MOS 1023 Chapter 1 Notes.docx

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Management and Organizational Studies
Management and Organizational Studies 1023A/B
Maria Ferraro

Custom Select Purpose and Use of Financial Statements Accounting Matters Accounting: The process of identifying, recording and communicating the economic events of a business to interested users of the information.  Financial reporting should be highly transparent, reliable, and accurate  Accounting: “the language of business”  Marketing managers must be able to decide on pricing strategies’ based on cost (should have a bit of accounting background) Users and Uses of Accounting Users of accounting information are divided into: Internal Users  Internal users of accounting information plan, organize, and run companies (people who work for the company)  Include finance directors, marketing managers, human resource personnel, production supervisors, company officers  For internal users, accounting information provide internal reports (financial comparison of operating alternatives, projections of earnings from new sales campaigns, forecasts of cash need for the next year, analyses of sales costs, budgeted financial statements) External Users  Investors and creditor are the main external users of accounting information.  Investors: use accounting information to make decisions to buy, hold, or sell their ownership interest (present and future shareholders)  Creditors: suppliers, and bankers use accounting information to evaluate the risk of granting credit or lending money  Example: Labor unions want to know whether the company can pay increased wages, customers interested in whether a company will support its product lines and honor product warranties, taxing authorities (Canada Revenue Agency) want to know whether the company respects tax laws, regulatory agencies (provincial securities commissions) want to know whether the company is operating within prescribed rules, economic planners use accounting information to analyze and forecast economic activity. Ethical Behavior  For financial information to have value to users (whether internal or external), must be prepared by people with high standards of ethical behavior  Have to be legal and responsible  Reporting scandals: Nortel Networks and Hollinger International Canada, Enron and WorldCom in the US, and Parmalat in Italy  After this, regulators and law makers made changes to help investors regain confidence in corporate reporting Forms of Business Organization Three forms of business organization: Proprietorships: A business owned by one person  Simple to set up and gives owner control over business  Small amount of money (capital) needed to stat proprietorship  Owner (proprietor) receives any profits, losses, is personally liable for debts of the business  Pay personal income tax  No legal distinction between the business as an economic unit and the owner  Almost never distribute financial statements publicly  Small business (hair salons, plumbers, mechanics, farms, small retail stores) Partnerships: A business owned by more than one person  Similar to proprietorship  Often formed because a person does not have enough economic resources to initiate or expand business, or because partners bring unique skills or resources to business  Pay personal income tax on their share of profits  All partners generally has unlimited liability for all debts, even if just one partner created the debt o Means that all partners can be forced to give up personal assets to repay debt  Partnerships can be formed with limited liability for selected partners  Almost never issue financial statements publicly  Retail and service businesses (professional practices of lawyers, doctors, architects, engineers, accountants) Corporations: A business organized as a separate legal entity owned by shareholders  As an investor to a corporation you receive shares to indicate your ownership claim  Can become shareholder (owner) by investing small amounts of money o This makes it easier to raise funds  Much easier to sell shares than proprietorship or partnership  Many businesses start as proprietorship or partnership and incorporate o Shoppers: started as partnership in 1921, by 1962 became a private corporation and in 2001 became publicly traded corporation  Shareholder have limited liability since they risk losing only the amount they invested in company’s shares (usually relatively small)  Pay income tax as separate legal entities on any corporate profits  May receive more favorable tax treatment than other forms of business organization  Combined number of proprietorships and partnerships in Canada more than corporations, but revenue produced by corporations is greater  Public Corporations: Shares are listed on stock exchanges o Commonly distribute financial statements to shareholder, creditors, other interested parties, and general public upon request o Must give their shareholders and annual report each year  Annual Repot: A document that include useful nonfinancial information (company’s mission, goals and objectives, products, people) about the company, as well as financial information (management discussion and analysis (MD&A), a statement of management responsibility for the financial statements, an auditors report, financial statements, notes to financial statements, and a historical summary of key financial ratios and indicators)  Private corporation: Do not issued publicly traded shares Business Activities All businesses involved in three types of activities: Financing Activities  Collecting the necessary funds to support the business  Include borrowing cash from lenders by issuing debt, or using cash to repay debt. Cash can also be raised from shareholders by issuing shares, or paid to shareholders by distributing dividends.  Creditors: Persons or companies that a business owes money to  Liabilities: Amounts owed to creditors in the form of debt or other obligations o Bank Indebtedness: When a company takes funds from an operating line of credit with its bank o Short Term Notes Payable: Money borrowed from the bank o Long Term Debt: can include notes payable, mortgages payable, lease obligations, and other types of debt securities borrowed for long periods of time  Share Capital: When a company obtains financing by selling shares of ownerships to investors o Common Shares: The amount paid by investors for shares of ownership in a company (just one type of share capital a company can issue)  Law requires that creditor claims must b
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