Bus 251- CH 1 notes
Accounting: system for gathering data about an entity’s economic activity,
processing and organizing hat data to produce useful info and communicating that
info to people who want to use it to make decisions
Accounting Standards for Private Enterprises (ASPE): were developed for
Canadian private companies. Made to provide a simplified set of accounting
principles that are appropriate for private businesses
Canada Revenue Agency (CRA): filing an income tax return every year.
responsible for administration and enforcement of federal tax laws, which means
that info must be accumulated and organized to complete the return
Corporation: separate legal entity, limited liability
Cost-benefit trade-off: comparing benefits of an action with its costs
Economic Consequences: affects people’s wealth, have an impact the decision they
make
Ex. Choosing between two accounting method, paying more or less tax
Entity: economic unit of some kind, business, university, government, or even a
person
External audit: external auditor’s examinations
External auditors: people who examines entities’ financial info on behalf of
external stakeholders
Financial Accounting: provides info to stakeholders who are eternal to an entity
International Financial Reporting Standards (IFRS): mandatory for publicly
accountable companies, while private companies can choose to use them.
Intended as a single set of globally accepted, high-quality accounting standards
Managerial Accounting: addresses the info needs and decisions of the stakeholders
who are internal to an entity—them managers and other employees
Not-for-profit organization: provide social, educational, professional, religious,
health, charitable, and other services in communities around the world
Partnership: unincorporated business owned by 2 or more entities called partners.
Could be people or corporations
Preparer: managers of an entity, decide what, how, and when info is to be
presented in an entity’s financial statements and other accounting reports.
Ex. senior managers such as controllers, chief financial officers, and even chief
executive officers, not junior or mid-level employees
Private Corporation: shares can’t be purchased unless entity or its shareholders
agree
Proprietorship: unincorporated business with one owner. Not a separate legal
entity. Does not pay taxes, includes the money made by owner’s personal tax return,
along with income from other sources
Public Corporation: shares can be purchased by anyone interested in owning part
of the company
Share: ownership in a corporation, are issued to investors when a company is
formed, and they can be issued at any time during a corporation’s life
Shareholder: owners of shares
Stakeholder: interested parties in having a stake in entity. Include owners, lenders,
taxation authorities, employees, governments, consumers, and regulators.
Stock exchange: a place (physical or virtual) where the shares of publicly traded
entities can be bought and sold ex. TSX or NYSE
What is Accounting?
Gather Data  Process and Organize Data  Communicate information
The Accounting Environment
Four key components of the accounting environment: overall environment, entities,
stakeholders and constraints
Environments: political, cultural, economic, competitive, regulatory and legal
Characteristics of Entities:
- Size, Industry
- Risk, Ownership structure
- Labor force
- Customers
- Suppliers
- distribution channels
- Contractual obligations
-
Public vs. private
Stage in lifecycle
Capital structure
Need for financing
Constraints: Limits to Managers’ Reporting Choices
- Contracts
- Accounting standards
- Moral and ethical considerations
- Law
- Income Tax Act
- Demands of powerful stakeholders
- Securities legislation
Examples:
- The Income Tax Act defines how certain transactions and economic events
must be accounted for in calculating the amount of income tax an entity must
pay
- Corporations must meet the requirements of the law they are incorporated
under (Canada Business Corporations Act)
- Some entities must agree to follow formal sets of accounting rules such as
Accounting Standards for Private Enterprises (ASPE) or International
Financial Reporting Standards (IFRS)
- Companies that trade on Canadian stock exchanges must meet the
requirements of the securities laws of their province and the rules of the
stock exchange
- Entities often enter voluntarily into contracts with other parties to do their
accounting in a certain way
- People involved in accounting and financial reporting process have a
responsibility to be ethical
Types of Entities:
- Individual
o Filing an income tax return.
o Keeping track of finances
o Borrowing money from banks.
o Insuring homes and belongings.
o Preparing budgets
-
Corporation
Partnership
Proprietorship
Not-for-profit organization
Government
Industry
Stakeholders: (how accounting info can be useful for them)
Owners: often not involved in business day-to-day affairs (e.g., shareholders of
public corporations) They need info from it for purposes of evaluating how well
their investment is doing.
- determine if management is doing good job
- assess effectiveness of business strategies
- consider whether they should sell their interest in company
- decide if managers should be replaced
Creditors: owed money, goods, or services
- need info to determine if an entity will be able to pay amounts owed and, if they
don’t pay up, whether there are assets that might be taken and sold to recover the
money owed
Taxation Authorities: most individual and corporations must file a tax return each
year
- CRA requires taxpayers to calculate their taxes using methods
consistent with Income Tax Act, Canada’s federal tax legislation
- CRA uses accounting info to assess the taxes owed by a
business/individual
Governments: use accounting info to decide whether certain entities should receive
governments support or subsidies. It can also have a political impact, for ex.
Company attracts the attention of politicians by making what the public perceives as
“too much money”
Labour Unions: concerned with interests of their members and attempt to
negotiate good wage and benefits packages with employers. Accounting info can
provide insights to the union about how much an entity can afford to pay employees
Communities/ Public Interest Groups: entities can affect their communities
Ex. Entities can be employers, taxpayers, or polluters. Accounting info provides
citizens and community leaders with info regarding the entity and its impact in the
community
Donors to Charities: Donors want to know their donations are mainly being used
to achieve the goals of the charity and not excessively for administration and
fundraising.
Stakeholders versus Preparers
How managers prepare accounting reports may have economic consequences.
Examples:
- Managers’ bonuses are sometimes based on the numbers contained in
accounting reports
-
Managers might own shares in a company so their wealth will be
affected by the company’s share price
Managers might lose their jobs if the company’s performance isn’t
good enough
The selling price of a business can be based on accounting info so the
owner of a business may benefit from “better” numbers
External auditors can examine the info in an entity’s financial statements, as well as
the data supporting it, to provide assurance the statements are fair representation
of the entity’s underlying economic activity and the accounting has been done in
accordance with the designated set of accounting standards
International Financial Reporting Standards
-
Most Canadian companies are private and not obliged to follow either
standard. IFRS and ASPE are flexible and require managers to exercise
judgment.
o Private companies usually have a relatively small number of
stakeholders
o Private companies usually know hwo the stakeholders
o Private company stakeholders are typically more
knowledgeable about the entity
o Private company stakeholders can usually obtain info directly
from the company (shareholders could speak with president),
likely impossible for shareholders of public company
Who Has to Follow IFRS and ASPE
Publicly Accountable Enterprises  IFRS
Private Companies  ASPE, IFRS, Nothing at all
Professional Accountants in Canada
-
Certified General Accountants (CGAs)
Certified Management Accountants (CMAs)
Chartered Accountants (CAs)
Differences between Financial and Managerial Accounting
Stakeholders
Financial Accounting
- external to entity
- investors, lenders, taxation
authorities, competitors, etc…
- usually don’t have direct access to
Managerial Accounting
- Internal to entity.
Managers and other
employees
info, must rely on entity for info
Purpose of Info
-
Reporting unit
Used for decisions of
a particular
stakeholder.
Investment decision,
evaluating
performance,
predicting cash flows,
lending/credit
decisions, etc.
- Financial statements are usually
for an entity as a whole
- used for operating
decisions such as price
setting, expansion,
evaluating which products
are successful, and
determining the amount of
a product that should be
produced
- info can be very detailed
and can be about any
aspect of the entity
(product, activity, etc..)
Frequency of
reporting
-
annually at a
minimum, quarterly
for public companies
- managers need info
quickly, even daily or
hourly
Constraints
-
Usually prepared in
accordance with
established set of
accounting standards,
such as IFRS or ASPE
Perspective
-
financial statements
mainly report
transactions that
have already
occurred
they are historical
- no constraints
- info can be prepared on
any basis the manager
requires
no requirement for an
entity to prepare any type
of report
- Reports prepared for
managerial decision
making are often future
oriented
Accounting is for Measurement
Info produced by an accounting system allows stakeholders to measure different
attributes of an entity, such as
- performance
- efficiency
- performance of managers, and how much bonus they should receive
-
how much it owes lenders
how much it’s worth
tax obligation
-sometimes economic activity is difficult or even impossible to observe, making
those measurements difficult to portray for stakeholders
Apple Tree – Income Statements
Income Statement: starts at zero at the beginning of every year and measures the
annual yield
Profit (net income) = Revenue – Expenses
Balance Sheet: a picture in time. It measures the cumulative result of your business
efforts. It sustains your business over the long haul
- measures what you own (Assets) and what you owe (Liabilities)
Assets – Liabilities = Equity (approximates the net value of your business,
accumulated earnings)
Income statement: how much cash was consumed by income statement
Balance sheet: how much cash was consumed in growing the balance sheet
The Cash Flow Statement connects the Income Statement to the Balance Sheet