Certified General Accountants Module 1 Certified General Accountants Financial Accounting Fundamentals (FA1) Module 1 Cheryl Hudson, CGA HBCom cherylhudson@live.com

Resources Textbook (mid chapter problems) Module 1 Resources Textbook (mid chapter problems) Lesson notes (test yourself, knowledge levels) CGA Manitoba Website, Blackboard (online lectures, examination blueprints) Old exams, marker comments Review class

Strategy Know course schedule (required readings and assignments) Module 1 Strategy Know course schedule (required readings and assignments) Focus on learning objectives and knowledge levels Read textbook and lesson notes in advance of class Dedicate time (weekly course materials, quizzes and assignments) Review old exams Additional help before or after class .

Assignment Structure 5 Quizzes (2% each) ; online, immediate feedback Module 1 Assignment Structure 5 Quizzes (2% each) ; online, immediate feedback 3 Integrative Assignments - Assignment 1 (Modules 1-5) 5%; 50 marks - Assignment 2 (Modules 1-6) 10%; 100 marks - Assignment 3 (Modules 1-9) 5%; 50 marks All submissions by 12:00 noon of given day CST

Module 1 Introduction to Accounting Concepts

Module 1 Learning Objectives Describe the function of accounting, the nature and purpose of the information it provides and identify users of accounting information (level 1) Distinguish among sole proprietorships, partnerships and corporations (level 2) Explain the importance of ethics in accounting and outline the key ethical standards expected of professional accountants.(level 1) Compare the fields of accounting and the kinds of work performed in each field. (level 2) Differentiate among the different kinds of financial statements (level 1) Explain the purpose of GAAP and describe each of the principles introduced (level 2)

Module 1 Learning Objectives 7. Analyze business transactions and their effects on the accounting equation (level 1) Describe the major areas of the conceptual framework of accounting (level 2) Describe the objective of general purpose financial reporting. (level 2) Describe the qualitative characteristics of useful financial information (level 2) Describe the cost constraints of useful financial reporting. (level 2) Describe the assumptions of accounting. (level 2) Describe the elements of financial statements (level 2)

Module 1 Learning Objectives 14. List the two criteria that determine when to recognize a transaction as an element of the financial statements. (level 2) List the methods of measuring the elements of financial statements. (level 2)

© 2009 McGraw-Hill Ryerson Limited. Module 1 What is Accounting? Accounting is a process that involves collecting information, recording it, and then reporting it to various decision makers. It’s objective is to help people make better decisions. © 2009 McGraw-Hill Ryerson Limited.

© 2009 McGraw-Hill Ryerson Limited. Module 1 Forms of Organization Sole Proprietorship Partnership Corporation © 2009 McGraw-Hill Ryerson Limited.

© 2009 McGraw-Hill Ryerson Limited. Module 1 Sole Proprietorships One owner Separate entity for accounting purposes Not a separate legal entity from the owner Unlimited liability Limited life Owner taxed on profits © 2009 McGraw-Hill Ryerson Limited.

© 2009 McGraw-Hill Ryerson Limited. Module 1 Partnerships Two or more owners Separate entity for accounting purposes Not a separate legal entity from the owners Unlimited liability Limited life Owners taxed on profits © 2009 McGraw-Hill Ryerson Limited.

© 2009 McGraw-Hill Ryerson Limited. Module 1 Corporations One or more owners Separate entity for accounting purposes Separate legal entity from the owner(s) Limited liability Unlimited life Corporation taxed on profits © 2009 McGraw-Hill Ryerson Limited.

Non-Business Organizations Module 1 Non-Business Organizations Not-for-profit and government organizations No identifiable owner Examples: schools, charities, libraries, hospitals, police, shelters © 2009 McGraw-Hill Ryerson Limited.

Users of Accounting Information Module 1 Users of Accounting Information Accounting is a service activity that provides information to help internal and external users make decisions. © 2009 McGraw-Hill Ryerson Limited.

Examples of External Users and Some of Their Decisions Module 1 Examples of External Users and Some of Their Decisions User Group Decisions to be made Lenders To lend money or not. Shareholders To invest or not. External auditors To determine the reasonableness of the client’s statements. Unions To determine if wages are fair. CRA To determine if payroll deductions are calculated properly. © 2009 McGraw-Hill Ryerson Limited.

© 2009 McGraw-Hill Ryerson Limited. Module 1 External Reporting Reports for external users are usually in the form of financial statements. The information in the statements needs to be relevant, reliable, and comparable. Generally accepted accounting principles (GAAP)are important in making the statements useful to users. Canadian GAAP are undergoing significant changes because of the adoption of International Financial Reporting Standards(IFRS). © 2009 McGraw-Hill Ryerson Limited.

© 2009 McGraw-Hill Ryerson Limited. Module 1 Internal users Internal users are involved in managing and operating an organization. Accounting provides information to these users to help them improve the efficiency and effectiveness of the organization. © 2009 McGraw-Hill Ryerson Limited.

Ethics and Ethical Behaviour Module 1 Ethics and Ethical Behaviour Ethics are beliefs that differentiate right from wrong. Ethics and ethical behaviour are important to the accounting profession and to those who use accounting information. Ethical practices build trust, which promotes loyalty and long-term relationships with customers, suppliers, employees, and investors. © 2009 McGraw-Hill Ryerson Limited.

© 2009 McGraw-Hill Ryerson Limited. Module 1 Ethics in Accounting One of the primary goals of accounting is to provide useful information for decision making. In order for the information to be useful, it must be trusted. Accountants must act in an ethical manner in order for the information they produce to be trusted. © 2009 McGraw-Hill Ryerson Limited.

Ethical Obligations of Accountants Module 1 Ethical Obligations of Accountants Maintain a high level of professional competence. Treat sensitive information as confidential. Exercise due care and professional judgement. Must not be associated with deceptive information. © 2009 McGraw-Hill Ryerson Limited.

Accounting Opportunities Module 1 Accounting Opportunities Broad fields of accounting include: Financial accounting Managerial accounting Taxation Accounting-related fields © 2009 McGraw-Hill Ryerson Limited.

Accounting Opportunities Module 1 Accounting Opportunities Accountants may work as: Private accountants Public accountants Government accountants © 2009 McGraw-Hill Ryerson Limited.

Focus on IFRS New accounting rules or GAAP applicable to public companies in Canada effective Jan 2011. International Financial Reporting Standards (IFRS) - new standards for financial recording and reporting for Publicly Accountable Enterprises Privately held Enterprises have the option of using GAAP or IFRS

IFRS Framework Reading 1-1: IFRS Framework (online) Conceptual framework Identifies fundamental concepts used to prepare and present financial statements for external users. Objective of financial statements Underlying assumptions Qualitative characteristics Elements of financial statements Concepts of capital and capital maintenance

Communicating Through Financial Statements Accounting provides useful information that helps users make decisions. This information is often provided in the form of financial statements. The major statements are the: Income statement Statement of Changes in Equity Balance sheet Statement of Cash Flows © 2009 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Income Statement The income statement reports: Revenues of the organization. Expenses (costs incurred in earning the revenues). Net income or loss. The income statement covers a period of time. © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Income Statement Inflows of assets in exchange for products and services provided to customers. © 2010 McGraw-Hill Ryerson Limited.

or the using up of assets from generating Income Statement Costs incurred or the using up of assets from generating revenue © 2010 McGraw-Hill Ryerson Limited.

Statement of Changes in Equity Reports on changes in equity over a period of time. Equity is affected by: Owner investments and withdrawals Net income or net losses Linked to the income statement © 2010 McGraw-Hill Ryerson Limited.

Statement Of Changes in Equity Covers a period of time. From the Income statement. © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Balance Sheet The balance sheet reports the: Assets Liabilities Equity of an organization at a point in time. Linked to the Statement of Changes in Equity © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Balance Sheet Properties or economic resources owned by a business © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Balance Sheet Debts or Obligations of the business © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Balance Sheet Owner’s claim on the assets of a business From the Statement of Changes in Equity © 2010 McGraw-Hill Ryerson Limited.

Statement of Cash Flows Reports the sources and uses of cash for a period of time. Organized by the company’s major activities: Operating Investing Financing © 2010 McGraw-Hill Ryerson Limited.

Statement of Cash Flows From the balance sheet © 2010 McGraw-Hill Ryerson Limited.

Generally Accepted Accounting Principles (GAAP) GAAP are rules that make up acceptable accounting practices. The primary purpose of GAAP is to make information in financial statements: Understandable Relevant Reliable Comparable © 2010 McGraw-Hill Ryerson Limited.

Generally Accepted Accounting Principles (GAAP) Canadian GAAP are being replaced by International Financial Reporting Standards (IFRS). The long-term goal is to have all countries using the same set of standards-IFRS. Adoption of IFRS will improve comparability of accounting information so users can make more informed decisions. © 2010 McGraw-Hill Ryerson Limited.

Fundamental Building Blocks Accounting Principles - Business entity principle - Cost principle - Going-concern principle - Monetary unit - Revenue recognition principle © 2010 McGraw-Hill Ryerson Limited.

= + The Accounting Equation Liabilities Equity Assets = + The accounting equation is used to keep track of changes in a company’s assets, liabilities, and equity. © 2009 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Transaction Analysis We need to determine: Which accounts are being affected. If the accounts are increasing or decreasing. © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Transaction Analysis (1) Virgil Klimb invests $10,000 cash in the business. Analysis: Cash increases by $10,000. Owner’s capital increases by $10,000. © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Transaction Analysis (2) Purchased supplies for $2,500 cash. Analysis: Supplies increase by $2,500. Cash decreases by $2,500. © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Transaction Analysis (3a) Purchased $1,100 of supplies on credit. Analysis: Supplies increase by $1,100. Accounts Payable increases by $1,100 © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Transaction Analysis (3b) Purchased $6,000 of equipment on credit. A promissory note was signed. Analysis: Equipment increases by $6,000. Notes payable increases by $6,000. © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Transaction Analysis (4) Services rendered for $2,200 cash. Analysis: Cash increases $2,200 Equity increases $2,200 © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Transaction Analysis (5) Payment of $1,000 rent expense in cash. Analysis: Cash decreases $1,000 Equity decreases $1,000 © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Transaction Analysis (6) Payment of $700 salaries expense in cash. Analysis: Cash decreases $700 Equity decreases $700 © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Transaction Analysis (7) Service contract signed for February and March. Analysis: No economic exchange has taken place All accounts remain unaffected © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Transaction Analysis (8)Services and rental revenues of $1,900 rendered for credit. Analysis: Accounts receivable increases $1,900 Owner’s capital increases $1,900 © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Transaction Analysis (9) Receipt of $1,900 cash on account. Analysis: Cash increases $1,900 Accounts receivable decreases $1,900 © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Transaction Analysis (10) Payment of $900 accounts payable. Analysis: Cash decreases $900 Accounts payable decreases $900 © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Transaction Analysis (11) Withdrawal of $600 cash by owner. Analysis: Cash decreases $600 Owner’s capital decreases $600 © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Financial Statements Financial statements are prepared to reflect the transactions we have recorded. © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Income Statement © 2010 McGraw-Hill Ryerson Limited.

Statement of Changes in Equity © 2010 McGraw-Hill Ryerson Limited.

© 2010 McGraw-Hill Ryerson Limited. Balance Sheet © 2010 McGraw-Hill Ryerson Limited.

Module 1 End of Module 1