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9 Jan 2011
Chapter 1 The Purpose and Use of Financial Statements Notes
Accounting Matters
x accounting : information system that identifies and records economic events of organization, and communicates them to wide
variety of interested users
x accounting—“language of business”; consistently ranked as one of top career opportunities
Users and Uses of Accounting
Internal Users
x plan, organize, and run company or work for company
x include finance directors, marketing managers, HR personnel, production supervisors, company officers
External Users
x investors use information to make decisions to buy, hold, or sell their ownership interest
x creditors use information to evaluate the risks of granting credit or lending money
x investors and creditors are main external users, but others use it including labour unions, customers, taxing authorities, regulatory
agencies, and economic planners
Ethical Behaviour
x ethics is of utmost importance to accountants and decision-makers who rely on financial info
x fortunately, most individuals in business are ethical, whose actions are legal and responsible
Forms of Business Organization
x proprietorship : a business owned by one person
x partnership : a business owned by more than one person
x corporation : business organized as separate legal entity having ownership divided into transferable shares held by shareholders
x only relatively small capital is needed to start business
x proprietor receives any profits, suffers any losses, and is personally liable for any debts
x no legal distinction between business as economic unit and owner
x similar to proprietorships except that there is more than one owner
x each partner generally has unlimited liability for all debts, even if other partner has created it
x buying shares in corporation is often more attractive than investing in proprietorship or partnership because it is easier to sell
x many businesses start out as proprietorship or partnership and eventually incorporate
x public corporations—commonly distribute their financial statements to shareholders, creditors other interested parties, and the
general public upon request
x private corporations—do not issue publicly traded shares and almost never distribute their financial statements publicly
Business Activities
Financing Activities
x two primary ways for corporations to raise outside money are (1) borrowing money and (2) selling shares in exchange for cash
x liabilities : debts and obligations of a business; claims of creditors on the assets of a business
x taking money from an operating line of credit results in bank indebtedness
x a company can take a short-term note payable to a bank for the money borrowed
x a company may also have long-term debt, which can include notes payable, mortgages payable, lease obligations, and other types
of debt securities borrowed for longer periods of time
x share capital : shares representing ownership interest in a corporation; if only one class exists, it is known as common shares
x common shares—term used to describe the amount paid by investors for shares of ownership in company; just one class of share
capital that company can issue
x shareholders have no claim to corporate resources until the claims of creditors are satisfied
x dividends : the distribution of retained earnings from a corporation to its shareholders, normally in the form of cash
Investing Activities
x assets : resources owned by a business
x every asset is capable of providing future services or benefits that can be short- or long-lived
x investing activities generally involve long-lived assets, such as computers, vehicles, buildings, and land, which are generally
referred to as property, plant, and equipment, an asset category
x cash is one of the most important assets owned by any business
x while cash can be used for, or result from, an investing activity, it is not itself an investing activity
x investments are another example of an asset and an investing activity, which can be either short- or long-term
Operating Activities
x operating activities—transactions which create revenues and expenses
x revenues : economic resources that result from operating activities of business, such as sale of product or provision of service
x sources of revenue that are common to many businesses are sales revenue, service revenue, and interest revenue
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Document Summary

Chapter 1 the purpose and use of financial statements notes. N many businesses start out as proprietorship or partnership and eventually incorporate. N while cash can be used for, or result from, an investing activity, it is not itself an investing activity. Summary of business activities: financing activities include borrowing cash from lenders by issuing debt, or conversely, using cash to repay debt. Cash can also be raised from shareholders by issuing shares or paid to shareholders by distributing dividends. N annual report a report prepared by management that presents financial and nonfinancial information about the company www. notesolution. com. The purpose of accounting is to provide useful information for decision-making. There are 2 types of user groups who use accounting information: internal and external users. Internal users work for business and need accounting information to plan, organize, and run operations. The primary external users are investors and creditors.

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