Accounting Chapter 1-4

What is accounting?: An information system that records and communicates financial information to users.

Internal Users: Manage companies, not-for-profit, & government organizations. Company officers, managers and directors in finance, marketing, human resources, production and other functional areas

External Users: do not work for company, Investors, lenders, and other creditors, Customers, employees, labour unions, Taxing authorities and regulators

Proprietorship: Owned by one person, limited life, unlimited liability, income tax paid by owners

Partnership: Owned by two or more, limited life, unlimited liability, income tax paid by each partner

Corporations: Sperate legal entity owned by shareholders, unlimited life, limited liability, public or private, corporation pays income tax

IFRS: International Financial Reporting Standards

ASPE: Accounting Standards for Private Enterprises

IFRS is used by: publicly traded corporations, required to present financial statements

Net income (loss): Revenue-expenses

Statement of Changes in Equity is used by: the company's dividend declaration practices and lenders and monitor the dividend payments

Statement of Financial Position is sued by: creditors, managers, lenders, investors.

Statement of Cash Flows shows: where cash came from, how it is being used and change in cash during the period

Financing Activity: Raising money. Debt financing is borrowing from bank/paying money back. Equity financing is selling shares in exchange for cash

Investing Activity: Investing money. Buying or selling property to run business, then investing if funds are sufficient

Operating Activity: Day-today expenses: Selling products/services, paying operating expenses

Order of Financial Statements: Statement of income, statements of changes in equity, statement of financial position, statement of cash flow

Debit is a normal balance for: Expenses, Assets and Dividends

Deferred Revenue: Getting prepaid, is a current liability

Prepaid Rent is a: asset

Salaries Payable is a: liability

Deprecation Concept: cost is recorded over life of a capital assets, recorded as equipment and accumulated depreciation in SOPF

Capital Asset: equipment, building, furniture, warehouse, etc. that will last longer than one year. Land is the exception, not a depreciable assets.

Current Assets: Cash, accounts reviewable, income receivable, prepaid expenses. These can be converted to cash and/or used in a year

Non-Current Assets: Last longer then a year and are not intended to be sold or convert to cash.

Examples of non-current assets: Long-term investments, property, plant and equipment, intangible assets.

Intangible assets: Non-current assets that do not have physical substance but have significant value. They generate a future value to the company despite having no physical substance.

Non-current liabilities: Obligations expected to be paid or settled after one year or operating cycle.

Current liabilities: Obligations to be paid or settled within one year of the financial statement date or one operating cycle, whichever is longer.

Dividends declared is classified as a: retained earning

Accumulated deprecation is classified as a: PPE

Mortgage Payable, due in 20 years is classified as a: NCL

Patents is classified as a: Intangible Asset

Relevance: Information that had predictive and confirmatory value and is material has this fundamental qualitative characteristic

Faithfull Representation: Information that is complete, neutral, and free of material error has this fundamental qualitative characteristic.

Verifiability: Public accountants perform audits to determine this enhancing qualitative characteristic.

Neutrality: This quality requires that we should not select information to favour one position over another.

Understandability: This enhancing qualitative characteristic describes information that a reasonably informed user can interpret and comprehend.

Predictive Value: When information provides a basis for forecasting income for future periods, it is said to have this quality.

Comparability: This enhancing qualitative characteristic requires that similar companies should apply the same accounting principles to similar events for successive accounting periods

Completeness: This quality results in information that has nothing important omitted.

Cost constant: This restriction requires that the value of the information presented should be greater than the cost of providing it.

Confirmatory Value: This quality describes information that confirms or corrects users' prior expectations.

Timeliness: This enhancing qualitative characteristic requires that information is available to decision makers before it loses its ability to influence their decisions.

Free from material error: Faithful representation means that information is complete, neutral, and this third quality.

Materiality: This quality allows items of insignificance that would like not influence a decision not to be disclosed.

Relevance is both: Predictive and confirmatory value

Assets and Liabilities are on the: Statement of financial position

Shareholders equity (R/E and common shares) are on the: Statement of financial position and statement of changes in shareholder equity

Revenue and Expenses are on the: Statement of Income

Rule #1: Revenue is recognized (recorded) when service is performed or merchandise is delivered (regardless if received cash or if we sent invoice to the customer or not, when work is done, revenue is recorded).

Rule #2: Expense is recognized (recorded) when it incurred (meaning, when goods or services are consumed or used), regardless if cash was paid or not.

How is depreciation recorded in adjusting entries: Debit depreciation expense, credit accumulated deprecation

How to correct a error when adjusting entries: identify the correct account that should have been used and record it on correct side

Income tax expense: Income tax payable

Interest expense: interest payable

Salaries expense: salaries payable

Utilities Expense: accounts payable

When adjusting entries always know the: date and adjusting frequency

The order of preparing post-closing trial balance: Revenue into income summary expense into income summary, income summary into retained earnings, dividends into retained earnings.

What are temporary accounts: all expense, dividends declared, revenue

Going Concern Assumption: Business will continue operating for the foreseeable future, this provides foundation for accounting cost justification for certain assets.

Cost Constraint: Ensures the value of financial reporting is greater then the cost of providing it

Accrual Basis Accounting: Revenue is recorded when event occurs, not when cash is received or paid. Revenue is recorded when earned, even if cash is not received. Expense are recorded when goods or service is provides, not when cash is paid.

Cash Basis Accounting: Revenue is recorded when cash is received, expense are recorded when cash is paid. This can lead to misinformation

Revenue Recognition under IFRS: Revenue is recognized when a company satisfies a performance obligation. 1. Identify the contract with the client or customer. 2. Identify the performance obligations in the contract. 3. Determine the transaction price. 4. Allocate the transaction price to the performance obligations in the contracts. 5. Recognize revenue when (or as) the company satisfies the performance obligation

Under ASPE, revenue can be recognized when: Services have been provided or the risks and rewards of ownership of the goods have been transferred to the buyer, Revenue can be reliably measured, Collection is reasonably certain

Carrying Amount: Cost - accumulated depreciation = Carrying amount. The carrying amount is what goes on the Statement of Financial Position.

IFRS used the term depreciation: yes

ASPE uses the term amortization: yes

IFRS requires a statement in changes in equity: yes

ASPE requires a statement of changes in equity: no, it requires a statement of retained earnings