partner
oCorporation: is an incorporated business owned by its shareholders, who own
shares representing partial ownership of the corporation
oBoard of directors: set policy for the corporation and appoints officers
Elect a chairperson, the most powerful person in the corporation and also
may carry the title of chief executive officer (CEO)
Generally Accepted Accounting Principals
Generally accepted accounting principals (GAAP): professional guidelines used to
make financial accounting information
Specify the standards for how accounts must record, measure, and report financial
In Canada, GAAP are established by the Canadian Institute of Chartered Accountants

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MGT120 Chapter 1
Publicly accountable enterprises (PAEs): are corporations and other organizations that
have issued or plan to issue shares or debt in public markets, must apply International
Financial Reporting Standards (IFRS)
IFRS are set by the International Accounting Standards Board and have been adopted by
over 100 countries in an effort to enhance the comparability of the financial reported by
public enterprises around the world
Private enterprises: have not issued and do not plan to issue shares or debt on public
markets, have the option to applying IFRS
IFRS are costly and complex to apply, many private enterprises apply Accounting
Standards for Private Enterprises (ASPE)
Accounting’s Conceptual Framework
Fundamental Qualitative Characteristics
oMust be predictive value, confirmatory value, or both
oMaterial: is significant enough in nature or magnitude that omitting or misstating
it could affect the decisions of the user
Faithful Representation:
oMust reflect the economic substance of a transaction or event, which may not be
the same as its legal form
oMust be complete, neutral (free of bias), and accurate (free of material error)
Enhancing Qualitative Characteristics
oMust be reported in a way that makes it possible to compare it to similar
information reported by other companies
oConsistent with how it was reported in previous accounting periods
oCan be checked for accuracy, completeness, and reliability
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