Notes on Financial Accounting

Definition: The primary goal of accounting is to identify and measure business activities to assess performance and financial health.
Reporting: Results are communicated to stakeholders, aiding in rational economic decisions.

External Users: Investors, creditors, government (e.g., CRA and regulators), non-profit organizations, customers.
Internal Users: Suppliers, employees and employee unions, management.
Types of Accounting: Financial Accounting focuses on external reporting; Managerial Accounting focuses on internal decision-making support.

Purpose: Business documents that report results to various user groups.
Types of Financial Statements:
- Income Statement: Reports revenues and expenses to determine net income or net loss.
- Statement of Retained Earnings: Tracks changes in retained earnings over time.
- Statement of Cash Flows: Details cash inflows and outflows across operating, investing, and financing activities.
- Balance Sheet: Shows the company’s financial position by listing assets, liabilities, and stockholders' equity.

Types of business entities:
- Proprietorship: Owned by one individual; personal liability.
- Partnership: Owned by two or more individuals; shared personal liability.
- Corporation: Owned by many shareholders; limited liability for owners.

Also known as the Statement of Operations or Statement of Earnings.
Main Categories:
- Revenues and Gains: Money received from the sale of goods/services.
- Expenses and Losses: Costs incurred in the process of earning revenues.
Bottom Line: Net income is critical, indicating profitability.

Net income is reported only if revenues exceed expenses; otherwise, it's a net loss.

Represents the cumulative amount retained from net income over the years after dividends.
Flow: Net income or loss is transferred from the Income Statement, and dividends are deducted.

Also referred to as the Statement of Financial Position.
Components:
- Assets: Total resources owned.
- Liabilities: Total obligations owed.
- Stockholders' Equity: Ownership stake in the company after liabilities are subtracted from assets.
Equation: Assets = Liabilities + Stockholders' Equity.

Measures cash inflows and outflows across different activities:
- Operating Activities: Cash from day-to-day operations.
- Investing Activities: Cash used for investments in long-term assets.
- Financing Activities: Cash transactions related to equity and debt.
Importance: Indicates the company’s liquidity and financial health.

The Income Statement feeds into the Statement of Retained Earnings.
Retained earnings from the Statement impacts the Balance Sheet under Stockholders' Equity.
The Statement of Cash Flows connects with the Cash component on the Balance Sheet.

Governed by GAAP (Generally Accepted Accounting Principles) in Canada, ensuring consistency and comparability across financial reporting.
Institutions: CICA Handbook, Accounting Standards Board, International Accounting Standards Board (IASB).
Adoption of IFRS (International Financial Reporting Standards) for global consistency in financial statements.

Objective: To provide useful information for investors and lenders to make decisions.
Qualitative Characteristics: Relevance, faithful representation, comparability, verifiability, timeliness, and understandability.
Assumptions & Principles:
- Entity Assumption: Separately identifies a business as an economic unit.
- Going Concern Assumption: Assumes the entity will continue indefinitely.
- Historical Cost Principle: Assets recorded at their purchase price.
- Stable Monetary Unit Assumption: Assumes the dollar's purchasing power is stable over time.