Accounting: the process of measuring, interpreting, and communicating
financial information to support internal and external business decision-
Shareholders, Potential Investors, To evaluate operations of the firm
To make investment decisions
Management To plan and control daily and
Union Officials To use in contract negotiations
Lenders, Suppliers To evaluate credit ratings
Employees To monitor their firms’
productivity and profitability
Business Owners and Board of Directors To track managers’ progress in
operating the organization
Government Agencies, Economic To evaluate tax liabilities
Planners, Consumer Groups To approve new issues of stocks
Open-book management: a management strategy that believes that allowing
employees to view financial information helps them to better understand
how their work contributes to the company’s success.
o Benefits employees in the end.
o Provide important information to help managers deal with the
competitive and economic environments.
o Help others to understand, predict, and react to technological,
regulatory, and social and cultural environments.
I.e. CRA organizes a volunteer program that people can sign up
to help others to file their income tax.
All organizations (for- and not-for-profits) perform three basic activities
(accounting plays a key role in each):
o Financing activities provide necessary funds to start a business and
expand it after it begins operating.
o Investing activities provide valuable assets that are needed to run a
o Operating activities focus on selling goods and services, but they also
view expenses as important elements of sound financial management.
Brian Hill (CEO of Aritzia) performed these steps and found great success in
the Canadian market.
o He decided to expand in the US and went to get financing from
Berkshire Partners who took a majority stake in the company (didn’t
want to take the risk of financing the expansion himself. o The company moved to a vertically integrate model because:
Hill believed they would benefit by cutting out a third-party
Hill believed Aritzia’s success was due in part because they
understood the customers’ needs.
If they are involved at the point of sale, they will have a
better feel for those needs.
Accounting professionals can be classified as:
o Public Accountants
An accountant who provides accounting services to individuals
or business firms for a fee.
Most provide three basic services:
Auditing (examining financial records)
Tax preparation, planning, and related services
o Since they are independent of firms, they can
provide unbiased advice about a firm’s financial
Four largest collect almost $4 billion annually. They include:
Ernst & Young
Certain critics believe when a public accountant provides both
auditing and management consulting to a single firm, a conflict
of interest is created.
This may weaken the confidence in the quality of the
financial statements that were audited.
The numerous bankruptcies forced this practice to end.
Legislation has set strict limits on the types of
consulting services auditors can provide.
o I.e. if an accounting firm audits a company, it
cannot provide any other services to that
Forced many firms to sell their consulting
practices or to created separate
companies to handle consulting.
Forensic accountants: focus on uncovering potential fraud in
many different organizations.
They investigate below the surface of an organization’s
accounting system to find out what actually happened.
They may testify as expert witnesses if a case goes to
Recognized accountants include:
Chartered Accountants (CAs) o Canada’s most recognized group of professional
o Must meet provincial requirements for
education and experience.
o Must successfully complete thorough testing in
accounting theory and practice, auditing, law,
finance, strategy, and taxation.
Need to meet specified Certified Management Accountant (CMA)
Certified General Accountant (CGA)
educational and experience
requirements and pass Certified Fraud Examiner (CFE)
certification exams. Certified Internal Auditor (CIA)
o Management Accountants
An accountant who is employed by a business other than a
public accounting firm.
They collect and record financial transactions and prepare
financial statements that are used by the firm’s managers in
They provide timely, relevant, accurate, and concise
information that executives can use to operate their firms
more effectively and more profitably.
A management accountant should be able to provide the
answers to many important questions:
Where is the company going?
What opportunities are in the company’s future?
Will certain situations expose the company to excessive
Does the firm’s information system provide detailed
and timely information to all levels of management?
Management accountants often specialize in different aspects
o A cost accountant decides on the costs of goods
and services and helps set their prices.
o A tax accountant works to minimize a firm’s tax
bill and handles its federal and provincial tax
o An internal auditor examines the firm’s financial
practices to ensure that its records include
accurate data and that its operations comply
with federal/provincial/local laws/regulations.
A certified management accountant (CMA) has been
thoroughly tested and been given certification by the
government. Management accountants are usually involved in the
development and enforcement of organizational policies on
such items as employee travel.
Since federal regulations for accounting and public reporting
have changed, the demand for management accountants has
greatly increased (due to the need to adapt).
o Government and Not-For-Profit Accountants
They perform professional services similar to the services
provided by management accountants.
They are primarily concerned with how efficiently the
organizations work to meet their objectives.
Government agencies that employ accountants include:
Canadian Security Intelligence Service (CSIS)
Province of Manitoba
City of St. John’s
Not-for-profit organizations that employ accountants include:
The not-for-profit sector is one of the fastest growing segments
of accounting practice (donors are interested in how the
groups spend the money raised; more accountability).
Generally Accepted Accounting Principles (GAAP): principles that outline the
conventions, rules, and procedures for deciding on the acceptable accounting
practices at a particular time.
International Financial Reporting Standards (IFRS)
Accounting Standards for Private Enterprise (ASPE)
Accounting standards for not-for-profit
Accounting standards for pension plans
Accounting standards for governments
o All GAAP’s are based on:
All data should be collected and presented in the same
manner across all periods (changes must be noted and
All information being reported should be appropriate
and assist users in evaluating financial information.
Representational faithfulness Financial information should reflect the substance of
the economic activity during the reporting period.
The accounting data in financial statements must be
dependable and can be verified by an independent
party (i.e. an auditor).
The financial information should be made available
within a time period that allows the financial
information to be useful in decision-making.
Financial information must be clearly presented to user.
Other independent and knowledgeable individuals must
be able to agree that the financial information is fairly
Ensures one firm’s financial statements can be
compared with those of similar businesses.
o Accounting Standards Board (AcSB): the organization that interprets
and modifies GAAP’s in Canada for private and not-for-profit
o Public Sector Accounting Boards (PSAB): the organization responsible
for accounting standards for governments.
Canadian public companies are required to use International Financial
Reporting Standards (IFRS).
o Allow for financial statements to be more easily compared from
country to country.
Required because of the increase in worldwide trade.
The idea of a uniform set of global accounting rules is gaining interest
o The expansion of the EU.
o The signing of cross-national trade agreements (i.e. NAFTA).
o The increase in investors buying shares in foreign multinational
o Helps investors make informed decisions.
International Financial Reporting Standards (IFRS): the standards and
interpretations adopted by the IASB.
o More than 120 countries require, permit the use of, or have a policy
working with IFRS (US not included).
International Accounting Standards Board (IASB): the organization that
promotes worldwide consistency in financial reporting practices.
A major difference between ASPE and IFRS is:
o Under ASPE, firms report, plant, property, and equipment on the
balance sheet at the historical cost minus depreciation. o Under IFRS, firms have the option to report plant, property, and
equipment on the balance sheet at current market value.
Provides a clearer picture of the real value of a firm’s assets.
Many accounting experts believe that, overall, IFRS is less complicated than
traditional GAAP and more transparent.
Financial Accounting Standards Board (FASB): the organization that
interprets and modifies GAAPs in the US.
o FASB and IASB are currently working on a project to work toward
Sarbanes-Oxley Act (SOX): made in response to accounting fraud.
o Public Company Accounting Oversight Board: created by the SOX.
Consists of five members who have the power to set audit
standards and to investigate and approve the accounting firms
that certify the books of publicly traded firms.
o All Canadian companies that have publicly traded stock or debt on a
U.S. stock exchange must comply with SOX.
o Bill 198 is the Canadian equivalent.
Both SOX and Bill 198 have added to the reporting requirement for publicly
o I.e. senior executives (including the CEO and CFO), must personally
certify that the financial information reported by the company is
Since it is very expensive for firms to meet GAAP standards and
requirements of SOX and Bill 198 (i.e. audits can cost millions in a year),
Canada has multiple sets of standards to help smaller businesses.
Corruption of Foreign Public Officials (CFPO) Act: a federal law that prohibits
Canadian citizens and companies from bribing foreign officials to win or
o Later extended to make foreign officials subject to penalties if they
cause similar corrupt practices to occur within Canada or its
Accounting deals with a firm’s financial transactions with its employees,
customers, suppliers, owners, and with bakers and various government
Prompt payment of bills keeps the firm’s credit rating high and helps its
future ability to earn a profit.
Accounting cycle: the set of activities involved in converting information and
individual transactions into financial statements (done by accountants).
The activities involved in the accounting cycle are:
Transactions are recorded, usually electronically, in
chronological order in books called journals, along with a brief
explanation for each entry.
o Classify Journal entries are transferred, or posted, usually
electronically, to individual accounts kept in a ledger.
All entries involving cash are brought together in the
ledger’s cash account.
All entries involving sales are recorded in the ledger’s
All accounts in the ledger are summarized at the end of the
accounting period, and financial statements are prepared from
these account summaries.
Computers have simplified the accounting cycle, making it both faster and
o I.e. POS terminals in retail stores perform several functions each time
they record sales.
They recall product prices from a computer system’s memory
and keep inventory count.
They also do the data entry functions that were once entered
Accounting software programs are used widely, and allow a do-it-once
approach: a single sales entry is automatically converted into a journal entry,
which is stored until needed.
o Decision-makers can then instantly access up-to-date financial
statements and financial ratios.
Some accounting software programs (i.e. QuickBooks and Simply
Accounting) have been designed specifically for entrepreneurs and small
o Other software programs (i.e. products from Oracle and SAP) often
need more sophisticated systems so are used by larger firms.
New programs can handle all of a company’s accounting information for
every country where it operates.
o I.e. foreign languages, currencies, and financial, legal, and tax
requirements of each nation where the firm does business.
Several software producers offer Web-based accounting products designed
for small and medium-sized businesses.
o Allow for access of information anywhere through the Web.
Three fundamental terms in the accounting equation:
Asset: anything with future benefit owned or controlled by a
Accounts Receivable Marketable Securities
Assets can either be:
Tangible (most common assets)
o For example buildings, equipment and
Intangible (possibly the most important)
o For example patents and trademarks.
o They are especially important for such
companies as computer software firms,
biotechnology companies, and pharmaceutical
o Johnson & Johnson reported +$31 billion in
intangible assets ($95 billion in total assets).
Liability: a claim against a firm’s assets by creditors.
Wages Payable Wages/salaries owed to
Accrued Wages employees.
o Owners’ Equity
Owners’ equity: the funds that owners invest in the business
plus any profits not paid to owners in the form of cash
In the case of a corporation, OE is the claims of the
A strong OE position is often used as evidence of a firm’s
financial strength and stability.
Accounting equation (accounting identity): the relationship that should
reflect a firm’s financial position at any time; assets should always equal the
sum of liabilities and OE.
The right side also represents the business’s financial structure (since
financing comes from either creditors/owners).
Double-entry bookkeeping: the process used to reco