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RSM100Y1 (431)
Chapter 15

Chapter 15 - Understanding Accounting and Business Law.docx

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Department
Rotman Commerce
Course
RSM100Y1
Professor
Michael Khan
Semester
Fall

Description
Chapter 15: UnderstandingAccounting and Financial Statements Jessie Zhang USERS OFACCOUNTING INFORMATION Accounting: the process of measuring, interpreting, and communicating financial information to support internal and external business decision-making. Accountants gather, record, report and interpret financial information in a way that describes the status and operation of an organization and aids in decision-making. Users: -Managers (major users) at a business government agency, or not-for-profit organization. Purpose: to plan and control daily and long-range operations -Business owners and boards of directors -Union officials -Investors Open-book management: allow employees to understand how their work affects the company’s bottom line. Companies share sensitive financial information with their employees. BusinessActivities InvolvingAccounting The natural progression of a business begins with financing. Accounting plays a key role in all 3 parts: 1. Financing activities – provide necessary funds to start a business and expand it after it begins operating 2. Investing activities – provide valuable assets that a needed to run a business 3. Operating activities – focus on selling goods and services, but they also view expenses as important elements of sound financial management ACCOUNTING PROFESSIONALS 3 classifications: 1. Public accountants: provides accounting services to individuals or business firms for a fee. 3 basic services a) Auditing, or examining, financial records b) Tax preparation, planning, and related services c) Management consulting o Accountants can provide unbiased advices about a firm’s financial condition. They are not a firm’s employee o Four largest public accounting firms: Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers. 2. Management Accountants: employed by a business other than a public accounting firms. Usually involved in the development and enforcement of organization’s policy. o Role: collects and records (also interprets) financial transactions and prepares financial statements used by the firm’s managers in decision- making. o Specializations  Cost accountant – decides on the costs of goods and services, and set their prices  Internal auditor – examines the firm’s financial practices to ensure it’s accurate and legal  Tax accountant – minimizes tax bill and handles tax returns 3. Government and not-for-profit accountants o Primarily concerned with how efficiently the organizations work to meet their objectives o Role is similar to management accountant THE FOUNDATION OFTHEACCOUNTING SYSTEM Accountants need to provide reliable, consistent, and unbiased information to decision-makers Generally accepted accounting principles (GAAP): principles that outline the conventions, rules, and procedures for deciding on the acceptable accounting practices at a particular time  All GAAP are based on these standards: o Consistency – data should be collected and presented in the same manner across all periods (same manner) o Relevancy – all information should be appropriate and useful (useful) o Representational faithfulness – financial information should reflect the substance of the economic activity during the reporting period (true) o Reliability – financial statements are dependable and can be verified by an independent party (dependable) o Timeliness – financial information should be made available within a time period that allows the information to be useful in decision-making (time constrained) o Understandability – clearly presented to the users o Verifiability – independent and knowledgeable individuals would agree o Comparability – can be compared with those of similar businesses  Accounting Standards Board (AcSB):the organization that interprets and modifies GAAP in Canada for private and not-for-profit businesses  International Financial Reporting Standards (IFRS): the standards and interpretations adopted by the IASB o Makes financial statements more easily compared from country to country o Provides valid information to foreign investors o Gives a clearer picture of the real value of a firm’s assets (report equipment at current market value) than ASPE (report at historical cost minus depreciation)  International Accounting Standards Board (IASB): the organization that promotes worldwide consistency in financial reporting practices  Financial Accounting Standards Board (FASB): the organization that interprets and modifies GAAP in the United States  Corruption of Foreign Public Officials Act: a federal law that prohibits Canadian citizens and companies form bring foreign officials to win or continue business THEACCOUNTING CYCLE Accounting cycle: the set of activities involved in converting information and individual transactions into financial statements 1. Recording transactions: in journals, in periodic order 2. Classifying transactions: posted to ledgers, it shows increases or decreases in specific accounts such as cash or wages 3. Summarizing transactions: into financial statements Accounting Equation Assets = Liabilities + Owners’equity Assets: anything with future benefit owned or controlled by a firm  Creditors and owners have cla
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