1. Copyright © 2014 Pearson Canada Inc. 1 - 1 Chapter 1

2. Copyright © 2014 Pearson Canada Inc. 1 - 2 Learning Objective 1 Define accounting, and describe the users of accounting information Why is accounting important, and who uses the information?

3. Copyright © 2014 Pearson Canada Inc. 1 - 3 Accounting: The Language of Business Accounting is an information system that: Measures business financial activities Processes that information into reports Communicates that information to decision makers For this reason it is called “the language of business”

4. Copyright © 2014 Pearson Canada Inc. 1 - 4 Financial Statements Business decisions are based on financial statements Is my business making a profit? Should I hire assistants? Am I earning enough money to expand my business?

5. Copyright © 2014 Pearson Canada Inc. 1 - 5 Decision Makers: The Users of Accounting Information Individuals Investors Government Regulatory, and Taxing Authorities Businesses Creditors Not-for-profit Organizations Other Users Accounting Information

6. Copyright © 2014 Pearson Canada Inc. 1 - 6 Financial Accounting and Management Accounting Financial Accounting Management Accounting Provides information to people outside the company Generates information for internal decision makers

7. Copyright © 2014 Pearson Canada Inc. 1 - 7 Learning Objective 2 Explain why ethics and rules of conduct are crucial in accounting and business Why is it important for accountants to be ethical?

8. Copyright © 2014 Pearson Canada Inc. 1 - 8 Ethical Considerations in Accounting and Business When there is a need to look as good as possible to attract investors, there is a potential for conflict External auditors express opinions as to whether the financial statements fairly reflect the economic events that occurred Unfortunately accounting scandals involving both public companies and their auditors, such as Enron have made the headlines in the last 12 years. Many changes had to be made to improve the quality of financial reporting.

9. Copyright © 2014 Pearson Canada Inc. 1 - 9 Professional Accounting Bodies & Standards of Professional Conduct Chartered Accountants (CA) Certified General Accountants (CGA) Certified Management Accountants (CMA) All governed by rules of professional conduct created by their respective organizations Chartered Professional Accountants (CPA)

10. Copyright © 2014 Pearson Canada Inc. 1 - 10 Learning Objective 3 Describe and discuss the forms of business organizations In what form can we set up a company?

11. Copyright © 2014 Pearson Canada Inc. 1 - 11 Forms of Business Organizations Proprietorship Partnership Corporation Limited-Liability Partnership (LLP)

12. Copyright © 2014 Pearson Canada Inc. 1 - 12 Proprietorship Advantages Disadvantages Single owner For accounting purposes each proprietorship is separate and distinct from the owner Limited life span Unlimited liability Limited availability to financial resources

13. Copyright © 2014 Pearson Canada Inc. 1 - 13 Partnerships Advantages Disadvantages Two or more owners More labour specialization More financial resources available Unlimited liability for general partners Potential conflicts among partners require written partnership agreements

14. Copyright © 2014 Pearson Canada Inc. 1 - 14 Corporations Advantages Disadvantages Legal separate entity Limited liability for shareholders Transferability of ownership is relatively easy Indefinite life of the organization Expensive to operate and set up Extensive governmental rules and regulations

15. Copyright © 2014 Pearson Canada Inc. 1 - 15 Limited-Liability Partnership (LLP) Advantages Disadvantages One partner cannot create a large liability for the other partners Each partner is liable for their own actions Written partnership agreements are still necessary

16. Copyright © 2014 Pearson Canada Inc. 1 - 16 Learning Objective 4 Explain the development of accounting standards, and describe the concepts and principles What are the rules of accounting, and why do we need them?

17. Copyright © 2014 Pearson Canada Inc. 1 - 17 Accounting Concepts Accounting Standards Board (AcSB) IFRS and ASPE are prepared under the authority of the Accounting Standards Board and are published as part of the Canadian Institute of Chartered Accountants (CICA) Handbook.

18. Copyright © 2014 Pearson Canada Inc. 1 - 18 Framework for Financial Reporting Objectives of financial reporting Qualitative characteristics of accounting information Elements of Financial Statements Recognition and Measurement Criteria, and Constraints Level 1 Level 2 Level 3 Level 4

19. Copyright © 2014 Pearson Canada Inc. 1 - 19 Level 1: Objective of Financial Reporting The primary objective of financial statements is to: Communicate information that is useful to investors, creditors, and other users

20. Copyright © 2014 Pearson Canada Inc. 1 - 20 Level 2: Qualitative Characteristics of Accounting Information For information to be useful, it must have: Relevance Comparability Reliability Understandability

21. Copyright © 2014 Pearson Canada Inc. 1 - 21 Level 3: Elements of Financial Statements Assets Liabilities Equity Revenues and expenses Gains and losses

22. Copyright © 2014 Pearson Canada Inc. 1 - 22 Level 4: Recognition and Measurement Criteria, and Constraints Principles Recognition Criteria Revenue Expenses Measurement Cost Other bases Disclosure Considerations Economic Entity Going Concern Stable- Monetary-Unit Constraints Cost/Benefit Materiality

23. Copyright © 2014 Pearson Canada Inc. 1 - 23 The Economic-Entity Consideration Each entity is accounted for separately and distinctly from the transactions of all other organizations and persons. You keep your business’s accounting separate from your personal accounting so that you may evaluate the success of your business.

24. Copyright © 2014 Pearson Canada Inc. 1 - 24 The Reliability Characteristic Information is reliable when it: Accurately represents the impact of the transaction Is free of error or bias

25. Copyright © 2014 Pearson Canada Inc. 1 - 25 The Cost Principle of Measurement Acquired assets and services should be recorded at their actual cost (historical cost)

26. Copyright © 2014 Pearson Canada Inc. 1 - 26 The Going-Concern Assumption The entity will remain in operation in the foreseeable future

27. Copyright © 2014 Pearson Canada Inc. 1 - 27 The Stable-Monetary-Unit Assumption The dollar’s purchasing power is relatively stable Allows accountants to ignore the effect of inflation in the accounting records

28. Copyright © 2014 Pearson Canada Inc. 1 - 28 Learning Objective 5 Describe and use the accounting equation to analyze business transactions How do business transactions affect the accounting records of a company?

29. Copyright © 2014 Pearson Canada Inc. 1 - 29 The Accounting Equation AssetsLiabilities + Owner’s Equity Economic Resources Claims to Economic Resources Liabilities (Outsiders) Owner’s Equity (Insiders)

30. Copyright © 2014 Pearson Canada Inc. 1 - 30 Assets Defined: Resources controlled by an entity that are expected to benefit the business in the future Examples of assets include: Cash Accounts Receivable Office supplies Merchandise inventory Furniture and fixtures Land Buildings

31. Copyright © 2014 Pearson Canada Inc. 1 - 31 Liabilities Defined: Debts that are payable to outsiders (creditors) Examples of liabilities include: Accounts payable Notes payable Salaries payable

32. Copyright © 2014 Pearson Canada Inc. 1 - 32 Owner’s Equity Defined: The amount of an entity’s assets that remains after the liabilities are subtracted Owner’s equity is often referred to as net assets

33. Copyright © 2014 Pearson Canada Inc. 1 - 33 Transactions That Increase and Decrease Owner’s Equity Owner Investments in the Business Revenues Owner’s Withdrawals from the Business Expenses Owner’s Equity INCREASESDECREASES

34. Copyright © 2014 Pearson Canada Inc. 1 - 34 Revenues Defined: Amounts earned by delivering goods or services to customers Examples of revenues include: Fees earned or service revenue Sales Rent earned Interest earned

35. Copyright © 2014 Pearson Canada Inc. 1 - 35 Expenses Defined: Amounts that have been paid or will be paid for costs that have been incurred to earned revenue Examples include: Rent Salaries and wages Utilities Supplies Amortization or depreciation

36. Copyright © 2014 Pearson Canada Inc. 1 - 36 Accounting for Business Transactions Any event that affects the financial position of the business entity and can be measured reliably

37. Copyright © 2014 Pearson Canada Inc. 1 - 37 Accounting for Business Transactions – An Example 1. The owner, Lisa Hunter, invests $250,000 to start a new business, HEC 2. HEC purchases land for a future office location, paying $100,000 cash 3. Purchases $7,000 office supplies on credit 4. HEC completes a consulting job for $30,000 cash 5. HEC completes a consulting job on credit for $25,000 6. HEC pays expenses for the month: salary $6,500; rent $4,000; utilities, $1,500

38. Copyright © 2014 Pearson Canada Inc. 1 - 38 Accounting for Business Transactions – An Example Continued 7. HEC pays $5,000 to the store from which it purchased $7,000 worth of office supplies in Transaction 3 8. HEC collections $15,000 from the customer of Transaction 5 9. HEC sells 50% of the land purchased in Transaction 2 for $50,000 cash 10. Lisa Hunter withdraws $6,000 cash for her personal use from HEC

39. Copyright © 2014 Pearson Canada Inc. 1 - 39 Accounting for Business Transactions Assets= Liabilities+ Owner’s Equity CashAccounts Receivable SuppliesLandAccounts Payable L. Hunter, Capital 1. +250,000+250,000 2. -100,000+100,000 3.+7,000 4. +30,000+30,000 5.+25,000 6. -12,000-12,000 7. -5,000-5,000 8. +15,000-15,000 9. +50,000-50,000 10. -6,000-6,000 222,00010,0007,00050,0002,000287,000

40. Copyright © 2014 Pearson Canada Inc. 1 - 40 Learning Objective 6 Prepare and evaluate the financial statements What financial statements are prepared by a company, and how do we create them?

41. Copyright © 2014 Pearson Canada Inc. 1 - 41 The Financial Statements Financial statements are the formal reports of an entity’s financial information The primary financial statements are: Income statement (statement of earnings or statement of operation) Statement of owner’s equity Balance sheet (statement of financial position) Cash flow statement

42. Copyright © 2014 Pearson Canada Inc. 1 - 42 Income Statement HUNTER ENVIRONMENTAL CONSULTING Income Statement For the Month ended April 30, 2014 Revenue: Service revenue$55,000 Expenses: Rent expense$4,000 Salaries expense6,500 Utilities expense 1,500 Total expenses12,000 Net income$43,000

43. Copyright © 2014 Pearson Canada Inc. 1 - 43 Statement of Owner’s Equity HUNTER ENVIRONMENTAL CONSULTING Statement of Owner’s Equity For the Month Ended April 30, 2014 Lisa Hunter, capital, April 1, 2014$ 0 Add: Investment by owner250,000 Net income for the month43,000 Subtotal293,000 Less: Withdrawals by owner(6,000) Lisa Hunter, capital, April 30, 2014$287,000

44. Copyright © 2014 Pearson Canada Inc. 1 - 44 Balance Sheet HUNTER ENVIRONMENTAL CONSULTING Balance Sheet April 30, 2014 AssetsLiabilities Cash$222,000Accounts payable$ 2,000 Accounts receivable10,000 Office supplies7,000Owner’s Equity Land50,000Lisa Hunter, capital287,000 Total assets$289,000Total liabilities and owner’s equity $289,000

45. Copyright © 2014 Pearson Canada Inc. 1 - 45 Cash Flow Statement HUNTER ENVIRONMENTAL CONSULTING Cash Flow Statement For the Month Ended April 30, 2014 Cash flows from operating activities: Cash collections from customers$45,000 Cash payments to suppliers$(10,500) Cash payments to employees(6,500)(17,000) Net cash inflows from operating activities28,000 Cash flows from investing activities: Acquisitions of land(100,000) Proceeds from sale of land50,000 Net cash outflows from investing activities(50,000)

46. Copyright © 2014 Pearson Canada Inc. 1 - 46 Cash Flow Statement, Continued Cash flows from financing activities: Investment by owner250,000 Withdrawal by owner(6,000) Net cash inflow from financing activities244,000 Net increase in cash$222,000 Cash balance, April 1, 20140 Cash balance, April 30, 2014$222,000

47. Copyright © 2014 Pearson Canada Inc. 1 - 47 Relationships among the Financial Statements The income statement for the month ended April 30, 2014 reports…. The statement of owner’s equity for the month ended April 30, 2014 reports…. The balance sheet at April 30, 2014 reports…. The cash flow statement for the month ended April 30, 2014 reports….