What is accounting?
A system that collects and processes (analyzes, measures, and records) financial information about an organization and
reports that information to decision makers.
Investors – Individuals who buy small percentages of large corporations and hope to gain in two ways. 1) They hope to
receive a portion of what the company earns in cash payments called dividends and 2) they hope they can sell their share of
the company at a higher price than they paid
Managerial or management accounting – developing accounting information for internal managers or decision makers in
order for them to plan and operate the day to day business operations. Eg: marketing/finance/HR directors
Financial accounting – this is developing accounting information for external decision makers such as creditors, investors,
customers, suppliers, etc and this is the focus of our textbook.
Statement of financial position
Purpose – to report the financial position of an entity at a particular point in time
Structure – Company name, statement type, date of statement, unit of measure (millions)
Patent is considered an asset
This statement is important because the assets helps external decision makers to judge whether the company has sufficient
resources to operate the business and also if the business could be sold for cash if it goes out of business. Liabilities show if
a company has sufficient cash to pay off its debts. Banks will look at this when giving loans. Shareholder’s equity is
important because the creditors repayments must be settled before paying the owners.
Consists of 3 things. Share capital: the investment of cash and other assets in the business by the owners in exchange for
shares; Retained earnings: amount of earnings reinvested in the business; Other components: reflect the changes in assets
and liabilities over time
Statement of Comprehensive income – reports the change in shareholder’s equity, during a period, from business activities
other than investments by shareholders or distributions to shareholders. It does not include investment by owners or
distributions to owners.
Format: Revenue – Expenses = Profit + Other comprehensive income = Comprehensive income
Costs of sales (aka cost of goods sold) is the total cost to produce the products sold to customers during the period.
External decision makers want to look at a firm’s profit to see if they are capable of selling goods and services for more than
they cost to produce and deliver.
Statement of Changes in Equity
This statement focuses on the distribution of profit and other changes to shareholder’s equity that affects the company’s
Date should be written as it would be written in the income statement (for the month ended..)
Creditors closely monitor a firm’s retained earnings because the firm’s policy on dividend payments affects its ability to
repay its debts
Retained earnings = Beginning retained earnings + Profit – Dividends