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    MBAB 5P01 - Chapter 1

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    Priya Mehta
    This document provides an overview of different types of business organizations including sole proprietorships, partnerships, and corporations. It discusses the key advantages and disadvantages of each structure. It also describes the basic accounting equation of Assets = Liabilities + Stockholder's Equity and defines the key elements of revenues, expenses, and dividends. Finally, it outlines the major Canadian and US standard-setting bodies and accounting principles of historical cost, fair value, and the monetary unit assumption.

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    MBAB 5P01 - Chapter 1

    Uploaded by

    Priya Mehta
    57 views3 pages
    This document provides an overview of different types of business organizations including sole proprietorships, partnerships, and corporations. It discusses the key advantages and disadvantages of each structure. It also describes the basic accounting equation of Assets = Liabilities + Stockholder's Equity and defines the key elements of revenues, expenses, and dividends. Finally, it outlines the major Canadian and US standard-setting bodies and accounting principles of historical cost, fair value, and the monetary unit assumption.

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    intro to accounting

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    This document provides an overview of different types of business organizations including sole proprietorships, partnerships, and corporations. It discusses the key advantages and disadvantages of each structure. It also describes the basic accounting equation of Assets = Liabilities + Stockholder's Equity and defines the key elements of revenues, expenses, and dividends. Finally, it outlines the major Canadian and US standard-setting bodies and accounting principles of historical cost, fair value, and the monetary unit assumption.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    57 views3 pages

    MBAB 5P01 - Chapter 1

    Uploaded by

    Priya Mehta
    This document provides an overview of different types of business organizations including sole proprietorships, partnerships, and corporations. It discusses the key advantages and disadvantages of each structure. It also describes the basic accounting equation of Assets = Liabilities + Stockholder's Equity and defines the key elements of revenues, expenses, and dividends. Finally, it outlines the major Canadian and US standard-setting bodies and accounting principles of historical cost, fair value, and the monetary unit assumption.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    Priya Mehta

    MBAB 5P01
    Chapter 1
    Financial Statements and Business Decisions
    Overview
    Types of Business
    Sole Proprietorship
    - Typically owned by one person who runs the operation
    - Small service business
    Advantages
    - Easy to establish since it does not need to be registered
    - Owner-manager has full control over operations
    - Owner-manager keeps all the profits
    - No risk of leaking of proprietary information
    Disadvantages
    - Owner-manager bears all the risks (unlimited liability)
    - Poor continuity - business dies with the person
    - Owner-manager may not have the financial resources needed to make investments to keep the business
    viable
    Partnership
    - Owned and operated by two or more people
    - Retail or service-type business (Accounting/Law firm)
    - Governed by a partnership agreement
    Advantages
    - Greater access to capital and expertise since partners can pool resources
    - Shared workload and profits in the agreed percentage
    Disadvantages
    - Continuity is less certain than proprietorship, due to trust issues
    - Risks are shared (maybe not equally) by all the partners (unlimited liability)
    Corporation
    - Ownership divided into shares of stock
    - Separation of ownership from control
    - Separate legal entity organized under state corporation law
    Advantages
    - Shareholders are not liable for corporate debts (limited liability).
    - Continuity of life – does not cease to exist if shareholders, or officers die
    - Corporations can raise capital easily, by selling shares of stock
    - Ease of transferring ownership interests
    Disadvantages
    - Expensive to establish and involves the most paperwork
    - Double taxation: the firm may pay taxes on its income, after which shareholders pay taxes on any dividends
    received, so income is taxed twice

    Business Operations
    Business Activity Shareholder Affected
    Selling shares to raise capital Shareholders
    Borrowing money/selling bonds to raise money/paying back loans Creditors

    1|Page
    Electing a CEO to run the business Board of directors
    Hiring and paying labourers Managers
    Purchasing and paying for raw materials Suppliers
    Selling products and collecting payments Customers
    Market Value of Firm = Price x Number of Shares
    Investors and Creditors
    - Business owners (investors or shareholders) profit from the corporation in two ways:
    o By selling their ownership interest in the future for more than they paid
    o By receiving a portion of the company’s earnings in cash or kind (dividends)
    - Creditors lend money to a company for a specific length of time and gain by charging interest on the money
    loaned

    Role of the Accounting System


    - To identify, collect and process, record, and communicate economic events of the firm to stakeholders for:
    o Internal decision making (e.g. Managers)
    o External decision making (e.g. Investors and Creditors)

    Users of Accounting Information


    - Financial accounting serves external users (CRA, investors, labour unions, creditors, OSC, customers and
    suppliers)
    - Managerial accounting services internal users (management, human resources, finance, marketing)

    Types of Financial Statements


    Statement of Financial Position/Balance Sheet
    - Reports financial position at a point in time (Assets = Liabilities + Shareholder’s Equity)
    Statement of Comprehensive Income/Income Statement
    - Reports the net earnings achieved during the accounting period, and income and expenses not recognized in
    net earnings (Revenues – Expenses = Net Earnings + Other Comprehensive Income = Comprehensive Income
    Statement of Changes in Equity/Statement of Stockholders’ Equity
    - Reports the way that elements of comprehensive income, dividends and changes to contributed capital
    affected the financial position of the company during the accounting period
    - Equity, beginning of period + Net earnings for year + Other Comprehensive Income – Dividends +/- Other
    changes, net = Equity, end of the period
    Statement of Cash Flows
    - Reports inflows and outflows of cash during the accounting period in operating, investing and financing
    activities (+/- CFO +/- CFI +/- CFF = Change in Cash)

    Relevant Standard-Setting Bodies


    - International Accounting Standards Board (IASB) - CANADA
    - Ontario Securities Commission (OSC) in Canada & Securities and Exchange Commission (SEC) - US
    - Accounting Standards Board (AcSB) in Canada & Financial Accounting Standards Board (FASB) - US

    Generally Accepted Accounting Principles (GAAP)


    - Standards that are generally accepted and universally practiced and that govern how to report economic
    events
    - Publicly Accountable for-profit firms: International Financial Reporting Standards (IFRS)
    - Private enterprises: Accounting Standards for Private Enterprises (ASPE)

    2|Page
    Measurement Principles
    Historical Cost Principle – companies record assets at their cost
    Fair Value Principle – assets and liabilities should be reported at fair value

    Assumptions
    Monetary Unit – only record transactions that can be expressed in terms of money
    Economic Entity – activities of the entity are separated from other economic entities (including owner)

    Basic Accounting Equation


    - Framework for recording and summarizing economic events
    - Assets are claimed by either creditors or owners
    - Claims of creditors must be paid before ownership claims

    𝐴𝑠𝑠𝑒𝑡𝑠 = 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟 ′ 𝑠𝐸𝑞𝑢𝑖𝑡𝑦

    Assets
    - Resources a business owns
    - Provide future services or benefits
    - Cash, supplies, equipment, etc.
    Liabilities
    - Claims against assets
    - Debts and obligations
    - Accounts payable, notes payable, etc.
    Stockholder’s Equity
    - Ownership claim on total assets
    - Referred to as residual equity
    - Common stock and retained earnings

    Revenues
    - Result from business activities entered into for the purpose of earning income
    - Common sources of revenue are: sales, fees, services, commissions, interest, dividends, royalties, and rent
    Expenses
    - Cost of assets consumed or services used in the process of earning revenue
    - Common expenses are: salaries expense, rent expense, utilities expense, tax expense, etc.
    Dividends
    - Distribution of cash or other assets to stockholders
    - Dividends reduce retained earnings
    - Dividends are not an expense

    When to Use the Accounting Equation


    - Not every event needs to be recorded
    - Criterion: If the financial position (assets, liabilities, or owner’s equity) of the company has changed

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