Chapter 1

Question 1

Accounting

Answer 1

The information system that identifies, records,

and communicates the economic events of an organization to interested users.

Question 2

Annual report

Answer 2

A report prepared by corporate management
that presents financial information including financial
statements, a management discussion and analysis section, notes, and an independent auditor’s report.

Question 3

Assets

Answer 3

Resources owned by a business. (p. 9).

Question 4

Auditor’s report

Answer 4

It expresses the auditor’s opinion as to whether the
financial statements present fairly the company’s results
of operations and financial position and their conformance with generally accepted accounting principles (unqualified opinion).
Without an unqualified opinion, we cannot have complete confidence that the financial statements give an accurate picture of the company’s financial health.

Question 5

Statement of financial position (IFRS)
Balance sheet (US)

Answer 5

A financial statement that reports what a
company owns (its assets), what it owes (its liabilities), and the resulting diff erence (its shareholders’
equity) at a specific point in time.

Answers the question: Does the company rely on debt or stockholders’ equity to finance its assets?
Assets = Liabilities + Stockholders’ Equity portion of the accounting equation.
Stockholders’ Equity = Common Stock + Retained Earnings.

Question 6

Basic accounting equation

Answer 6

Assets = Liabilities + Stockholders’

Equity. (p. 13).

Question 7

Certified public accountant (CPA)

Answer 7

An individual who has met certain criteria and is thus allowed to perform audits of corporations. An auditor is an accounting professional who conducts an independent examination of a company’s financial statements.

Question 8

Common stock

Answer 8

The total amount paid in by stockholders for the shares they purchase. (p. 9).

Question 9

Corporation

Answer 9

A business organized as a separate legal

entity owned by stockholders. Limited liability,

Question 10

Dividends

Answer 10

Payments of cash from a corporation to its

stockholders. (p. 9).

Question 11

Expenses

Answer 11

The cost of assets consumed or services used in

the process of generating revenues. (p. 10).

Question 12

Income statement

Answer 12

A financial statement that reports a company’s revenues and expenses and resulting net income or net loss for a specific period of time.
Revenue & Expense portion of the accounting equation.
Answers the question: Are the company’s operations profitable?
Amounts received from issuing stock are not revenues, and amounts paid out as dividends are not expenses. As a result, they are not reported on the income statement.

Question 13

Liabilities

Answer 13

Debts and obligations of the business owed to creditors. Liabilities represent claims of creditors on the assets of the business.

Question 14

Management discussion and analysis (MD&A)

Answer 14

A section of the annual report that presents management’s views on the company’s ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations.
Management must highlight favorable or unfavorable trends and identify significant events and uncertainties that affect these three factors.

Question 15

Net income

Answer 15

The amount by which revenues exceed expenses.

p. 10

Question 16

Net loss

Answer 16

The amount by which expenses exceed revenues.

p. 10

Question 17

Notes to the financial statements

Answer 17

Notes clarify information presented in the financial statements and provide additional detail.

Question 18

Partnership

Answer 18

A business owned by two or more persons associated

as partners. Unlimited liability.

Question 19

Retained earnings

Answer 19

The amount of net income retained in

the corporation. (p. 12).

Question 20

Statement of changes in equity (IFRS)

Retained earnings statement (US)

Answer 20

A statement of changes in equity shows the changes in each component of shareholders’ equity (usually common shares and retained earnings), as well as
total equity, during a period of time.

A financial statement that shows the amount of income the company paid out in dividends and the amount reinvested in the company.
Answers the question: What is the company’s policy toward dividends and growth?
A company striving for rapid growth will pay a low or no dividend.
= +Net Income / -Net Loss -Dividends

Question 21

Revenue

Answer 21

The increase in assets or decrease in liabilities
resulting from the sale of goods or the performance of
services in the normal course of business. (p. 10).

Question 22

Sole proprietorship

Answer 22

A business owned by one person. Unlimited liability.

Question 23

Statement of cash flows

Answer 23

A financial statement that shows cash received and cash paid for operating activities, investing activities, and financing activities for a specific period of time.
Operating activities are the types of activities the company performs to generate profits.
Investing activities include the purchase or sale of long-lived assets used in operating the business, or the purchase or sale of investment securities.
Financing activities are borrowing money, issuing shares of stock, and paying dividends.

Answers the question: Does the company generate enough cash from operations to fund its investing activities?
Compare the amount of net cash provided by operating
activities with the amount of net cash used by investing
activities. Any deficiency in cash from operating activities must be made up with cash from financing activities.

Question 24

Stockholders’ equity

Answer 24

the claims of owners on the assets of the business. It has two parts: common stock and retained earnings.

Question 25

Financial Statements

Answer 25

Financial statements provide information about a
company’s performance and financial position. BRIC
1) Income statement, 2) Retained earnings statement, 3) Balance sheet, 4) Cash flow statement

Question 26

Uses of accounting information

Answer 26

Internal users are managers who need accounting information to plan, organize, and run business operations.
The primary external users are investors and creditors.
Investors (stockholders) use accounting information to
decide whether to buy, hold, or sell shares of a company’s stock.
Creditors (suppliers and bankers) use accounting
information to assess the risk of granting credit or loaning money to a business.
Other groups who have an indirect interest in a business are taxing authorities, customers,
labor unions, and regulatory agencies.

Question 27

three principal types of business activity

Answer 27

(1) Financing activities involve collecting the necessary funds to support the business. (2) Investing activities involve acquiring the resources necessary to run the business. (3) Operating activities involve putting the resources of the business into action to generate a profit.

Question 28

Generally accepted accounting principles (GAAP)

Answer 28

A general guide, having substantial authoritative support, that describes how economic events should be recorded and reported for financial reporting purposes.

Generally accepted accounting principles can differ depending on the form of business organization.
Publicly traded corporations must use International Financial Reporting Standards (IFRS),
a set of global accounting standards developed by the International Accounting Standards Board.

Private corporations, whose users can have different needs than publicly traded corporations, have
a choice between using IFRS or Accounting Standards for Private Enterprises (ASPE), developed by
the Canadian Accounting Standards Board.
Most private corporations choose to use ASPE, although there are exceptions.

As proprietorships and partnerships are private companies (even though they are not private
corporations), these companies generally follow ASPE for external fi nancial reporting purposes.
However, proprietorships and partnerships oft en prepare fi nancial statements only for the internal
use of the owner(s), in which case they don’t have to follow any particular set of accounting standards.