Chapter 1 Accounting Module

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

Chapter 1- Purpose and Use of Financial Statements • accounting is the information system that identifies and records the economic events of an organization and communicates them economic systems depend on highly transparent, reliable and accurate financial reporting • • “the language of business” Users and Uses of Accounting INTERNAL USERS internal users of accounting information plan, organize and run companies • EXTERNAL USERS • external users are investors that use accounting information to make decisions to buy, hold or sell their ownership • creditors evaluate the risks of granting credit to a company ETHICAL BEHAVIOUR • in order for financial information to have value to its users, it must be prepared by individuals with high standards of ethical behaviour • ethics in accounting is of the utmost importance Forms of Business Organization PROPRIETORSHIP • owned by one person • simple to set up and gives you control, usually operated by the owner personally liable for all debts of the business • • no legal distinction between business and owner PARTNERSHIP • a partnership is similar to a proprietorship except there is more than one owner • often formed because one person does not have enough economic resources to initiate the business, or because partners bring unique skills to the partnership • unlimited liability for all debts of the partnership • exception: limited liability CORPORATIONS • as an investor in a corporation, you receive shares to indicate your ownership claim • can become owners by investing relatively small amounts of money • makes it easier for corporations to raise funds shares are easy to sell • • thousands of shareholders, shares are traded on organized stock exchanges • many business starts as proprietorships or partnerships and eventually incorporate • limited liability • corporations pay income taxes as separate legal entities • revenue produced by corporations is far greater • public corporations commonly distribute their financial statements • private corporations do not issue public traded shares Business Activities • all businesses are involved in three types of activity-financing, investing and operating FINANCING ACTIVITIES • two primary ways of raising outside funds- borrowing money and issuing shares • liabilities- amounts owed to creditors • operating line of credit with its bank results in bank indebtedness • short-term note payable • long-term debt- borrowed for longer periods of time i.e. notes payable, mortgage payable, lease obligations • share capital- selling shares of ownership • common shares- term used to describe the amount paid by investors for shares of ownership • claims of creditors differ from those of shareholders • in loaning money, you specify a repayment schedule, interest is added • creditor claims must be paid before shareholder claims • shareholders have no claim to corporate resources • dividends- payments to shareholders INVESTING ACTIVITIES • investing activities involve the purchase of the long-lived resources i.e. assets that a company needs • assets- resources that a company owns • every asset is capable of providing future services or benefits that can be short or long-lived property, plant and equipment- computers, vehicles, buildings, land • • cash- can be used for, or result from, investing activities, not itself an investing activity • investments are another example of an asset OPERATINGACTIVITIES • operating activities- transactions which creates revenues and expenses • revenues- amount earned from sale of goods • may also earn interest revenue on excess cash held as investments • sales revenue, service revenue and interest revenue account receivable- right to receive money in the future • • inventory- items held for future sales to customers • cost of goods sold- cost of the merchandise inventory sold is an expense • expenses- cost of assets that are consumed costs of goods sold, operating expenses, depreciation expense, interest expense, income taxes • • short-term liabilities i.e. accounts payable • accounts payable- purchase on credit • bank indebtedness- created by amounts owed to the bank on an operating line of credit • interest payable, dividends payable, salaries payable, provincial sales taxes, property taxes payable, income tax payable • net earnings- when revenues are more than expen
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