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
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