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.