What is Accounting?
Accounting
a comprehensive system for collecting, analyzing, and communicating financial information
Accounting identifies and records the economic events of an organization and communicates to interested users
Bookkeeping
Recording accounting transactions (just collecting)
Accounting information system
Organized procedure for identifying measuring, recording, and retaining financial information
Without accurate accounting info, a business would face SIG problems
Discuss the frequency of financial information
Users of accounting info
Business managers
Employees and unions
Investors and creditors
Taxing authorities
Government regulatory agencies
Controller
Head of AIS
Ensures that the accounting system provides that reports and statements needed for planning, controlling and decision-making
Auditing
Examination of financiaol records to ensure fair reporesentation
Tax Services
Tax return and preparation and tax planning
Management Consulting Services
Personal financial planning to business planning
GAAP
Rules and practices for the preparation of financial statements
Difference for public and private companies
Public trades use International financial reporting standards
Private trades may use ifrs or accounting standards for private enterprises
Proprietorships and partnerships generally follow ASPE for external reporting
Not required to follow any particular standards for internal use rules for financial reporting vs rules for tax preparation.
Financial Statements
Income Statement
Reports revenues and expenses for a specific period of time
Statement of changes in equity
Reports the change in each componentsof shareholders' equity during a period of time
Shows the changes in each component of shareholders' equity for the period
Share capital
Amounts contributed by shareholder
May include common and preffered classes
Retained earnings/Deficit
Cumulative net income retained in the company
Statement of financial position
Shows the assets, liabilities and shareholders' quity at a sepciif point in time
Assets
Resources owned or controlled by a business
Liabilities
Claims of lenders and other creditors
Shareholders' equity
Claims of shareholders
Statement of cash flows
Reconciles opening to ending cash balances
Current Assets
Assets expected to be converted to cash, sold or used in the business within one year or one operating cycle, whichever is longer
Operating cycle is the average time it takes to go from cash to cash in producing revenue
Usually listed in order of liquidity
Reverse order of liq also possible
Examples include cash, held-for-trading investments, accounts receivable, inventory, and prepaid expenses
Non-Currents Assets
Assets not expected to be converted to cash, sold or used in the business within one year one operating cycle
All assets not considered current
Examples
Long term investments
Property, plan, equipment
Tangible assets with relatively useful lives
Used in operating the business
Examples
Land
Buildings, Equipment
furniture
Intagible assets and goodwil
Other assets
Depreciation
Allocation(expense) of the cost of property, plant, and equipment over their estimated useful lives
Companies systemmatically assign a portion of the cost of an asset to expense each year. Under IFRS this allocation is referred to as depreciation for property, plant, and equipment, and amortiazation for intagible assets
Under ASPE amariotn isused instead of depreciation
The cost of long-lived assets with indefinite lives is not depreciated
Accumulated depreciation account shows the total amount of depreciation taken to date
Intangible Assets
Non-current assets that do not have physical substance and represent a privilege or a right held by the company
Examples
Patents, copyrights, trademarks, licenses
Goodwill: excess price paid on acquuisition of another company
Authorized if they not have an indefinite life
Current Liabilities
Obligations that are to be paid or settled within the coming or one operated cycle
Examples
Bank debt
Accounts payable
Unearned Revenue
Bankloans/Notes payable
Currents maturities of long-term debt
Non-Current Liabilities
Debts expected to be paid or settled after one year
Examples
Bank Loans/Notes Payable
Lease obligations
Pension and benefits obligations
Financing Activites
Obtaining and repayed funds to finance the operations of the business
Operating Activites
Operating activies are the main day to day acitivies of the business
Analysis-Using the finance statements
Specific tools can be used to analyze the financial statements
Ratio analysis expresses the relationships between selected financial statement data
Intracompany
2 or more periods for the same company
Intercompany
Between the company and a competitor
Industry average comparsion
Based on averages for particular industires diffucult sometimes to assemble true industry
Liquidity Ratios
Measuring a company's short term ability to pay its obligations and to meet its unexpected needs for cash
Current Ratio = Current assets/Currents Liabilities
Working Capital = Currents assets-Currents Liabilties
Higher is generally better
Solvency Ratios
Measure a company's ability to survive over a long period of time
Profit bility Ratios
Basic Earnings per share = profit avaiable to common shareholds/ weighted average number of common shares
Return on equity= netincome/total owners quity
Reutrn on sales=Netincom/Sales revenue
Objective of reporting
To provide Financil info that is useful to exisint and potention invetors.
Qualitative characterisitcs of accounting info
Info has relevance if I makes a difference in suer's decisions may have predeictive value and confirmatory value
Materiallity is important:will info influence the decisions of users
Fiathful Represetation
Information should reflect economic reality it must complete, meutral and free form error
Enhancing qualities pf usefull info
Comparability
Users can ditify and understand and similarites and differences amoung titems
Verify
Inddent conssense that info is faithfully represented
Timelinss
Availabale before it loses its usefullnes
Cost Constraint
Ensures that the value of the info provided by finace reporting is greater than the cost of providing it
The benefits of reporting should justify the costs of provding the service
Going concern assumption
The business will continue operatingi in the future
The key assumption provides a foundation for accounting
Provides justifcation for using cost as the value of ctain assets
The Accounting Cycle
Anazlyze transaction docs
Record transactions in a journal
Transger entries from the journal to a ledger
Do a trail balance
Prepare Financal statemetns
Analyze the statements
International accounting standards
Memebers in over 80 countries
Gaol to elimate diffferences
Revenue Recog
Revenue recog
The formal recording and reporting of revenues in the statemetns once the earnings cycle is completed
Matching
Expenses will be matched with revenues to show net income for an accounting period
Budget
Adetailed plan of estimated recepts and exenditures for a futre period
A internal statement (one year)
Ethical Behaviour
For accounting info to have value preprarer must have high ehtical sntandards
Actions are legal and responsible
Consider organization's interests
Accontants, other prefessionals, and most companies have rules or codes of conduct to guide ethical behaviour
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