Financial Accounting Notes

Learning Objectives

• LO 1: Identify the uses and users of accounting.
• LO 2: Describe the primary forms of business organization.
• LO 3: Explain the three main types of business activity.
• LO 4: Describe the purpose and content of each of the financial statements.

Uses and Users of Accounting

• Definition: Accounting identifies and records economic events of an organization and communicates information to interested users.
• Categories of Users:
  • Internal users:
  • Manage companies, non-profit, & government organizations.
  • Include company officers, managers, and directors in various departments (finance, marketing, human resources, production).
  • External users:
  • Do not work for the company.
  • Examples include investors, lenders, creditors, customers, employees, labor unions, taxing authorities, and regulators.

Ethical Behavior in Accounting

• Importance: For accounting information to maintain value, preparers must adhere to high ethical standards, ensuring actions are legal and responsible.
• Guidelines: Accountants and professionals usually follow a code of conduct to navigate ethical behavior.

Forms of Business Organizations

1. Proprietorship

   • Owned by one person (proprietor).
   • Advantages: Simple to set up, owner control, and income taxed to the owner.
   • Disadvantages: Limited life and unlimited liability.

2. Partnership

   • Owned by two or more persons.
   • Requires a written agreement.
   • Features: Limited life, each partner has unlimited liability, and income tax is paid by individual partners.

3. Corporation

   • Separate legal entity owned by shareholders.
   • Advantages: Indefinite life, ability to raise capital, and limited liability for shareholders.
   • Income taxes are paid by the corporation.
   • Types: Public (shares traded publicly) or Private (shares not publicly traded).

Generally Accepted Accounting Principles (GAAP)

• Definition: Rules and practices for preparing financial statements.
• Standards:
  • Publicly traded corporations: Must follow International Financial Reporting Standards (IFRS).
  • Private corporations: May use IFRS or Accounting Standards for Private Enterprises (ASPE).
  • Proprietorships and partnerships generally follow ASPE for external reporting but are not required to use specific standards for internal use.

Three Types of Business Activities

1. Financing Activities

   • Purpose: Obtaining and repaying funds to finance operations.
   • Examples: Selling or repurchasing shares, borrowing money, and repaying loans.

2. Investing Activities

   • Purpose: Purchase or sale of long-lived assets necessary for operation.
   • Examples: Transactions involving property, plant, equipment, and investments in other companies.

3. Operating Activities

   • Definition: Main day-to-day activities of the business.
   • Includes sources of income and expenses, with related accounts such as accounts receivable and accounts payable.

Financial Statements

1. Statement of Income

   • Reports revenues and expenses for a specific period.
   • Example formula: $Net Income = Revenues - Expenses$

2. Statement of Changes in Equity

   • Shows changes in each component of shareholders' equity for the period.
   • Components include share capital and retained earnings.

3. Statement of Financial Position

   • Reflects assets, liabilities, and shareholders' equity at a specific moment.
   • Accounting equation: $Assets = Liabilities + Shareholders’ Equity$

4. Statement of Cash Flows

   • Reports the cash effects of operating, investing, and financing activities.
   • Shows net increase or decrease in cash for the period.

Relationships Between Financial Statements

• Financial statements are interrelated; results from one statement may feed into another.
  • Example: Net income from the statement of income is reported in the statement of changes in equity.

Annual Report Requirements

• Public corporations must produce an annual report including:
  • Financial statements
  • Management discussion and analysis
  • Auditor’s report
  • Notes to financial statements

IFRS vs ASPE Key Differences