Chapter 1

Question 1

3 primary ways of organisational forms

Answer 1

sole propriership

Partnership

corporation

Question 2

sole proprietorship

Answer 2

owned by one person.
Easiest- only need a business licence.
no special legal procedures
all profits and losses are part of the owners taxable income
owner is personally responsible for all debts

Question 3

partnership

Answer 3

similar to sole but profits, taxes and legal liabilities are the responsability of both owners.
a lawer is needed to make a partnership agreement- more expensive
- the agreements describes how profits are shared between partners and what happens if someone leave or comes.
advantage: more resources that can help with growth

Question 4

corporation

Answer 4

the corporation, not the owners, are responsible for the taxes and debts- seperate entity from owners.
owners cannot lose more than their investments (advantage)
disadvantage: legal fees for creating a corp can be high. income tax returns must be filled for both the corp and its owners.

corps can get more money for growth because they divide ownership of the corporation into shares that can be sold to new owners. these buyer are then called shareholders and get a share certificate.
The owners can sell the shares privately or publicly on the stock exchange. Usually corps start out as private and “go public” if they need lots of funding

Question 5

Accounting

Answer 5

info system that analyzes, records and summarises the activities affecting its financial conditions and performance and then report the results to inside and outside decision makers.

Question 6

private vs. public accountant

Answer 6

private: hires the accountant as an employee
public: gets advice from an accountant that works for a variety of businesses. (usually hired by small businesses that dont have the work for full time

Question 7

CPA

Answer 7

Chartered professional accountant: merging of many different accountant titles

Question 8

managerial accounting reports

Answer 8

internal use only: to the employees and used to make business decision related to production, marketing, human resources and finance.

they include financial plans and continuously updated reports about companies performance.

For example: can be used to determine wheather to build, buy, rent, continue or discountinue producing particular products, how much to pay employees,

Question 9

Financial accounting reports

Answer 9

called financial statements
made periodically for people not not employed by the business. these do not contain detailed internal records.
creditors and inverstors are the two primary external users.

other external users can be customers- used to judge their ability to provide services. Governments can also collect them to look at taxes based on info used to prepare the financial statement

Question 10

creditors

Answer 10

anyone to who maney is owed

banks: used to evaluate the risk that they will not be repaid the money they loaned. banks want periodic updates to see how wiell the company is doing and interviene if they dont seem like they can repay the loan

Suppliers: also want to make sure the business can pay them for the good or services they deliver. usually look at the business’s credit standing and ask for financial statement before entering into business relationships

Question 11

investors

Answer 11

Shareholders: exsisting and future shareholders rely on financial statements to help evaluate whether the company is financially secure and likely to be a profitable investement.

Question 12

Basic accounting equation

Answer 12

what a company owns must equal what a company owes to its creditors and shareholders: relationship between assets, liabilities and shareholder’s equity

Question 13

seperate entity assumption

Answer 13

the business itself, not the shareholders who own the business, is viewed as owning the assets and owing the liabilities- financila reports include only the activities of the business and not those of its shareholders

Question 14

assets

Answer 14

economic resource controlled by compnay: has measurable value and is expected to benefit the company by producing cash inflow or reducing cash outflow. example: pizza oven, pots and pans, tables, chairs.

other non measurable assets include good hardworking employees. not included on financial statements

Question 15

liabilities

Answer 15

measurable amounts that the company owes to the creditors.

for example NOTE PAYABLE
ACCOUNT PAYABLE is when a company buys goods from another company, it usually does so on credit by promising to pay for the goods
WAGES PAYABLE: owe wages to employees
Taxes payable: owes taxes to gov.

Question 16

NOTE PAYABLE

Answer 16

if a company borrows from bank: they have a liablity. borowers sign a legal document called a note which describes detail about the company’s promise to repay the bank

Question 17

ACCOUNT PAYABLE

Answer 17

is when a company buys goods from another company, it usually does so on credit by promising to pay for the goods

Question 18

Shareholders equity

Answer 18

represent the owners’ claim on the business: claims can arise for two reasons:

1. owners have a claim on the amounts they contributed directly to the company in exchange for its shares (contributed capital)
2. the owners have a claim on amounts the company has earned through profitable business operations (retained earning)

Question 19

contributed capital

Answer 19

1. owners have a claim on the amounts they contributed directly to the company in exchange for its shares

Question 20

(retained earning)

Answer 20

the owners have a claim on amounts the company has earned through profitable business operations (retained earning)

important because businesses are only successful if they make more than what they spend. these profits belong to the owners so they increase shareholders equity, through these profits, pwners can get back more money from the company than they paid in (a return in their investment).

Question 21

since company profits are so important, accounting systmes track the two components of profit:

Answer 21

revenue and expenses

Question 22

revenue

Answer 22

earned by selling goods or services to customers. for example pizza palace: revenue is measured at the amount the company charges its customers for pizza

Question 23

expenses

Answer 23

all costs of doing business that are necessary to earn revenues. ex: advertising, utilities, rent, wages…

they are incured to to generate revenue

Question 24

net income

Answer 24

perfered term over profit.

calculated as revnue - expenses

Question 25

by generating net income, a company increases its

Answer 25

shareholders' equity

Question 26

net income can be left in the compnay to accumulate or it can be

Answer 26

paid out to the company's shareholders for their personal use- dividends

Question 27

dividends

Answer 27

companies net income accumulates in retained earnings until a decision is made to distribute them to shareholders. the most common dividends for small businesses are cash. Dividends are not an expense incured to generate earnings- they are a distribution of earnings. they are determined at the discreation of the companies board of directors. some businneses will never declare a dividend and can leave the money in the company.

Question 28

what are financial statements what four accounting reports are included

Answer 28

assets, liablities, shareholders' equity, expenses and divided appear in different reports that collectively are called a financila statements. 1. income statement 2. statement of retained earnings 3. balance sheets 4. Statement of cash flows

Question 29

how often are fianncial statements prepared

Answer 29

they can be monthly, every 3 onths (quarterly) and yearly companies can choose when their fiscal year end is. can be a calnedar year end (dec 31st) or a physical year end where it can be any day other than dec 31st.

Question 30

Income statement

Answer 30

the heading includes who (name of business), what (title of the report), when (time peridoe covered ex. for the month ended september 30th). the info included: Revenue (from largest to smallest), Expenses and net income (total is double underlined) there is an explanation on the side

Question 31

how do income statements change with larger companies

Answer 31

add a fourth line in the heading where they state if the money is rounded to the nearest thousand or million. if they are internation the fourth line also includes the currency (unit of measure asusumption

Question 32

unit of measure assumption

Answer 32

results of business activities should be reported in an appropriate mopnetary unit, in canada is the cad

Question 33

do high $$ values for net income mean the owner will have more cash?

Answer 33

no, they are better off. business may provides goods/services one month but not collect cash for it until the next month, or expenses for the current month;s activities may actually be paid in a different

Question 34

statement of retained earning

Answer 34

reports the way that net income and distribution of dividends affected the financial position of the company during the period. the heading: the name of the company, the title of the report and the accounting period. included: - retained earnings (profits that have accumulated in the compnay over time, can be 0 if a new company - Add: Net income - Subtract: dividends results with retained earning ( double underline) there is an explanation on the side

Question 35

Balance sheet

Answer 35

reports the amount of assets, liabilities, and shareholders' equity of a business at a point in time. screen capture of the businesses resources and claims to resources on a certain day the heading includes name of company and title of the statement, unlike the other statements the balance sheet is presented for a point in time the assets are to be listed in the order in how quickly trhey can be turned into cash. liabilities are llisted in how soon they can be paid off

Question 36

``` Assets: cash accounts receivable supplies equipment ```

Answer 36

cash: total amount in the bank account asccounts receivable: businesses right to collect from customers for sales made on credit. for example a tab on university students eating pizza. supplies: supplies on hand equipment: equipment on hand: - both include the total cost of when the mateiral was purcahsed- not on their current value (cost principle of accounting

Question 37

cost principle of accounting

Answer 37

assets are initially reported on teh balance sheet based on their original cost to the company.

Question 38

``` liabilities and shareholders equity: liability: acounts payable note payable Shareholders' equity: contributed capital retained earning ```

Answer 38

accounts payable: amount business owes for supplies and advertising, etc ex. food and paper note payable: bank loan contributed capital: dollar amount of the companies shares retained earnings: earning expected to be retained in the company

Question 39

Statement of cash flow

Answer 39

reports the operating, investing, and financing activities that caused increased and decreased in cash during the period. heading: name of business, title of statement, sccounting period for example : Cash flow from operting activities (cash received from customers, cash paid to employees and suppliers), cash used in investing activities (cash used to buy equipement)

Question 40

three types of activities included in statements of cash flow

Answer 40

1. Operating: activities are directly related to running a business to earn profit. they include buying supplies, making pizza, serving food to customers, repairs 2. investin: activities involve buying and selling productive resources with long lives (such as buildings, land, equipment, tools), purchasing investments, and lending to others. 3. Financing: any borrowin from banks, repaying bank loans, receiving contributions deom shareholders, or paying dividends

Question 41

page 16- review

Answer 41

review

Question 42

what are creditors intersted in assessing

Answer 42

1. is the company generating enough cash flow to make payments on its loan. 2. does the company have enough assets to cover its liabilities

Question 43

1. is the company generating enough cash flow to make payments on its loan.

Answer 43

answer will come from statement of cash flow

Question 44

2. does the company have enough assets to cover its liabilities

Answer 44

answer will come from camparing assets and liabilities reported on the balance sheet

Question 45

what do invester examine when wanting returns on their investements

Answer 45

income statement (and statement of returned earning) for info about the companys ability to generate profit- and distribute dividends

Question 46

Generally accepted accounting principles (GAAP)

Answer 46

rules of accounting approved by the canadian institute od chartered accountants for use in canada

Question 47

international financial reportin standards (IFRS)

Answer 47

rules of accountin created by the international accounting standards boards for international use.

Question 48

publicly accountable profit-oriented enterprise

Answer 48

has shares or debts tradin in a public market or holds assets in a fiduciary capacity for someone else and is required to use IFRS

Question 49

ACCOUNTING standards boardn AcSB

Answer 49

independant body supported by the CPA canada to develop and establish standards and guidance that govern financial accounting and reporting in canda

Question 50

AcSB determined what in canada

Answer 50

one of two different sets of accounting rules would be appropriate for use in canada: IFRS and ASPE

Question 51

pRIVATE Enterprise

Answer 51

does not have publicly traded shares in an open market nor does it holds assets in a fiduciary capacity for someone else. has the option use IFRS or ASPE.

Question 52

What would Lululemon or shoppers drug mart need to use. they are a publivly accontable profit-oriented enterprises

Answer 52

must use IFRS

Question 53

WHAT CAN A private company WHOS SHARES are not on a public stock exchange use

Answer 53

IFRS or ASPE

Question 54

What is a publicly accontable profit-oriented enterprises

Answer 54

entity that : - has issued debt or equity instruments that are outstanding and traded in a public market (stock exchange) - holds assets in a fiduciaty capacity for a broad group of outsiders as one of its primary businesses

Question 55

fiduciary

Answer 55

individual or corporation that is holding assets for another party . exmaples: banks, credit unions, and insurance companies

Question 56

Accountin Standard for private enterprises

Answer 56

only used by private enter. | rules of accountin that address the issues that are more relevant in a private enterprise enviro.

Question 57

what is the goal of ASPE and IFRS

Answer 57

ENSURE COMPANIES PRODUCE FInancial info that is useful to investors, lendersma dn other creditors in making decisions

Question 58

what are the 2 characteristics financial info must have to be judged

Answer 58

relevance and faithful representation: enhanced when the info is comparable, verifiable, timely and understandable

Question 59

CAS

Answer 59

Provide auditors with up-to-date tools and required procedures in order to carry out high quality financial rstatements audits

Question 60

some companies hier independant auditors to scrutinize their financial records

Answer 60

k

Question 61

sarbanes-oxley act SOX

Answer 61

CREATED IN THE US congress after the fall of enron due to accounting fraud. includes regulations on many topics , including internal control systems and certification of executives canadian version is C-SOX or Bill 198

Question 62

ethical dilemas

Answer 62

1. identify who will be affected by the situation- those to benefit and be harmed 2. identify the alternative courses of action 3. choose most ethical alternative