Internal users of accounting information
employees and managers
external users of accounting information
investors, creditors, customers, government
proprietorship
A business owned by one person who has complete control and liability
partnership
a business organization owned by 2/+ people who agree on a specific division of responsibilities and profits
corporation
A separate legal entity owned by shareholders who share in its profits but are not personally responsible for its debts
reporting entity concept
the separation of business and personal records
(even though there's no legal distinction between a proprietorship/partnership and its owner(s))
public corporation
A corporation whose stocks publicly traded on a stock exchange
Needs to provide financial statements to external users
private corporation
business whose shares are not traded publicly on the stock market
No need for publicly distributed financial statements
Generally Accepted Accounting Principles (GAAP)
a set of accounting standards that is used in the preparation of financial statements
Differ among forms of business organization. Include IFRS and ASPE
IFRS
Canadian publicly traded corporations must use _______ when preparing financial statements for external users
IFRS, ASPE
Canadian privately traded corporations may use _______ or ________ when preparing financial statements for external users
financing
Raising or repaying funds to finance business organizations.
2 main ways
1. issuing shares (equity)
2. borrowing $ (debt)
common shares
The most basic form of ownership in a firm
dividends
distribution of retained earnings to shareholders
residual claim
common stockholders have a right to share in the income and assets of a corporation after higher-priority claims are satisfied
Corporation's debts must be paid off first before any dividends declared
investing
The purchase/sale of long-lived assets needed to operate a company
Ie. PPE, intangible assets (royalties, trademarks, etc.), investments (other companies' shares)
operating activities
Daily-to-day activities that generate revenues and expenses
income (revenue)
the amount received from the sale of G/S. Results from increased assets or decreased liabilities.
account receivable
an unwritten promise by a customer to pay, at a later date, for G/S rendered.
expense
The cost of assets consumed or services used in the process of generating revenues.
net income
revenues - expenses
Notes to the financial statements
Where you can carify the financial statements and provide additional detail
fiscal year
an accounting period that is one year long (doesn't have to be from January to December)
income statement
A financial statement showing the revenue and expenses for a fiscal period.
Statement of changes in equity
reports the amounts and sources of changes in equity investors' investment in the firm over a period of time.
shareholder's equity
The ownership interest in a company. Shareholder's claim on total assets = share capital + retained earnings
share capital
amounts contributed by shareholders to a company exchange for shares of ownership
The sum of common + preferred shares
retained earnings
The amount of net income retained in the corporation (not distributed to shareholders).
Accumulated from past and present accounting periods
deficit
when net losses are greater than net income. Retained earnings = 0 for that period.
retained earnings at the end of a period
retained earnings at the start of a period + net income - dividends declared
statement of financial position
Reports assets + claims to those assets.
Also known as the balance sheet.
accounting equation
Assets = Liabilities + Shareholders' Equity
statement of cash flows
Provides info about the cash receipts and payments of a business during a specific period of time
annual report
a yearly statement of the financial condition, progress, and expectations of an organization
Also includes non-fin info like mission, goals, products, etc.
asset
a resource that a company owns/controls that will provide future economic benefits (generate cash flows)
current assets
Assets that are expected to be converted into cash/used up within year of company's financial statement date
operating cycle
the average time between purchasing or acquiring inventory and receiving cash proceeds from its sale
(transform cash back to cash)
held-for trading investments
investments in debt securities (another company's bonds) or equity securities (another company's shares) that will be resold later for profit
Are different from cash equivalents b/c of higher risk
accounts receivable
Amounts owed to a company by customers who previously purchased G/S on credit
accrued revenues
Revenues earned but not yet received in cash or recorded
notes receivable
amounts owed to company by borrowers that are supported by a written promise to repay
-incl loans receivable
Unlike accounts receivable, usually are interest-bearing
inventory
goods held for sale to customers
Expected to be sold within the operating cycle
supplies
consumable items that do not become part of the final product
cash equivalents
Short-term, highly liquid investments that can be readily converted to a specific amount of cash and which are relatively insensitive to interest rate changes.
long-term investments
include debt securities and equity securities that management wants to hold onto for several years
plant, property, and equipment
tangible assets with relatively long lives, are useful in business operations
Usually listed in order of permanency, so starting w/ land
revaluation model
An alternative to the cost model and allows for long lived assets to be reported at fair value as long as there is an active market for the asset
straight-line depreciation
Method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life.
accumulated depreciation
the total amount of depreciation expense that has been recorded since the purchase of a plant asset
contra asset account
an asset account where the balance is a deduction to the asset account
carrying amount
cost - accumulated depreciation
intangible assets
intangible, non-current assets. Represented a privilege/right granted to the company.
Include trademarks, patents, copyrights
amortization
Allocation of the cost of an intangible asset over its service life
goodwill
the buying of another company at a higher price than what the company's net assets are worth. Usually b/c the company that's buying wants to boost its reputation
liabilities
obligations from past transactions that will result in the transfer of an economic resource
current liabilities
obligations to be paid/settled within 1 yr of financial statement
bank indebtedness
A short-term loan from a bank, typically occurring when a company uses credit to cover cash shortfalls.
accounts payable
amounts owed to suppliers for purchases made on credit
accrued payables
Unrecorded liabilities for expenses that have been incurred but not yet paid during the financial reporting period
unearned revenue
cash received and a liability recorded before services are performed
notes payable
Amounts owed to banks, suppliers etc. that are supported by a written promise to pay
Unlike accounts payable, usually bear interest
current maturities of long-term debt
The portion of a long-term liability that will be paid within one year.
accrued liabilities
expenses that are owed but haven't been paid yet
non-current liabilities
obligations expected to be paid/settled after 1 year
lease obligations
amounts to be paid in the future on long-term rental contracts used for equipment or other property
pension and benefit obligations
amounts owed to past and current employees for retirement benefits
deferred income tax liabilities
amounts arising from difference between accounting department and tax treatment. Represent income tax related to current year's net income that will be paid in subsequent period.
Like when gov gives tax relief so you don't need to pay right away
liquidity ratios
Measures of the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.
working capital
current assets - current liabilities
A measure of liquidity
current ratio
current assets/current liabilities (liquidity)
solvency ratios
Measures of the ability of the company to survive over a long period of time by having enough assets to settle liabilities when they're due
Measures long-term debt-paying ability
debt to total assets ratio
total liabilities/total assets
profitability ratios
Measures of the operating success of a company for a given period of time.
basic earnings per share (EPS)
income available to common shareholders/weighted average # of common shares
The higher, the better.
Measures income earned on each common share
price earning ratio
Even though can't compare EPS of 2 cos, can use EPS to calculate this ratio
(market P/share)/EPS
conceptual framework of accounting
the collection of concepts that guide the manner in which accounting is practiced
objective of financial reporting
provide useful financial info about a company to external users
accrual basis of accounting
reporting income when it is earned and expenses when they are incurred
(Not when cash = received/paid)
relevance
would influence user's decision
predictive value
we use to describe financial information that helps users to predict future events. Part of relevance.
confirmatory value
helps users confirm or correct prior expectations
materiality
whether an item is large enough to likely influence the decision of an investor or creditor. Whether its omission or misstatement would matter.
Determined by magnitude or nature (what info is related to)
comparability
Ability to compare the accounting information of different companies because they use the same accounting principles.
verifiability
occurs when independent measurers, using the same methods, obtain similar results
timeliness
having information available to decision-makers before it loses its capacity to influence decisions
understandability
Users with a reasonable knowledge of business can interpret and understand the info
cost constraint of accounting
the value of the information provided should exceed the cost of providing it
going concern assumption
The assumption that the company will continue in operation for the foreseeable future.
(Why some assets are listed as non-current)
historical cost basis of accounting
Measurement basis that states that assets and liabilities should be recorded at their cost at the time of acquisition.
current value basis of accounting
Measurement basis that states that certain assets and liabilities should be recorded at their current value.
double-entry system
A system that records the two-sided effect of each transaction in appropriate accounts.
journal
diary w/ chronological listings of a biz's fin transactions
posting
process of transferring journal entries from the general journal to the general ledger accounts
All transactions related to 1 account = consolidated
trial balance
a proof of the equality of debits and credits in a general ledger
cash basis of accounting
Reporting income when the cash is received and expenses when the cash is paid.
matching principle
Expenses must be recognized in the same period as the revenues they help to generate
temporary accounts
Revenue, expense, and dividend accounts whose balances a company transfers to Retained Earnings at the end of an accounting period.
permanent accounts
all accounts that appear in the balance sheet; account balances are carried forward from period to period
Adjusting Entry
An entry made at the end of the accounting period that is used to record revenues/expenses to the period in which they are earned/occur.
income summary
An account to which the revenue and expense account balances are transferred at the end of a period.
credit balance
a condition that occurs when the total of the credits in an account is larger than the total of the debits in that account.
debit balance
a condition which occurs when the total of the debits in an account is larger than the total of the credits in that account.
faithful representation
one of the two fundamental qualities for accounting info to be useful
information that is complete, neutral, and free from error.
on account
A record that summarizes all the transactions pertaining to a single item in the accounting equation