1、1-1The Financial StatementsChapter 11-2Learning Objective 1Use accounting vocabulary.1-3Accounting LanguageAccounting is an information system that:Measures business activitiesProcess data into reports(financial statements)Communicates results to decision makers1-4Accounting LanguageFinancial Statem
2、ents:Financial information about a business entity that is prepared in a systematic report format that can be used by decision makers to make decisionsIncomeStatementBalanceSheetStatement ofCash Flow1-5The Flow of Accounting Information3.Businesses report their results.2.Business transactions occur.
3、1.People make decisions.1-6IndividualsUsers of Financial StatementsInvestors andcreditorsGovernmentregulatoryagenciesNon-profitorganizationsTax Authorities1-7Financial AccountingSummarize business transactions of business entity for a specified periodUsers External decision makersInformation must:Be
4、 presented in systematic reports meet GAAP standards for relevance and reliability 1-8Management AccountingFinancial and operating data about an organizations activities,processes,operating units products services and customersUsers -internal decision makersInformation-can generated using assumption
5、s-Future oriented -not governed by GAAP1-9Ethics in AccountingInformation must be:1.RelevantInformation has predictiveor feedback valueCan influence a decisionTimelyReliableInformation is verifiableInformation must be objective1-10Ethics in AccountingIntegrity is built in financial accounting as fol
6、lows:Generally accepted accounting principles(GAAP)Audits of financial statementsSecurities commissionsInternal Control StructureAccounting Standards Board of the Canadian Institute of Chartered Accountants1-11Ethics in Accounting and BusinessStandards of professional conduct for accountantsSelf-reg
7、ulating bodies of accountantsCICACGAACSMAC1-12ProprietorshipsPartnershipsCorporationsHow to Organize a Business1-13CorporationsStocksShareholdersCanadian Business Corporation ActBoard ofDirectorsChief Operating Officers,Presidents,Managers1-14How to Do Accounting:Principles and ConceptsThe rules tha
8、t govern accounting are called GAAP(generally accepted accounting principles).Accountants follow professional guidelines.1-15GAAPCICA Handbook:official source of GAAP;sanctioned by federal and provincial governments and the Canadian Securities AdministratorsAccounting Standards Board(AcSB)Public Sec
9、tor Accounting Standards Board Emerging Issues Committee(EIC)International Accounting Standards Board(IASB)1-16International Accounting Standards Board(IASB)IASB is charged with setting International Financial Reporting Standards(IFRSs)Canadian GAAP will converge with IFRSs1st year for reporting und
10、er IFRS-based standards will be 20111-17Learning Objective 2Learnaccounting conceptsand principles.1-18Conceptual Framework Information must be useful for decision makersRelevanceReliabilityComparabilityUnderstandabilityGAAP1-19GAAP Requirements for Financial InformationGAAP requires:business entity
11、 conceptcost principlegoing concern assumptionobjectivity principleadequate disclosurestable dollar assumption1-20The Business Entity ConceptAn accounting entity is anorganization that stands apartas a separate economic unit.1-21Assets and services acquiredshould be recorded at theiractual(historica
12、l)cost.The Cost Principle1-22The Going-Concern ConceptThe entity will continueto operate in the foreseeable future.1-23(1)are verifiable and(2)can be confirmed by anindependent observer.The Objectivity Principle1-24Adequate DisclosureFinancial statements should be accompanied by any information nece
13、ssary for the statements to be interpreted properly.1-25The Stable-Monetary-Unit ConceptThe dollars purchasingpower is relatively stable.1-26Learning Objective 3Apply the accounting equation to business organizations.1-27The Accounting Equation1-28The Accounting EquationAssetsOwnersEquityLiabilities
14、Assets=Liabilities+Owners Equity1-29The Accounting EquationAssets are the economic resourcesof a business that are expected toproduce a benefit in the future.Liabilities are“outsider claims”or economic obligationspayable to outsiders.Owners equity represents the“insider claims”of a business.1-30The
15、Accounting EquationFor a corporation,shareholders equityis divided into two main categories.Contributed capitalRetained earningsAssets=Liabilities+Shareholders equityAssets=Liabilities+Contributed capital+Retained earnings1-31The Accounting EquationContributed capital is the amount investedin the co
16、rporation by its owners.The basic component of contributedcapital is common shares.Retained earnings is the amount earnedby income-producing activities andkept for use in the business.1-32The Accounting Equation:Net incomeRevenues are increases in retainedearnings from delivering goodsor services to
17、 customers.Expenses are decreases in retainedearnings that result from operations.1-33Components of Retained EarningsRevenues forthe periodExpenses forthe period=Net income(or Net loss)for theperiodDividendsfor theperiodEndingbalance ofretainedearningsEnd ofthe periodStart ofthe periodBeginningbalan
18、ce ofretainedearnings+or=1-34Learning Objective 4Evaluate business operations.1-35The Financial StatementsThe financial statements are a pictureof the company in financial terms.Each financial statement relates to a specificdate or covers a particular period.1-36Information Reported on the Financial
19、 Statements1.How well did the company perform (or operate)during the period?Revenues Expenses Net income(Net loss)IncomestatementQuestionAnswerFinancialStatement2.Why did the companys retained earnings change during the period?Beginning Retained Earnings+Net income(or Net loss)-Dividends=Ending R.E.
20、Statement of Retained Earnings1-37Information Reported on the Financial Statements3.What is the companys financial position at the end of the period?Assets=Liabilities+Owners equityBalancesheetQuestionAnswerFinancialStatement4.How much cash did the company generate and spend during the period?Operat
21、ing cash flows Investing cash flows Financing cash flowsIncrease or decrease in cashCashflowstatement1-38The Balance Sheet:Measuring Operating PerformanceThe balance sheet or statement of financial position reports the companys assets,liabilities and owners equityas of a specific date.1-39The Income
22、 Statement:Measuring Operating PerformanceThe income statement,statement ofoperations,or statement of earnings reports the companys revenues,expenses,and net incomeor net loss for the period.1-40The Cash Flow StatementThe cash flow statement reportsthe companys cash inflows andoutflows from operatin
23、g,investing,and financing activities.1-41Learning Objective 5Use financial statements.1-42Relationships Among the Financial StatementsIncome Statement Net IncomeStatement of Retained Earnings-Add net incomeBalance Sheet-Report retained earnings Cash Flow Statement-Report cash balance from balance sh
24、eet1-43Starting a Business Example:Hot Dog Vendor Owner(s)provide the funds These funds are used by the managers of the company to buyEquipmentInventoryOther Assets1-44Hotdog BusinessDetermine Business Structure:-proprietorship-partnership-corporation1-45Hotdog BusinessAdministrative Requirements Re
25、gister business with local business authorities Register business with tax authorities-Obtain GST/PST/Income tax accounts Contact lawyer to set up business Contact external accountant1-46Hotdog VendorManagers develop plans&set goals Make a profit Sell a high quality product Set selling price to enab
26、le profit1-47Hotdog BusinessBusiness decisions that must be made before you open:Where to locate your hotdog stand How many stands Will you hire employees Hours of operation Advertising Contact suppliers Financing requirements1-48Hot Dog BusinessAs the business operates:Goods are sold(Revenue)Expenses are incurredProfit is invested in inventory,equipment,etc.Management-Prepare financial statementsExternal Auditors-Review financial statementsUsers-Use them to make decisions1-49End of Chapter 1
