COMM 201 Chapter 1 Seminotes

Chapter 1 – Organizational Forms

Types of Business Structures

• Sole Proprietorship:

  • Owned by one individual.

  • Easiest to start, with no special legal procedures required.

• Partnership:

  • Involves two or more owners.

  • Profits, taxes, and legal liabilities are shared among partners.

• Corporation:

  • A legal entity distinct from its owners.

  • Limited liability for owners, allowing for easier capital acquisition.

What is Accounting?

• An organized system designed to:

  • Capture, analyze, record, and summarize business activities.

  • Report financial results to internal and external decision-makers.

• Main Goal: Capture and report information related to operating, investing, and financing activities.

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External Users of Accounting Information

• Creditors:

  • Suppliers, banks, and other entities to whom money is owed.

• Investors:

  • Existing and potential shareholders interested in company value.

• Directors:

  • Governing bodies overseeing company direction.

• Government Agencies:

  • Regulators ensuring compliance with laws.

Basic Accounting Equation

• Formula: Assets = Liabilities + Shareholders’ Equity

• Definitions:

  • Assets: Economic resources owned by a company expected to produce future cash flows.

  • Liabilities: Obligations owed to creditors.

  • Shareholders’ Equity: Owners' claims on assets after liabilities.

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Components of Equity

• Contributed Capital:

  • Equity paid in by shareholders.

• Retained Earnings:

  • Accumulated profits reinvested in the business.

Key Financial Terms

• Revenue:

  • Income generated from selling goods or services.

• Expenses:

  • Costs incurred to generate revenue.

• Net Income (Profit):

  • Calculated as Revenues minus Expenses.

• Dividends:

  • Distribution of profits to shareholders from retained earnings.

Learning Activity 1-1: Personal Financial Assessment

• Track own assets, liabilities, revenues, and expenses.

  • Example Assets: dresser, clothes, beauty products.

  • Example Liabilities: credit card payments, rent, car payment.

  • Example Revenue: monthly earnings from work.

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Financial Report Preparation: Case Study

• Context: Jason vs. Ashley's financial situation assessment.

  • Jason: Owns PlayStation, cash in bank, and potential Porsche.

  • Ashley: Cash in bank and a vintage car with some loan obligations.

• Task: Prepare a financial report comparing assets and liabilities for both individuals.

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Financial Statements Overview

• Balance Sheet:

  • Snapshot of what a business owns (assets) and how it is financed (liabilities and equity).

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More Financial Statements

• Income Statement:

  • Reports net income by subtracting expenses from revenue over a time period.

• Statement of Retained Earnings:

  • Details changes in retained earnings, highlighting net income and dividends.

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Statement of Cash Flows

• Reports cash inflows and outflows from operating, investing, and financing activities.

• Understanding cash flow is essential for grasping a company's liquidity.

• Companies can adopt IFRS or ASPE based on their nature.

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Notes to Financial Statements

• Financial statements are usually prepared monthly, quarterly, or annually.

• Businesses can choose between a fiscal year end or a calendar year end.

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Purpose of Notes in Financial Statements

• Provide insights into accounting decisions made.

• Offer additional details on account balances.

• Disclose financial items not listed in main financial statements.

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Constructing Financial Statements

• Example: World Enterprises' retained earnings report.

• Required to prepare an income statement, statement of retained earnings, and balance sheet.

• Determine the starting point for financial document preparation.

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Financial Statement Usage

• Stakeholder perspectives:

  • Creditors: Assess if assets cover liabilities.

  • Investors: Gauge profitability and dividend history.

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Key Concepts for External Financial Reporting

• Major terms include Assets, Liabilities, Shareholders' Equity, Revenues, Expenses, Dividends, Cash Flows.

• Objective: Provide useful financial information.

• Characteristics: Relevance, Timeliness, Faithfulness, Comparability, Understandability.

Indigenous Communities' Financial Reporting

• Adhere to standards like the CPA Canada Public Sector Accounting Handbook.

• Increasing independence in financial reporting, though standards are assumed to be followed.

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Environmental, Social, and Corporate Governance (ESG)

• Growing expectation for companies to provide ESG disclosures.

• Differences in corporate behavior are being acknowledged and acted upon.

Learning Activity 1-5

• Solve for missing financial data in comparative reports between corporations.

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Copyright Information

• Sourced from "Fundamentals of Financial Accounting" by Phillips et al.

• Additional materials include Indigo financial statements in their annual reporting.