financial accounting chapter 1

Accounting

The information system that measures, processes, and communicates financial information about an identifiable economic entity

Financial Statements

Reports that summarize a company’s financial performance and position

Users of accounting information

Internal: managers and employees

External: investors, creditors, regulators

GAAP

The standard framework of guidelines for financial accounting used in Canada and other countries

Ethics in Accounting

The responsibility of accountants to act with integrity, objectivity and professionalism

First kind of Financial Statement

Income statement. Reports a company’s revenue and expenses to show net income or loss over a period of time

Second kind if financial statement

Statement of retained earnings. Shows how net income and dividends affect earnings over time

Third kind of financial statement

Balance sheet. Lists a companies assets, liabilities and equity at a point in time

Fourth kind of financial statement

Statement of cash flow. Shows the inflows and outflows of cash over a period of time, separated into operating, investing and financial activities

What is the account equation

Assets = liabilities + shareholders equity

Economic entities assumption

Business is separate from its owners

Monetary unit assumption

Only transactions measurable in money are recorded

Time period assumption

Business activities can be divided into specific reporting periods

Going concern assumption

Business will continue operating into the foreseeable future

Historical cost principle

Assets are recorded at their original cost

Revenue recognition principle

Revenue is recorded when it is earned, not when cash is received

Expense recognition principle

Expenses are recorded in the same period as the revenues they help generate

Full disclosure principle

All information that affects user’s understanding must be disclosed

Assets

Resources owned by a business

Liabilities

Obligations the business owes to others

Equity

Owners claims on the business after liabilities

Dividends

Distribution of earnings to shareholders

Net income

Revenues minus expenses

Retained earnings

Accumulated net income not distributed as dividends